Private market investments in climate technology took a sharp dive in 2023 but did better than venture capital and private equity overall, according to a new report from PriceWaterhouseCoopers.
"For investors in climate technology ventures, the past two years have been a test of resolve and adaptability," said PwC's fourth annual State of Climate Tech report released Oct. 17.
PwC found a broadening investor base for climate tech startups, and more funding of technologies with greater potential to reduce emissions.
The accounting, audit and financial services firm also talked to investors about market trends and approaches and found a 40.5% decline in climate tech private market funding in 2023, compared to a 50.2% drop for venture capital and private equity financing overall, as a result of geopolitical turmoil, lower valuations, and higher inflation and interest rates.
Climate tech continued to gain market share for a fourth consecutive year, reaching a record 10% in 2023 compared to 9.2% in 2022 and 7.2% in 2020, the report found. Based on its Climate Tech Investment Index, PwC analyzed more than 8,000 climate tech startups and 32,000 deals worth more than $490 billion over the past 10 years.
One key trend: a significant shift in investments towards startups targeting solutions to reduce emissions from industrials, whose share of investment rose to 14% by the end of the third quarter 2023 after a long-term average of under 8%. That was noticeable in the North American market, where startups in that sector rose to 16% from 9% in one year.
By contrast, the mobility sector, which still attracts the greatest portion of investment, saw its share decline to 45% from a long-term 50% average.
PwC also found a growing share of funding directed to technologies with increased emissions reduction potential such as carbon capture, utilization and storage (CCUS), green hydrogen, and alternative foods, while those with lower emissions reduction potential areas or more mature technologies such as wind and solar saw a dip.
CCUS technologies were the only climate tech category with an absolute increase in investment over the past two years, spurred by corporate commitments to purchase carbon removal credits, and government incentives like the Inflation Reduction Act and Bipartisan Infrastructure Law in the U.S.
Another shift noted in the report was climate tech funding away from early stage deals, which for the first time represented less than half of the total for climate tech; meanwhile mid-stage reached more than 45%, up from around a quarter of deals four years ago.
Investors reported that the decline in early stage deals is driven by concerns about the technologies' scalability and start-ups' reluctance to raise funds at lower valuations. The report also found indications that climate tech investment is becoming more mainstream, with a growing share of first-time investors joining the market.
