Climate tech investment is soaring this year — but might not be going to the right areas, PwC says

• The average size of a climate tech deal almost quadrupled to $96 million in the first half of 2021, up from $27 million one year prior, PwC said.
• It added that the number of active climate tech investors rose from less than 900 in the first half of 2020 to over 1,600 in the first half of 2021.
• While overall investment is up, PwC says investors are neglecting some of the most important climate tech areas.

Investment in companies developing technology to try to combat the climate crisis grew to $87.5 billion in the year leading up to Jun. 30, according to new research from PwC published Wednesday.

That's up 210% on the $24.8 billion that was invested in climate tech in the same period the year before, the financial services firm said in its PwC "State of Climate Tech 2021" report, adding that 14 cents of every venture capital dollar now goes to climate tech.

But venture capital and private equity companies aren't necessarily backing the right climate tech companies, according to PwC.

The firm focuses on what it says are the five leading technology solutions: solar power, wind power, food waste technology, green hydrogen production, and alternative foods/low greenhouse gas proteins. It says these five received just 25% of the climate tech investment between 2013 and Jun. 2021, despite technologies in these areas representing over 80% of the emissions reduction potential by 2050.

The lion's share of climate tech funding, some $58 billion, went to mobility and transportation companies, PwC said. That includes companies focused on e-scooters, electric vehicles and flying taxis.

The average size of a climate tech deal almost quadrupled to $96 million in the first half of 2021, up from $27 million one year prior, PwC said, adding that the number of active climate tech investors rose from less than 900 in the first half of 2020 to over 1,600 in the first half of 2021.

Climate tech SPACs (special purpose acquisition companies) raised $25 billion in the first half of 2021, accounting for more than a third of all the climate tech funding during the period.

While overall growth is up, the number of early stage, seed and series A investments in climate tech has remained largely stagnant since 2018, PwC said, adding that there's a need to fund more young climate tech start-ups that have the potential to become companies worth $1 billion or even $10 billion.

On Tuesday, French climate tech start-up Sweep announced that it has raised a $22 million series A round led by Balderton Capital, a venture firm based in London that has also backed urban navigation app Citymapper, e-scooter firm Voi and on-demand car service Virtuo.

In terms of geography, U.S. climate tech companies are attracting the most venture capital funding, with $56.5 billion going to start-ups in the country in the year leading up to Jun. 30. PwC said Chinese climate tech companies raised the second highest amount, with $9 billion.

The world has 10 years to halve global greenhouse emissions if it is to have any hope of achieving net zero by 2050.

"Innovation is critical to meeting the challenge and the good news is that climate tech investment is up significantly across the board," Emma Cox, global climate leader at PwC U.K., said in a statement.

"However, our research has found there is potential to better channel and incentivize investment in technology areas that have the greatest future emissions reduction potential. This raises the question of why these sectors are missing out — are investors missing a value opportunity or is there an incentive problem that needs the attention of policy makers?"

Over the decades, many investors have chosen not to back climate tech start-ups over concerns that they may not deliver a suitable financial return. There was a period of rapid growth between 2013 and 2018 but climate tech investment plateaued between 2018 and 2020, according to PwC, which attributed the slowdown to macroeconomic trends and the global pandemic.

However, investment rebounded sharply in the first half of 2021 as environmental, social and corporate governance (ESG) was thrust into the spotlight and companies committed to net-zero strategies.

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