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Corporate investors circle climate tech pioneers

Venture capitalists are pouring money into the next climate tech pioneers – with corporate venture arms in the vanguard.

Delivering a net-zero global economy is going to take a lot of innovation – and the world’s largest companies are increasingly directing serious capital towards the challenge and opportunity of decarbonising their business models. Last year, $10.5bn of corporate venture capital (VC) funding was committed to ‘climate technology’ companies, shows data from PitchBook, a financial data and software company tracking such transactions. This technology includes developing solutions that help to address climate change from energy, transport, agriculture, industry and the built environment.

“When companies are looking at going into a new market, or new technologies like cleantech, they have a choice as to whether to buy or build,” says Timothy Galpin, senior lecturer in strategy innovation at Oxford University’s Said Business School.

Building up a new business internally can be time and resource-intensive, says Galpin. By pursuing the ‘buy’ option, essentially acting like a venture capital firm, companies can make a number of small bets in promising companies, gaining market knowledge and industry expertise, he says. They also have the potential to acquire the company if it proves successful and a good fit.

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A broad range of technologies are included in the climate tech sphere. In addition to obvious activities, such as clean energy technologies and low-carbon transportation, PitchBook includes technologies aimed at reducing the impact of agriculture, resource extraction and industrial processes, with this latter category including carbon capture and green hydrogen.

PitchBook has been tracking climate tech since 2010. Over that period, a total of $50.6bn of venture capital has been deployed, either by conventional financial VC funds or by strategic corporate investors. Research from advisory and accountancy firm PwC, released last October, found that $60bn was invested between 2013 and 2019.

Transport has attracted the most VC funding, at $26.1bn, says Pitchbook, followed by $7.2bn for energy and $4.1bn for agriculture. The total has been steadily rising over the decade, apart from a dip in 2019, after a series of blockbuster Chinese VC fundraisings the previous year distorted the picture.

Some of the biggest recipients of venture capital investment include Faraday Future, a US start-up that is developing electric vehicle (EV) platforms, and which has raised $4.4bn, Hellobike, a China-based bicycle-sharing service, which has raised $3.5bn, and ChargePoint, a US operator of EV charging stations, which has attracted $955m.

Net-zero strategies

“Corporate VCs are getting into [the climate tech] space because they are looking at their parent’s net-zero commitments and realising that the technologies needed to get there aren’t commercially viable or available at scale,” says Celine Herweijer, a partner at PwC in London. “The corporate VC route is a way to bet on these technologies, work with those who are co-developing them, and help them grow at scale and deploy them in their own business.”

As examples, she cites Amazon, which is backing companies developing heavy-duty EVs, and BP, which is investing in carbon removal technologies.

Allied to this is the realisation that companies will not simply be able to offset their way out of the problem, says Mike Barber, head of the UK sustainability practice at Deloitte. “Companies are realising that the current price of offsets is going to go up very, very materially – and they want to take steps to reduce exposure to their future market price,” he says.

The Task Force on Climate-related Financial Disclosures is also having an effect, Barber adds. The voluntary initiative recommends that companies disclose how they are adapting their strategy in response to climate change. “It is forcing organisations to think more about their future competitive advantage, and how they need to evolve their exposure to, and upside from, transitional risk,” he says. “That is increasingly having an influence on attitudes to cleantech.”

Tech giants make their bets

A notable trend in recent years has been the arrival of the tech giants, with Amazon and Microsoft both establishing dedicated billion-dollar-plus funds to seek out climate tech opportunities. Galpin at the Smith School is not surprised by their interest. First, it reflects an ongoing industry convergence. “These companies’ technologies are embedded in all industries, whether energy or transportation. Industry convergence drives these companies that you wouldn’t traditionally think of as cleantech.”

He adds: “Another reason is that these tech companies are becoming conglomerates more than many realise. As well as their search engine or e-commerce business, they are also developing cleantech businesses.”

However, as VC investors burnt in the last cleantech boom and bust know all too well, making money in the sector is far from straightforward. Investors lost around half of the $25bn they placed in cleantech start-ups from 2006 to 2011, shows analysis from the MIT Energy Initiative.

The main problem was that many such companies were still in the research and development stage or had capital-intensive business models that were unlikely to deliver the high returns on investment VCs had enjoyed in software and internet companies.

This time around, many climate tech investments are in capital-light business models, avoiding money pits such as second-generation biofuels producers or solar cell manufacturers that got crushed by low-cost Chinese competitors. And, crucially for corporate investors, they can often afford to be more patient than purely financially motivated VC funds.

For corporate VC arms, the investment often comes from R&D budgets, says Daniel Grosvenor, head of renewables at Deloitte. This has the advantage of not requiring the near-term returns that either financial VCs or, indeed, corporate business units would need to deliver. “Those who are running their corporate VC more like a financial investor, saying that they need to see a three to five-year exit, that is quite hard in cleantech at the moment,” he says.

Investment flows are closely linked to regulation and policy, highlights Herweijer at PwC. “The more supportive the regulation, the more you are seeing in terms of climate tech innovation,” she says. Compared with the last cleantech boom, “there is a much stronger and more consistent regulatory environment”.

That helps to explain the large proportion of climate tech investment tracked by PwC  directed to Chinese companies. Beijing’s strong support for EVs drove a significant proportion of the $20bn invested in Chinese climate tech companies, compared with $29bn in North America and just $7bn in Europe.

Scale and scope

So how should companies looking to invest in the next wave of innovation approach the market? Galpin suggests the first decision they have to make relates to scale and scope. “Are they looking at making a strategic shift, or are they just testing the waters?” Then, they need to decide on their focus. “Do they want to go broadly across various technologies, or focus on one or two in particular?”

The third decision relates to how much influence they want in their investee companies, and how much guidance they expect to give. If they want to be closely involved, they need to ensure they allocate the necessary resources.

“It is one thing to allocate capital, but then it takes time to provide guidance, ask questions, and answer questions from the companies they are investing in,” says Galpin.

Mark Nicholls

Contributing editor Mark Nicholls, co-founder and former editor of Environmental Finance, specialises in sustainable finance and responsible investment, including ESG disclosure and carbon markets.