by Daron Pearce, founder and CEO of Daron Pearce Associates

Investing in Climate Tech Companies

PWC found that climate tech accounts for 14 cents of every Venture Capital (VC) dollar. Yet some investors are still worried about another clean tech collapse.

Pitchbook analyst Svenja Telle says:

“Back then everything was focused on really R&D–heavy technologies in clean energy. This time it’s about decarbonising the entire economy, something that is relevant for every single sector. And it’s the only way forward.”

True the sector could be vulnerable to soaring IPOs and inflated stock prices, such as the increase from $46 (£34) for Beyond Meat Inc. to $135. But investors must not let the risks detract from the fact that climate tech is a long-term investment tied to specific metrics.

Jonah Goldman, Managing Director at Breakthrough Energy, reminds us that climate tech investing can make a significant difference:

“If I had a wish for 2022, it would be that we take all of that effort, and we channel it through a productive set of metrics to say, ‘This activity is the most effective that we could have towards our decarbonisation goals and climate goals.' I think we’re pretty far away right now from knowing exactly where all this effort should be channeled. But that’s a great problem to have.”

And he's right. The top five technologies - which represent over 80% of future emissions reduction potential by 2050 - receive just 25% of recent climate tech investment. There is a real challenge ahead to get climate tech startups the funding that they need to support the global focus on ESG.

So, what can investment managers do to drive funding and capitalise on opportunities?

PWC's 2021 Climate tech report makes the following recommendations:

• Fill the funding gap: Invest in intermediaries that are targeting early-stage climate tech ventures.
• Fund early-stage investing life cycles: Investors across the early-stage life cycle of climate tech companies need to recognise the time-critical opportunity climate tech offers and to free up more capital to address the large financing and funding gap.
• Develop in-house technical and commercial capability: Support direct investment in climate tech deals, bring in more established startups and nurture technical and C-Suite talent for young startups.

Investment will play a key role in overcoming the barriers to net zero but this requires collaboration, partnerships and the right support. Then, investors can create a robust sector that delivers the results needed to mitigate climate change. New asset classes are being created opening up fresh opportunities for institutional investors and the policyholders they represent.

A Chicago-based financial technology company is pioneering an entirely new credit asset class - the Master Credit Participation Certificate or “CPC” - reshaping the traditional credit market into a more agile, resilient model with a positive ESG impact.

Joanne Marlowe CEO of UFT Commercial Finance explains how a CPC permits an investor to efficiently tap into existing but unutilised investment capacity to gain significant exposure to large-scale ESG projects. 

“The addition of the CPC unleashes a new-found investment capacity linked to select types of illiquid portfolio assets that would otherwise be inaccessible without an investor's willingness to take cumbersome direct debt on their portfolio and assume the risk of separately reinvesting that leveraged capital."

The Future of ESG and Technology

The future of ESG and technology is linked to the need for companies to demonstrate their willingness to invest in environmental and social factors.

Technology supports ESG potential by driving value-based outcomes to measure and improve impact. In fact, it could very well be one of the most important factors in generating economic value and forcing existing companies to rapidly innovate.

To do this, businesses need to establish ESG reporting technologies that remove manual and disconnected tools as well as developing sustainable IT service models. They can then create holistic views of ESG data that enables them to differentiate themselves from competitors while confidently identifying investment risks and opportunities.

The relationship between the environment and technology has to be viewed as a long-term opportunity to develop new business models and to create a symbiotic paradigm where the planet heals and investors secure positive returns based on globally standardised measures.

Part 1 of the Daron Pearce series can be found here.