Which Way Will the Curve Bend for Climate Tech in 2022?

Technology Policy Net Zero Science & Innovation

Which Way Will the Curve Bend for Climate Tech in 2022?

Commentary
Posted on: 21st January 2022
Olamide Oguntoye
Policy Lead, Science & Innovation Unit

After shares of Plug Power plunged into penny stocks status in the late 2000s, the future looked bleak for the American fuel cell maker. The share price hovered below $5 for most of the 2010s until the last two years, when it began to soar as investor interest in climate tech boomed.

A growing investor interest in climate tech is a sigh of relief as we ramp up efforts to meet decarbonisation targets. But the question is can we expect the growth to continue in the new year?

The current outlook seems optimistic for three reasons.

Momentum is building up

Last year climate tech got a thrust of new commitments from the public and private sectors. The US signed its $1.2tn infrastructure bill, a heavy climate tech focus. The UK announced the Glasgow Breakthroughs as the COP26 host government focusing on accelerating clean technologies. At the same time, the EU launched its partnership with Breakthrough Energy Catalyst to invest over $1bn in clean technologies.

Many of these announcements will materialise this year. BE Catalyst kickstarted its EU programme with the request for proposal announced in January. Cash reserves for investment stockpiled in 2019-20 are now in use while programmes held back by the pandemic are becoming active.

Corporate ESG (Environment Social and Governance) is also a crucial part of the equation, with a growing cohort of global fund managers announcing an ESG focus for trillions of dollars worth of assets under management. A tug of war between greenwashing and actual impact is likely to continue. But the growing ESG announcements will set a positive signal for more climate tech investment in 2022.

Pandemic is in the DNA

There is still a risk that the new year sees new episodes of Covid spikes, lockdowns, and travel restrictions. But climate tech investors appear to have come full circle in navigating the turmoil. The latest investment figures show a rebound from pandemic stagnation.

Arguably the pandemic has raised public awareness of new possibilities for more climate-friendly alternatives in daily life, including intelligent mobility and remote working. These are areas with climate tech start-ups are emerging with new solutions.

The record speed of vaccine discovery can also be linked to a renewed belief in the power of innovation to address global challenges like climate. Increasingly the pandemic is seen less as a barrier to investments but rather as an opportunity for lessons on tackling climate change with speed.

Risk appetites are stronger

Areas of climate tech otherwise considered fringe are now attracting more significant interest. Nuclear fusion is a case in point. Cumulative venture funding for fusion companies reached almost $5bn, most of it coming within the last two years. Tech billionaires, venture capitalists, and institutional investors are now throwing their weight behind promising fusion start-ups.

Megadeals in climate tech have risen to new heights. PwC counted over 120 mega-rounds in 2021 from Rivian’s combined $5.2bn rounds to Northvolt’s $2.8bn equity round. As megadeals have grown, so have the range of fundraising options, including SPACs, indicating a more robust risk appetite.

In the new year, one can expect further growth for fusion companies and others that are typically considered non-mainstream.

What it all means

Investment in climate tech is likely to continue a growth streak in 2022. Mobility and transport, including electric mobility, micro-mobility, and other innovative transport solutions that have dominated the new investment landscape, will likely remain prominent. One can also expect progress in other intelligent applications in the new year. Technologies like Web3, decentralised finance and digital currencies can transform how we buy, use, and share energy services.

For policymakers, the current positive outlook means three areas must become a priority. The first is to ensure investment in core emission reduction technologies gains more traction. Of the 15 technology areas analysed in PwC’s report, the top five representing more than three-quarters of 2050 emissions reduction potential received only a quarter of recent climate tech investment. It is not enough to keep capital flowing into the low-hanging fruits, like new mobile apps tracking emissions. Instead, more action must be geared towards actual emission reduction, particularly in hard-to-abate sectors, including shipping, steel, and cement production.

The second is to elevate innovation into a more central part of the climate policy. Recent growth in climate tech investment is driven mainly by late-stage venture funding. At the same time, early-stage financing appears to have stagnated. The trend is alarming given the plethora of innovative solutions with colossal promise for emission reduction. More government R&D grants, subsidies, and low-cost loans must be invested to ensure promising tech solutions progress from the lab to commercial readiness.

Finally, there are opportunities to deploy climate solutions at scale in Africa and other emerging markets. Improving the overall investment landscape through better governance regimes must be a top policy focus. Promoting investment in climate adaptation which currently receives less than five percent of venture funding would also be crucial. It is a year to be optimistic about climate tech but also a year when bold enabling policy must kick in.

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