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How to Successfully Invest in Climate Innovation

by Esme Learning

Climate innovation will come to a standstill without sufficient financial resources and investments from governments and the private sector. However, these investments will far outweigh the benefits. 

According to the World Bank, climate change efforts will need an investment of  US$90 trillion by 2030. It also estimates that an investment of $1 could yield $4 in benefits.1 Last year, VCs doubled their investments in climate change towards solutions that reduce emissions, promote adaptation to the impact and build resilience.

Download our free ebook,Building a Climate-Crisis Proof Businessto discover the climate action goals, innovations and technologies creating investment opportunities in climate tech.

In fact, the UN lists five areas where adaptation to the impacts of climate change could turn an investment of $1.8 trillion into $7.1 trillion, including1:

  • Early warning systems
  • Climate-resilient infrastructure
  • Improved dryland crop production
  • Global mangrove protection
  • More resilient water resources

The Role Private Investors Are Playing to Fight Climate Change 

Both private and retail investors and venture capitalists have shown a growing interest in funding climate change projects that benefit society. Many private companies have pledged to adopt sustainable business models that align with a 1.5°C future.

Moreover, strategic investors are also recognising the increasing opportunities in a mass-scale transition to a greener, decarbonised economy by 2050. Yet, investments are only in the early stages, if that goal is to become a reality. 

Thus far, pension funds and investment firms globally have aligned with a 3.5°C future. But now, many are moving with haste to decarbonise their portfolios and make them compatible with net-zero targets. 

Investors are also doubling down their efforts to fulfill the Paris Agreement goals. In 2019, the Net Zero Asset Owner Alliance was launched at the UN Climate Action Summit. Consisting of 29 members, the Alliance jointly manages assets of $5 trillion. The members, including pension funds, insurance companies and independent wealth funds, are working on processes that help align their portfolios with net-zero targets.

As yet, there remains enormous scope for investors to fuel climate change solutions — and not just by investing in new projects. Change managers within companies have to take decisive steps to accelerate the decarbonisation process.

They have to use their voting power to systematically build portfolios that support climate resolutions and lead the process of adaptation to climate change in shareholders’ meetings. Further, change managers and innovators have to ensure their investments will truly impact climate objectives and benefit the sustainable recovery plan.

3 Criteria for Investing in Cleantech

Although investments in cleantech gained momentum last year, it’s nowhere near what the urgent and immediate challenges demand. Climate change solutions need well-funded, innovative startups and the means to proliferate those solutions globally. 

Investors can play a role in tackling climate change by gearing their investment in climate tech solutions focused on reducing greenhouse gas emissions or addressing the impacts of global warming. These solutions can be grouped into three broad categories, regardless of industry; those that: 

  • Reduce or remove greenhouse emissions directly. 
  • Help people adapt to the impacts of climate change. 
  • Help people understand climate change. 

Currently, the most challenging areas of climate change — the five sectors and the two key issues that contribute to most of the emissions are: 

  • Energy 
  • Mobility and transport 
  • Food, agriculture and land use
  • Heavy industry 
  • Built environment
  • Greenhouse gas capture and storage
  • Climate and Earth data-generation 

Venture capitalists should look at three sustainability criteria for successful investments:

  • Feasibility:VCs have to consider to what extent a solution is technically feasible, adaptable at scale and cost-effective to achieve one of the key objectives like carbon reduction in a specific sector. 
  • Capital efficiency: investors have to know how much capital the cleantech solution will need to prove the model. 
  • Potential for value creation: they have to understand how and whom the solution will affect,  which processes it will improve and whether it will lead to CapEx gains or tax efficiencies for businesses that use the solution.

6 Key Factors Driving Investment in Climate Innovation 

Climate tech will play a critical role in helping organisations and societies achieve net-zero goals. The global green tech and sustainability market is growing at a CAGR of 21.9% and is expected to reach $74.64 billion by 2030.2

This rapidly-growing market is driven by factors such as3:

  • Rapid advancement and availability of technology and infrastructure: low-carbon techs, renewable energy generation and battery manufacturing have become much cheaper and more widely available. 
  • Astute VCs have already leaped towards cleantech investments: as a result, more investment capital is available for research and development. 
  • A supportive policy and regulatory environment: thus far, 120 countries have committed to decarbonising their economies. These countries have also added spending, and policies that ban and phase-out carbon-intensive processes and promote measures like carbon pricing. 
  • Top entrepreneurs and founders are turning to climate innovation: cleantech is drawing top talent from multiple disciplines and geographies to address this urgent challenge. 
  • Organisations worldwide are proposing ambitious climate action plans: so far, over 300 global enterprises have committed to net-zero targets supplemented by more impactful ESG goals. 
  • Consumer demand for high quality and low-carbon products has skyrocketed: consumers expect businesses to be responsible, take climate action and want more climate-positive products and business models, from plant-based meats to sustainable supply chains.

Nancy Pfund, founder and managing partner of VC firm DBL Partners, says, “These days, LPs in climate VC funds mirror those of typical Sand Hill Road fund investors, and climate tech investment enjoys a broad level of support, across all asset classes.”3

Join the Imperial College Business School Executive Education Climate Innovation: Accelerating to Net Zero Emissions programme to gain the framework to invest in cleantech projects with the most potential for impact.

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