Scalability, quick returns, minimal risks – emerging climate tech is not always great at offering investors these three things. While technological innovations within this space keep coming thick and fast, this is not translating into the kind of rapid investment needed to power our collective climate response.

The climate tech boom period of 2021-2022, when investments totalled almost $100 billion, is over. It’s unlikely to be repeated in the near future unless a major financial shakeup enables a major mentality shift once again.

What can be done to make clean technologies more appealing for fundraising rounds? What will drive more favourable investor sentiment? Essentially, how can climate tech capitalise on its full potential, and hence secure more capital? 

Global finance is getting greener. By demand of international regulators and the everyday public, a heavier reporting burden is being placed on corporations and companies across much of the world. The European Union’s CSRD (Corporate Sustainability Reporting Directive) came into effect in 2024, as did the US’ long-awaited Securities and Exchange Commission (SEC) climate-related disclosure rules in March 2024.

These major new rules are emblematic of the broader shift towards greater transparency, accountability and, above all, sustainability across global business and the finance systems that support it. At the same time, it is abundantly clear that the size and severity of the global climate crisis are both huge – driving an equally sizeable opportunity for climate tech.

In theory, these two factors (push and pull) should be enough of a spur to jolt companies of all sizes and sectors to clean up their own operations, while also prompting investors to support broader climate tech development. However, sustainability-based tech, particularly climate tech, is still finding it hard to traverse the investment  “valley of death” as innumerable startups fail for lack of timely funding.

Traditional investors essentially want two things – quick returns and manageable risks. Climate tech is not known for offering either of them. Unlike software companies and digital consumer goods where growth curves are steep and rapid, development cycles in climate tech can take many years or even decades to complete.

In terms of risks, most climate tech startups are a distinctly unappealing prospect for major traditional investors. Technology risks are high; as the specific solution or advancement may be quickly superseded or a rapid shift of industry standards and norms. Political risks may also be high; governments of the day may significantly change their position on a given climate issue, business practice or even their attitude towards whole industrial sectors regarding sustainability.

While venture capital firms and other more speculative forms of investment arms may have the patience and the risk tolerance needed to bet big on climate tech, they are significantly outnumbered compared to more traditional investment activities. While VCs saw assets under management jump from $300 billion in 2008 to $3.5 trillion in 2022, the number of new venture capital funds fell by 60% between 2022-2023.

VCs are the lifeblood of climate tech – pouring more than $12 billion into clean energy start-ups alone in 2022, a six-fold growth from 2019. Fewer emerging VC funds means less new money that’s likely to be pumped into climate tech and the wider clean tech ecosystem.

Build Bankable projects: While sinking money into real-world projects isn’t easy for capital-starved startups and small-scale firms, if climate tech companies can develop small but bankable projects that prove the commercial viability of the underpinning technology, this can go a long way to calming investor anxieties.

Apply established ideas to new markets: While plenty of climate-tech startups aim to bring wholly new or novel solutions to fruition, others are focusing on taking proven technologies and banking on being the first to bring them to untapped markets. By selling a pre-proven technological concept in a new context, firms can appeal to a much wider range of investors who are more comfortable to lend to a commercialisation and market expansion venture. One British startup MOPO (Mobile Power) works across seven African countries operating solar charging stations to rent out tiny single-use batteries. With over 16 million rentals, this has quickly grown into a proven multi-million-dollar business.

Appeal to catalytic capital investors: Catalytic capital is an underutilised but growing form of investment. Mostly populated by foundations, high-net-worth individuals (HNIs), governments, and Development Finance Institutions (DFIs), catalytic capital is far more patient than commercial investors, and generally comfortable with the prospect of not seeing returns for 10-20 years, versus perhaps 5-10 years for the more patient end of the VC market. Recent research suggests that while currently undermobilised due to a lack of market misconception, catalytic capital could quickly assume a total investment value of $286 billion in private capital – 7 times current levels of mobilisation in a typical year by global climate finance systems. Appealing to such lenders requires climate tech companies to deeply understand their core mission and typical investment play methodology. Since catalytic lenders are usually larger and more transparent than many typical commercial investors, it’s easier to understand their motivations. Climate tech firms will have to show that their product or solution aligns with both the commercial and wider philosophical stance of the lender.

Investor sentiment on climate tech is changing. While many firms shy away from the risks involved, more are seeing the risks of not investing. Opportunity costs, regulatory non-compliance and the broader worry of becoming outdated in the eyes of the market is encouraging fresh investment in climate tech. 

Companies involved in this space that are looking to raise fresh capital will always have to work hard to prove their case and sustain investor confidence, but the winds are slowly shifting in their favour.