Climate Tech Deal Flow Holds Up Amid Threat of Economic Downturn

By Leslie Kaufman

Electricity towers, power lines and wind turbines near Barnstorf, Lower Saxony, Germany, on Tuesday, Aug. 23, 2022. German power surged to above 700 euros ($696) a megawatt-hour for the first time as panic over Russian supplies gripped markets and politicians warned citizens to brace for a tough winter ahead. Photographer: Krisztian Bocsi/Bloomberg , Bloomberg

(Bloomberg) — Dealmaking for new technology to tackle climate change held roughly steady in the third quarter, suggesting enthusiasm for environmental innovation is persisting through growing signs of an economic downturn.

Funds from venture capital and private equity went into 539 deals, compared with 547 in the three months to June, according to a review of climate-related sectors published Monday by BloombergNEF, a clean energy research group.

Strength in the number of deals contrasts with a drop-off in the amount of money being put to work in new technology to combat global warming. The $10.7 billion of funding in the period marks the third consecutive quarterly decline from the record $19.6 billion in the fourth quarter last year. However, that slide need not signal broader weakness in climate-tech funding.

Plenty of financiers have money to put to work, and when they find the right company they’re ready to participate, said Sarrah Raza, BloombergNEF analyst and author of the report. It’s a more positive picture than in broader financial markets, where stock indexes are slumping amid investor worries about a recession.

“It’s not as grim as it might seem” in climate tech, Raza said. “Funds are still pouring out money to startups. The reason why there may be a lack of investment is because there just may not be enough startups” at the right stages now.

Buildings attracted a surprising amount of interest in the third quarter. Typically, when a significant amount of capital makes its way to this sector, this is due to one company raising an unusually large round. However, 39 startups in the buildings sector attracted $480 million in funding, suggesting investors are waking up to the importance of tackling the environmental challenges in this space. Buildings account for 10% of global energy-related CO2 emissions, according to the International Energy Agency, behind only power, industry and transportation.

“In 2021, there was no point even discussing the building sector because there was such a minuscule level of investment,” said Raza. “I think this comes from investor awareness that to actually decarbonize our planet requires attacking the harder-to-abate sectors, rather than some of the cooler areas like flying electric airplanes and sexy EVs.”

Energy was the big winner in the three months to September, accounting for 53% of the entire quarter’s funding, or $5.7 billion. Thirteen of the biggest deals were for companies focused on providing clean power, mainly from solar or energy storage. The biggest of the quarter was a $1.1 billion late-stage VC round and convertible note for Northvolt, the Stockholm-based battery company.

Transport was the second-largest sector. The total fell off notably from last year, to $2.2 billion, led by electric vehicle manufacturing. Agriculture had its weakest quarter since the start of last year, attracting $162 million.

Raza said that since fourth quarter of 2021 was so large, investment declines may continue in the current period. However, this should inspire rather than discourage: “If I take anything from this report, it’s a huge encouragement for founders, for techies to go ahead and do that startup because there is money out there looking to flow into these technologies.”

©2022 Bloomberg L.P.

Source: BNN Bloomberg