Climate change, driven by human activities and the resultant increase in greenhouse gas (GHG) emissions, poses a significant threat to the planet’s ecological balance. Companies worldwide are responding to this increase by adopting sustainable practices and integrating climate considerations to achieve decarbonization in their operations. With a significant market-size of USD 1.68 trillion in 2022 according to Grand View Research, the global decarbonization market is expected to receive significant demand from firms worldwide for decarbonization-related solutions to achieve Environmental, Social, and Governance (ESG) goals. Climate technologies or climate tech are innovative technologies, approaches or solutions that help reduce GHG emissions and achieve decarbonization across all sectors.
Multiple sectors focus on reducing GHG emissions and adopt climate tech to promote their decarbonization efforts. Recent third-party research finds climate tech-based funding to have increased in sectors accounting for higher emissions, for example the industrial sector. On the other hand, climate tech investments in agriculture, land-use, and food sectors (high-emission sectors) have also witnessed gradual increase in investments. According to the World Economic Forum, USD 120 billion worth of climate tech deals were completed in 2023, compared to the mere USD 20 billion worth of deals in 2017. Businesses have invested in climate technologies including enhancing energy efficiency through renewable energy sources like solar and wind power, employing energy-efficient practices and smart technologies to optimize resource usage, using advancements in transportation (carbon capture, storage, and electric vehicles), and using data analytics tools to monitor and optimize their environmental performance.
Drivers for adopting climate tech
Climate researchers at the University of Oxford classify the drivers for innovation in climate change or net zero as ‘demand pull’ and ‘supply push’ innovation. As the name suggests, demand pull innovation requires sufficient demand for an innovative product or services in the market as opposed to the high-risk, supply push innovation. Supply push is a technology-push approach to uncover technically complex solutions.
As a case for the supply push innovation, U.S-based electrical services giant Eversource has developed an underground heat pump involving a looping system of pipes to capture heat and provide geothermal energy. This is a first-of-its-kind experiment in the U.S. utilities sector and is in its pilot stage. On the other hand, demand-pull innovations in climate-smart agriculture are emerging to promote low-GHG farming practices. German start-up Klim has built a regenerative agriculture ecosystem that offers a knowledge platform for farmers and helps them receive financial support from companies seeking to reduce their carbon footprint. Meat.The End, an Israeli start-up develops plant-based meat as an alternative for minced meat to make tasty and texture-rich, plant-based burgers.
The commitment to achieve net-zero emissions by 2050 is a powerful driver for the development and adoption of climate tech. This ambitious goal propels industries, governments, and businesses to seek innovative solutions that can effectively reduce and offset GHG emissions. Apart from this, according to a consensus reached by the global panel of farming technology in China in 2023, the need for transforming global agriculture food systems to boost food yield, tackle climate change, and decrease rural poverty depends on technological innovation in agriculture.
Climate Tech Investments: A Transatlantic Surge in North America and Europe
As the world increasingly focuses on sustainability and the need to address climate change, investing in climate tech presents numerous opportunities for nations and businesses, globally. Despite the surge in climate tech investments in the past decade, investments in climate tech have witnessed a 50% drop in 2023 compared to 2021. In 2023, fewer than 2,500 deals were completed in the industry with most of the investments concentrated across the mobility and energy sectors. However, funding among early-stage climate tech firms is going strong across North America and Europe with the funding reaching nearly USD 100 billion in 2022 (of which 80% is equity funding) compared to a meagre USD 20 million in 2019. Despite promises among startups through awareness of climate change and rapid technological advancements, a rapid pace in adoption of climate tech is the way forward in 2024.
The Traction in North America
Regionally, investments in climate tech have gained momentum across North America particularly among industrials owing to the US Inflation Reduction Act under which investors obtain grants and incentives. According to a third-party research, around USD 44 billion worth of climate tech deals were completed in 2023 of which North America received around 40% of the investments followed by Europe which received 26% of the overall funding.
North America and Canada have attracted investments in renewable energy, particularly through solar and wind power projects such as the Hilda onshore wind energy Project in Canada which will generate 105.4 Mega Watt (MW) of wind energy supported by a USD 17.5 million federal investment in 2024. In North America, investments in climate tech demonstrated greater variability compared to other regions with a diversified investment portfolio into various sectors. There is growing integration of renewable energy sources and investments in energy storage technologies, with emphasis on advanced batteries. In addition, as shown above, venture capital funds are starting to invest in start-ups dedicated to address climate challenges, fostering innovation in the climate tech sector.
Climate Tech Investment Traction in Europe
In Europe, the climate tech sector has remained resilient to economic downturns due to hefty grants, cross-sector regulations, and corporate commitments (to decarbonization by 2030 or 2050) with a USD 18 billion market value in 2023. Mandatory regulations have helped businesses reduce their carbon footprint, signalling an opportunity for climate tech startups to further help them decrease carbon footprint in their operations.
Europe’s leadership in adopting renewable energy offers large opportunities for investors in developing solar and wind projects, along with promising advancements in emerging technologies like wave and tidal energy. The Wedusea project funded by Innovate UK and Horizon Europe is a USD 20 million project aiming to commercialize tidal energy consumption in Europe. Apart from this, there are 17 other projects underway at an estimated value of USD 1.2 Billion to generate around 160 MW of power.
While substantial investments into climate tech underscores Europe’s potential for investors seeking to contribute to and benefit from the region’s commitment, deepwashing has emerged as a risk to the growth of the sector. These are tech companies posing themselves to develop ‘deep tech’ solutions for mitigating climate change, which are not significantly transformational or deep as they sound. For instance, solar startups in the region are found to focus more on improving deployment of a solution rather than fundamentally increasing the potential of the system itself. Investors in Europe look to companies that create transformation technologies that help achieve radical change in energy consumption issues.
The Climate Tech Scenario in India
In India, the climate tech industry is still at its infancy due to the unstructured and inefficient technology business landscape in the country. In 2023, venture capital investment in climate tech reached USD 1.29 billion in the country falling from USD 1.49 billion in 2021. However, there is significant increase in climate tech interest within the country from consumers with engineers, product managers, and entrepreneurs driving awareness and increasing the scope of innovation . India is home to several climate tech firms including Ola Electric an Electric Vehicle manufacturer, battery swapping solution provider ChargeUp, and smart farming manufacturer, Growit. To improve the traction for climate tech investments, the Indian government has developed Mission LiFE, a mass movement to preserve the environment and further established a carbon trading market in 2023. However, the country is yet to implement rigorous regulatory frameworks and has a lower rate of adoption of climate tech.
Key Takeaways
The growing concern among the rapid rise in GHG emissions have prompted climate tech enthusiasts to develop innovative approaches to combat climate change. Alongside commitments to decarbonization, technological innovation and demand-pull innovation are key drivers to the adoption of climate change tech globally. In the past decade, the world has witnessed the investment inflow in climate tech solutions across industries has grown, mainly in North America and Europe. While mandatory legislation has accelerated the adoption of climate tech in Europe, the US Inflation Reduction Act has given investors the boost to actively invest in the sector. In India, government support through grants and initiatives offers innovative opportunities to the incipient climate tech sector in the country. However, despite lucrative opportunities for market participants in the climate tech sector, the scope of improvement in the rate of adoption of climate tech and the development of regulatory frameworks for preventing the risk of deepwashing remains a challenge to tackle.
