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Climate tech: How ESG investing is evolving into ‘a profitable endeavor’

·Assistant Editor
·4 min read

As economies across the globe square up to the challenge of slowing human-caused global warming, venture capital firms hope to tackle climate change without repeating the mistakes of a decade ago.

“I think some of the extreme weather events are making some things a little more apparent to people," Mike Winterfield, founder and managing partner of Active Impact Investments, said on Yahoo Finance Live (video above). “But I think the second thing that's happened is it moved from, say, a group of do-gooders and concerned environmentalists to people who were serious about business and wanted to leverage capitalism sincerely in a way to make this a profitable endeavor, and I think that's when it dragged investors in.”

Venture capital-backed climate tech companies have raised $14.2 billion worldwide in 2021 as of June 25, according to PitchBook data. That builds on a years-long wave: Between 2013 and 2019, according to PwC, worldwide annual venture capital funding into climate tech grew 3,750% in absolute terms, which was three times the growth rate of VC investment into artificial intelligence over that time period.

Climate-focused funds received a flood of capital in 2021. (Source: PitchBook)
Climate-focused funds received a flood of capital in 2021. (Source: PitchBook)

The general trend is also positive: Environmental, social, and governance (ESG) investing has become a major secular theme across assets overall as investors adopt the framework for everything from stocks to the CLO markets.

“I think there's just a lot of tailwinds for the space,” Winterfield said. “This is where the talent wants to work, when you look at millennials. This is where the regulations are going. This is where consumer behavior and preferences are changing. This is where investor money is flooding. So I would expect in the next 10 years that sustainability will become sort of a big go-to and big growth and performance space in investing.”

Is climate tech the new clean tech?

This isn't the first time there have been high expectations for companies looking to tackle some of the world's most difficult problems such as facilitating the energy transition, revolutionizing agriculture, and finding alternatives to the world's appetite for plastic.

Between 2006-2011, Silicon Valley VC firms — fueled by rising fossil fuel prices, energy legislation, and increased consumer awareness of climate change — poured $25 billion into the clean tech sector. By 2011, over half of that amount was lost, and the number of new clean tech companies in subsequent years diminished substantially.

The boom and bust of clean tech has made investors question whether climate tech will be any different.

That said, there are a few key areas where climate tech differs. One area is climate tech's singular focus on reducing greenhouse gas emissions across economies. In other words, while clean tech primarily dealt with the environmental impacts of the energy sector, climate tech is aiming to solve the main driver of climate change in all sectors.

Climate tech has primarily gravitated toward transport and mobility, according to PwC's annual climate tech report, with 63% of investment going to that sector. So while the energy sector produces far more global emissions, it has received less VC funding as more mature technologies like solar and wind are being financed in other ways.

More people are investing in climate tech. (Getty Images)
More people are investing in climate tech. (Getty Images)

Another major tailwind for climate tech this time around is support from consumers and governments, which lagged a decade ago.

“The need is bigger and more urgent than it has ever been before, and [so is] people's understanding of that," Winterfield said.

Consumers willing to vote with their dollar have enabled startups like Beyond Meat (BYND) to reach multi-billion-dollar valuations. That consumer demand has bolstered investors' confidence and has drawn talent to the innovative tech companies, Winterfield noted.

“What we're seeing with a lot of the companies that we're investing in and that others are investing in in the space right now is that they're already proving to perform,” he said. “They're reaching high levels of profitability, cash flow. We're seeing acquisitions, IPOs happening in the space, and investors are getting rewarded for moving into the space right now, and the level of talent and innovation that is moving into the space is absolutely astounding.”

A growing political will to act on climate change has also spurred cautious optimism. While Winterfield said that President Biden's recent actions on climate, as well as those taken in Canada, showed “a ton of promising steps in the right direction,” investors have reason to be wary of government-led climate action.

“I think it is the responsibility of the companies that we invest in to have a model that allows them to be profitable even without government intervention,” Winterfield said. “The government intervention that has hurt us in the past at times has been essentially funding industries that are causing the problem. So you have money coming out of both pockets.”

Grace is an assistant editor for Yahoo Finance and a UX writer for Yahoo products.

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