Despite whispers of a downturn earlier this year, investors continue to express confidence in climate tech. Though numbers are down compared with 2021, a year that many agree is an outlier in the VC world, they’re on track to beat 2020 as the second hottest year for investment.
What’s more, deal counts and values were up in the second quarter of this year compared with the first, suggesting that the slowdown has more or less skipped climate tech.
Though deal count is down nearly 19% compared with last year, it was up 15.4% in the second quarter, according to a PitchBook analysis. Total market deal value, down year over year, was up significantly in Q2, and the average value per deal has held steady at $23.6 million, more than triple what it was five years ago.
In some ways, those modest numbers could be interpreted as a slight cooldown. But the sector is probably just taking a breather given its near-term potential. Just five years from now, PitchBook estimates the climate tech market will near $1.4 trillion, representing a compound annual growth rate of 8.8%.
With that kind of growth coming down the pike, there are a lot of different bets to place in the climate tech sector, but a few stand out for their early-stage potential and favorable tailwinds.
Perhaps the biggest opportunity — buoyed by congressional action, of all things — is direct air capture, or DAC. The technology grabs carbon dioxide directly from the atmosphere, concentrates it and then sends it elsewhere for storage or use. It’s the sort of terraforming tech that the Intergovernmental Panel on Climate Change says we’ll probably need to limit warming to 1.5 degrees Celsius, but it’s still incredibly expensive. One leading company, Climeworks, said a few years ago that it spends $500 to $600 to remove 1 ton of carbon dioxide.
What’s drawn investors into the space, and what’s likely to bring more off the sidelines, is a provision in the Inflation Reduction Act that extends a tax credit through 2032 and raises it from $50 per ton to $180. Climeworks thinks it can cut its costs in half by then, meaning its post-tax credit expenses would be closer to $80 to $150 per ton. That’s close to what end users pay today for higher grades of carbon dioxide.
The Inflation Reduction Act should also give a significant lift to the construction and retrofit industries. The new law offers generous tax credits for homeowners to install heat pumps and so-so tax credits for adding insulation, replacing windows and doors, and so on. Even though the insulation and air sealing credits aren’t as groundbreaking, together they should help open the door for many startups that are exploring innovative building materials or new approaches to improving building efficiency.
When those materials reach the end of their lives, startups like Enerkem and Novoloop can chemically recycle and upcycle the waste materials to create low-carbon building blocks for new things. The recycling sector, which also covers lithium-ion battery recycling, should see 10% CAGR over the next five years, according to PitchBook.
Another sector with a forecasted 10% annual growth rate includes ecosystem monitoring. For decades, it was the domain of governments and universities that spent millions on massive satellites and long-term ecological studies. Over the last decade, the private sector has contributed smaller, cheaper satellites, drones and embedded sensors. Big names like Planet and Spire Global have created an explosion of high-resolution imagery and other data related to weather, vegetation, soil moisture and more. As the climate continues to change, such geospatial intelligence will be increasingly valuable.
There are a number of other industries the PitchBook report calls out, but those are the ones we’re watching most closely today.
Even after the last few years of growth in the climate tech sector, it’s clear there’s still a lot more room. To reach net zero by 2050, the world will have to invest anywhere from $3 trillion to $9 trillion per year on average, according to estimates from BNEF and McKinsey. Given that investment takes time to ramp up, expect investment figures to rise markedly in the coming decades. In other words, investment opportunities in climate tech are just warming up.
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