In a rapidly evolving world where climate change draws increasingly more attention, the intersection of climate technology and carbon markets forms a pivotal narrative in shaping our future.
Raw Ventures is deeply involved in these markets as they go along our core values focusing on a better, more sustainable future for our planet. It is clear that both professional investors and the general public are starting to get a deeper understanding of the risks faced by the environment and this is reflected in increased financing for the climate-related industries. In this article, our venture partner Renat Lokomet shares the latest news and market predictions for the near future.
Despite facing funding fluctuations, the European climate tech sector in 2023 demonstrated resilience and innovation, transitioning from software-based solutions to more tangible, infrastructure-centric technologies. This shift, along with the rise in corporate commitments to carbon neutrality, signals a significant transformation in how we approach environmental sustainability.
The market for carbon credits is also undergoing a crucial transformation, striving for greater transparency and effectiveness. The commitments and discussions at COP28 further highlight the global urgency and complexity of achieving a greener future. For venture capitalists and investors, this landscape presents a blend of challenges and opportunities, underscoring the need for a nuanced understanding of the evolving dynamics in climate tech and carbon markets.
This article delves into these trends, exploring how they are collectively forging a path towards a more sustainable and environmentally responsible world.
Climate Tech Funding
In 2023, the European climate tech sector witnessed significant developments, marked by both challenges and triumphs. Despite a decrease in the total number of deals, European climate tech managed to raise $18 billion. This figure is an 11% decline from 2022's $20.3 billion, yet indicates a stronger resilience in funding compared to the global climate tech market, where funding dipped by 33% year-over-year. This resilience in funding was further highlighted by the performance of climate tech against the wider tech market. In 2023, while total European tech deals decreased by 40% year-over-year, climate tech showed relative strength.
The third quarter of 2023 was particularly noteworthy, setting a new record for VC funding raised by European climate tech startups, with an impressive $7.6 billion. Interestingly, the two companies receiving the largest funding in the year, H2 Green Steel - $1.5 billion (developing a fossil-free manufacturing process for steel) and Northvolt - $1.2 billion (Europe’s largest battery manufacturer), are both Swedish and co-founded by renowned Harald Mix.
In 2023 the climate tech industry continued to move away from software-based solutions towards more tangible, physical technologies. This transition gave rise to the "infrastructure startup," a new breed of startup characterised by its physical footprint, encompassing gigafactories, biofuels, and next-generation materials plants. This shift also gave rise to an acronym "FOAK" (first-of-a-kind), referring to the stage where founders construct the first physical version of their technology.
Investor interest in climate-focused funds remained robust despite the overall downturn in tech fundraising. In the first eight months of 2023, 37 new VC funds focused on climate tech raised $13 billion. The share of climate tech deals in all tech deals globally also continued to rise reaching 10% - steady growth from 1.5% over the decade.
However, the sector is not without its challenges. Market uncertainty remains a significant risk, along with the dangers of greenwashing and heavy dependence on regulatory requirements. Nevertheless, the benefits for the planet and the growing investor interest, reflected in the $121 billion of total private climate assets under management across various funds raised since January 2021, underscore the sector's potential and resilience in the face of adversity.
Carbon Markets and Regulations
In the contemporary landscape of environmental responsibility, the journey towards carbon neutrality is a crucial goal for numerous entities. However, this journey is characterised by varied methodologies and speeds. Businesses, in particular, are grappling with legal obligations to decarbonise, underlining a shift towards sustainability. Increased societal and government pressures are driving companies to reduce their carbon footprint. Moreover, the push from banks and public markets for more ESG compliance means a company's environmental efforts greatly affect its debt costs and business valuation. These challenges continue to prop up global carbon markets.
More and more companies worldwide are setting science-based targets verified by SBTi. This initiative has produced the most robust and rigorous framework available today for converting global climate commitments to the corporate level. Since its establishment in 2015, over 2,000 companies have had their targets validated by the SBTi and 2,000 more have made commitments. Companies representing over 34% of the global economy by market capitalisation have committed to these science-based targets, this number includes such multinational giants as Pfizer, P&G, Tetra Pak and hundreds of others.
The desire of corporations to become greener, together with public pressure will continue to fuel the voluntary carbon market, particularly the market for Verified Emission Reductions (VERs), also known as carbon credits, which is expected to experience substantial growth in the near future. The carbon credits market, currently fragmented and dominated by over-the-counter (OTC) trades, is on the cusp of transformation. With the development of more stringent monitoring procedures aimed at curbing issues like double counting and over-estimation of carbon credits; it is expected to become more transparent and welcoming to new entrants.
Carbon credit prices vary significantly across different regions and markets but the most important factor in determining their price is their quality. The buyers must be sure that the credits they purchase are “real” and that they adhere to the highest industry standards. Purchasing low-quality credits can lead to greenwashing allegations bringing PR and legal problems to the company. High-quality credits require high-quality professionals who can design, develop and look after the carbon project. The number of such experienced teams is limited, and we expect the demand for their valuable services to grow exponentially in the coming years.
Notably, developing nations, particularly in Southeast Asia and Africa, are increasingly becoming central to decarbonization projects, playing pivotal roles in global efforts to combat climate change. Various projects aimed at the reduction of methane emissions and sustainable carbon dioxide storage are being developed in these regions. The role of transitional fuels, such as liquefied petroleum gas, is gaining recognition as well. In developing regions, these fuels offer a more environmentally friendly and healthier alternative to traditional biomass burning, balancing immediate energy requirements with long-term sustainability. Other interesting carbon removal innovations like direct air capture (DAC) are gaining more traction and funding, and are essential in achieving net-zero targets.
COP28 in December 2023 marked a significant step with the agreement to transition away from fossil fuels in energy systems by 2050. However, some stakeholders expressed disappointment at the lack of firmer commitments, such as an outright "phase-out". This may be attributed to the lingering concerns that a complete abandonment of fossil fuels could have adverse economic consequences. This scenario might escalate the demand for carbon credits as a pathway to achieving net-zero. The acknowledgement of transitional fuels might mean a more gradual shift from more detrimental energy sources, striking a balance between current energy needs and future environmental objectives.
The conference witnessed over $80 billion pledged towards climate finance initiatives, signalling future growth and development in the industry. Additionally, over 50 major oil companies signed a decarbonisation charter, committing to net-zero emissions in their direct operations by 2050, near-zero methane leakage by 2030, and the elimination of routine flaring by the same year. Additionally, over 100 countries have pledged to triple their renewable energy capacity and double their energy efficiency rate by 2030. This commitment will become beneficial to renewable energy firms, heralding a brighter, more sustainable future.
The path to carbon neutrality is complex and multifaceted, involving legal, technological, economic, and societal dimensions. For VC firms and investors, understanding these dynamics is key to making informed decisions that not only yield financial returns but also contribute to a more sustainable and environmentally responsible future. Soon, we will see increasingly more activity in climate tech and carbon markets with more stakeholders involved. Large multinational companies and funds will keep investing in these industries driving up the quality of teams, services and products offered by them.