Inside European Climate Tech’s $17.5 billion record in 2022

  • Climate tech was a light green shoot in a tumultuous 2022, but there will be a delayed correction.
  • The sector has been shaped by an abundance of capital and emission reduction regulations.
  • 2023 will be marked by real decarbonization efforts and energy startups will come out on top.

War, soaring cost of living and soaring interest rates have battered almost every aspect of the technology market in 2022.

The era of cheap capital also came to an end as venture capitalists traded riskier bets for companies with strong fundamentals, a shift that sparked waves of layoffs across the industry. Sectors that were once VC favorites like Web3 and fintech have seen significant declines from their all-time highs in 2021.

But there was a green shoot: climate technology. Investments in technology to solve the world’s biggest challenges exploded in 2021, and the trend has continued in 2022.

For European climate technology, the year was marked by an abundance of capital, regulatory changes and increased demand for energy solutions due to the Russian invasion of Ukraine.

“The ultimate culmination of this is that boards now understand that decarbonisation is a must for doing business,” said Mauro Cozzi, co-founder and CEO of London-based carbon accounting firm Emitwise.

Investment in goal-driven companies – defined as those working towards one of the 17 United Nations Sustainable Development Goals – is on track to match last year despite the economic downturn. These companies raised $17.3 billion in 2021 and are expected to raise $17.5 billion in 2022, according to Atomico’s latest report on the state of European technology.

A multitude of funds have been created to support startups in the fight against CO2 emissions. Satgana, Climentum Capital and Contrarian Ventures are among those that reached their first close this year.

The money is still flowing in previous bets: direct air capture start-up Climeworks landed $650m in April, solar company Sunly landed $210m (€200m) in October and carbon credit rating startup BeZero carbon secured $50 million last month.

There has been a shift from software to hardware, European investors said. Carbon accounting – once seen as a safer bet for SaaS-oriented companies embarking on green investing – has shown early signs of consolidation with layoffs and acquisitions. Notably, Berlin-based Planetly was acquired by US company OneTrust and shut down less than a year later.

The material has benefited from Europe’s maturing debt ecosystem, which can fund heavy investment in assets and infrastructure that may not be suitable for full rounds.

“In climate, you have a lot of physical stuff,” said Kiko Ventures partner Arne Morteani. But debt is also useful for energy markets, for example, where companies need a balance sheet for security, hedging or working capital, he added.

Specific funds are emerging to help hardware, biotech or infrastructure companies grow, but there’s a funding gap between that and scaling companies, the investor said. For example, when a biofuels or water treatment company has its first plant but needs investment to build the second. People want to fix this, Mortaeni said, but the economic downturn has stopped progress “in its tracks”.

Climate tech is an outlier in 2022, but it hasn’t escaped the downturn. Britishvolt’s future was thrown into question when the company reportedly struggled to secure funding, while Berlin-based Infarm was plagued by layoffs, cutting its workforce by more than half.

The gold rush will slow down, investors and founders said. “We’re just getting started on climate tech,” Emitwise’s Cozzi said. “One of the realities of being a bit more isolated area is that the ripples just take a bit longer to get through it.” Emitwise has downsized this year.

Many climate tech companies have risen to lofty valuations, said Magda Lukaszewicz, director of Balderton Capital. In the new environment, they will have to “achieve a lot” to justify additional capital at a higher valuation. They will also need to be more attentive to hiring, burn rates and company goals, she said.

Energy and infrastructure companies are seen as the winners, while pure software games could see some consolidation, investors and climate tech founders said. The jury is still out on the hardware: some investors are optimistic, while others expect capital-intensive companies to struggle as the cost of that capital rises.

“I think both arguments are fair; it’s hard to predict the weighting,” Balderton’s Lukaszewicz said.

“But you still can’t eat software. You can’t drive software. You can’t breathe software,” she added.

Investment funds have jumped on the climate tech tailwinds, promising to back impact businesses. There has already been backlash as a new regulation, the EU Taxonomy, has introduced concrete, data-based definitions of impact.

The most impact-oriented Article 9 funds should be made up only of sustainable investments with specific goals, such as removing one tonne of carbon dioxide from the atmosphere and, therefore, respecting the most stringent reporting requirements. A wave of these funds have been downgraded to Article 8, which invest in social or environmental enterprises but have less stringent impact requirements. French asset manager Amundi and investment management giants BlackRock and Pimco have reclassified some of their Article 9 funds.

Regulations mandating corporate emissions reporting have also been introduced, but will really take off next year, which should help curb corporate greenwashing.

European Catchment Manager Ellen Moeller

Watershed’s European Manager, Ellen Moeller.

Watershed



Ellen Moeller, European head of Kleiner Perkins and Sequoia-backed carbon management company Watershed, said companies were moving beyond setting targets and measuring emissions to adopting decarbonization plans. “That’s probably the most fundamental change,” she said.

Regulation will continue to be a driver in 2023, as will the energy crisis. This lines up with analysis from Atomico, which found that companies that deal with the use of the planet’s resources have gained traction this year.

Investors are optimistic about backing energy storage solutions and the next generation of renewables. Lukaszewicz is interested in energy decentralization; she sees a future where people produce and store their own energy and then sell it back to the grid. Solar power, storage, heat pumps, other renovations and ways to fund them are all categories to watch, she said.

The need for lasting solutions to the climate crisis is more urgent than ever, said Atomico Partner Tom Wehmeier. “Technology can and should have a role to play here, and Europe is emerging as a leader.”

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