Dismissed as “woke capitalism” by some, the trend of making investment choices based on the positive impact they will have on society is here to stay. In the UK, much of this shift has focused on climate tech, so much so that the country is fast emerging as a global investment hub for climate tech start-ups.
A report by PwC shows that more venture capital funding is being ploughed into climate tech start-ups in the UK than any other country in Europe. Globally, the report found that climate tech is growing quickly as an asset class, with £71 billion invested over the second half of 2020 and the first half of 2021. From January to June 2021, record investment levels over £48.8 billion reflected a 210 per cent increase compared to the twelve months prior.
UK LEADS THE CHARGE
The UK has been at the forefront of this boom. According to a report by London & Partners and Dealroom, London is one of the leading hubs for climate tech globally, with £2.68 billion invested since 2016. London-based venture capital (VC) firms have raised over half of all European dedicated climate tech funds in the last two years.
Earlier this year, Climate VC launched in London to support start-ups in the UK that focus on climate change and carbon emissions. It will invest in 120 early-stage climate start-ups in the next three years, with £10 million to be invested in the first year. Climate VC is looking to double its funds every quarter, which would result in over £35 million by 2025. The firm has already invested in Global OTEC, which converts ocean thermal energy into clean power for tropical island nations, and Treeconomy, a nature-based carbon removal company.
Elbow Beach Capital launched a £20 million venture vehicle in March to back start-ups focusing on decarbonisation, sustainable energy and social impact opportunities. It plans to invest between £500,000 and £1.5 million in pre-seed to Series A businesses in the UK and globally. So far, it has led the seed round for WASE, a wastewater treatment and bioenergy company, and invested in Glasgow-based electric 4×4 manufacturer, Munro Vehicles, which plans to decarbonise vehicle fleets in the mining, forestry and agriculture sectors.
The money is starting to flow in the right direction, but not fast enough, according to the latest Intergovernmental Panel on Climate Change’s (IPCC) report. IPCC authors warn that financial flows are three to six times lower than the levels needed by 2030 to limit global warming to below 1.5C or 2C.
WHERE SHOULD THE MONEY GO?
According to PwC, investors are prioritising low-carbon transport when they should be focusing on five other areas which could collectively deliver 80 per cent of emissions reduction by 2050: solar power, wind power, green hydrogen production, reducing food waste and scaling proteins with a lower greenhouse gas footprint than animal proteins.
The report found that by 2050, almost half of global CO2 emissions reductions will come from technologies that are currently only at the demonstration or prototype phase. That is why more patient capital from early-stage VC investors is needed to deliver future breakthroughs, according to the report’s authors. “Investors need to look beyond the low-hanging fruit to help scale technologies in harder-to-abate sectors,” they conclude.
A SLOW DOWN?
In the UK, VC funding into climate tech start-ups stood at £329.6 million in Q1 2022, down from £857.6 million the previous quarter. Globally, a Climate Tech Report by PitchBook, which examines VC trends, found that investment in climate tech took a hit in Q1 of 2022 and predicts that it could fall further in Q2. But the report concludes that ultimately climate tech investment will continue to accelerate, partly due to the war in Ukraine and resulting calls for energy independence and partly due to the climate change crisis.
As Peter Gajdoš, Climate Lead at VC firm Fifth Wall, told a TechCrunch climate technology event in California: “Climate doesn’t care about inflation. The oceans are warming up. The forests are burning. These problems are still there, and someone needs to solve them, which creates opportunities.”
LOOKING TO THE FUTURE
Investment in hydrogen, solar, batteries, nuclear and wind will all accelerate, according to PitchBook’s research. The UK is already on the case. London-based HydrogenOne Capital, for example, provides investors with opportunities in clean hydrogen and energy storage. Earlier this year, it led a round of funding that secured £35 million for Bramble Energy. The investment will allow the company to roll out its portable power products globally and continue its ground-breaking work on hydrogen fuel cells.
Fusion energy is being touted as another solution to achieving a clean energy transition. Not to be confused with nuclear fission – the splitting of atoms to release energy (think nuclear power stations) – fusion is the opposite: the fusing together of hydrogen atoms at ultra-high temperatures to release energy (think the sun).
The technology is still in its infancy. Fusion start-up Tokamak Energy, based in Oxfordshire, is calling for more investment into this emerging sector.
Technology may not be the magic pill that cures all climate change problems, but it is becoming increasingly clear that limiting global temperature rise to 1.5C will not be possible without it. The innovative solutions climate tech start-ups are providing will continue to be an essential part of the mix.