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The rise of green capital

 


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I’ve seen many times the excitement centered around new technologies such as railroads, electricity, personal computers, fiber optics, and e-commerce. Early investors make dangerous bets on seemingly weird ideas. When a few people gain traction, money (and hype) follows. As the market grows, large investors such as venture capitalists, private equity firms and Wall Street will build up technology and help scale up.

Similar dynamics are being deployed in climate technology today. Fifteen years ago, solar power plants and electric vehicles were marginal players with poor business prospects. But years of successful innovation, iteration, and improvement, combined with a broad sense of urgency to deal with climate change, have spurred an investment boom. In 2013, venture capital (VC) companies invested only US $ 418 million globally in companies offering decarbonization solutions, according to PwC’s State of Climate Tech 2020 report. In 2019, its investment increased to $ 16.3 billion, a staggering 3,750% increase.

In PwC’s State of Climate Tech 2021 report, the hockey stick curve shows no signs of flattening yet. From July 2020 to June 2021, $ 87.5 billion in VC investment will be invested in a wide range of business suites including renewable energy, electric vehicles, carbon removal, food waste, agriculture, and decarbonization of the construction environment. it was done. Climate technology currently accounts for 14% of all VC investments. Megafunds are ring fenced for climate technology, including Brookfield’s $ 7 billion Global Transition Fund and TPG’s $ 5.4 billion Rise Climate Fund. We counted 78 unicorns in eight climate technology challenge areas.

However, while the market may be efficient in the long run, it can be very inefficient in the short run. Funding is proportional to technologies most likely to extract the most carbon from the air, such as solar power, wind power, food waste technology, green hydrogen production, alternative food / cold room effect gas (GHG) proteins, etc. It’s not flowing. These technologies account for more than 80% of the potential emission reduction potential by 2050, but have received only 25% of the investment in climate technology in the last eight years.

Overall, the most mature climate technology market accounted for the majority of investment (see graph). Mobility and transportation, including electric vehicles, batteries and components, received an investment of $ 58 billion, or more than two-thirds of the total. Tesla is worth nearly $ 1 trillion, which is not surprising given that the largest incumbent automakers are bringing electric vehicles to market. And, of course, it’s very important to transform the vast mobility sector to reduce emissions. However, that sector accounted for only 16% of total carbon emissions. Compare this to industry and manufacturing, which account for 29% of emissions and receive only 9% of venture investment.

Change the story

Indeed, the world needs funding and much more across all sectors to reach its aggressive decarbonization goals. However, funding early technology areas can enable breakthrough innovations, create sectoral turning points, attract more investment and accelerate adoption. Such developments will help provide meaningful economic benefits while contributing to the decarbonization of larger sectors. To this end, VCs and businesses need to rethink what they need to invest in areas where they can reduce emissions the most. The analysis includes a new type of government to extend revenue periods, create aggressive markets through procurement strategies (mainly for corporate investors), and mitigate the risk of unproven technology pioneers. Includes the development of public-private partnerships.

Take wind and sunlight as examples. Investing in these technologies is very similar to the broadband efforts of the 1990s. Broadband investments have cost billions of dollars in laying cables that carry data at very high speeds across the ocean, but investing in ways to bring data of the same speed to people’s homes and offices. Was relatively few. And devices — that is, the last mile. As a result, the system remained inefficient as data could accelerate from Hong Kong to the United States, but crawls slower when people try to download email. Comprehensive investment is required for the entire system to function at the optimum level.

Similarly, today, in wind and solar, large amounts of capital are spent on the construction and construction of turbines and panels that generate energy. After all, these factors have an established and profitable business model. It’s a necessary step, but it’s not enough. Not enough investment has been made to develop an infrastructure that can supply zero-emission power from where it was created to where it will be used, or to store it for use in the evenings or windless days. .. In the first half of 2021, half of the energy investment was invested in renewable energy, 24% was invested in storage and only 2% was invested in grid management.

Malta Inc, based in Massachusetts, which manufactures electric heat storage systems. There were some notable investments, including the $ 50 million fund received by. In January 2022, Bill Gates-backed public-private venture Breakthrough Energy Catalyst invested $ 1.5 billion in key decarbonization technologies such as direct air capture, green hydrogen, energy storage and sustainable aviation fuels. Announced and could reach $ 15 billion. ..

Shelter and food

Consider the construction environment, a sector that accounts for 20.7% of the world’s GHG emissions. Both the number and amount of transactions entering this sector have declined since 2018. Reason: It is very capital intensive to come up with a solution to reduce emissions in the construction and operation of a building. It takes time to earn revenue. VCs can play an important role in helping related startups scale to their expertise and capital. In addition, creating market demand by committing to a transition to a particular material helps drive innovation in areas that are difficult to decline. For example, the Global Cement and Concrete Association has created an industry guide to achieving Net Zero by 2050.

The food system, which accounts for 20% of the world’s greenhouse gas emissions, is also underfunded, receiving only 12% of climate technology investment from 2013 to the first half of 2021. Indeed, there are hot areas where funding is being poured. Most of the investment is in alternative foods / low GHG proteins, a sector that grew 111% from July 2020 to June 2021. Increasing consumer demand for these products raises the level of investor confidence. Agricultural biotechnology, genomics, and nature solutions. Value chain GHG reductions; vertical and urban agriculture have each raised more than $ 1 billion over the past year. This trend is promising: it is moving towards a critical mass.

Intentional investment

The story of green hydrogen could be a solid blueprint for the kind of investment signal that begins to raise large sums of money. For example, 12 countries and the EU have recently announced their hydrogen strategies, and 19 more have drafted them. The UK government announced last summer that it hopes to attract about £ 4 billion (US $ 5.38 billion) of private investment in low-carbon hydrogen energy production by 2030.

The constructed environment accounts for 20.7% of the world’s GHG emissions. Both the number and amount of transactions entering this sector have declined since 2018.

On the corporate side, Shell, BP and Mitsubishi Power are working on the Green Hydrogen Project as part of their Net Zero strategy and are beginning to increase their investment in hydrogen energy infrastructure. PwC could reach about 530 million tonnes of global demand for green hydrogen by 2050, replacing about 10.4 billion barrels of oil equivalent (about 37% of world oil production before the pandemic) I presume that there is.

Over the last eight years, green hydrogen production has raised $ 1.4 billion and most of the investment has been spent on developing scalable and sustainable electrolytic cell technology that has the potential to enable large-scale adoption. .. Indeed, hydrogen can be stored today. Converted to synthetic fuel. Alternatively, it is shipped from the production point via a pipeline, truck, or ship. However, it requires additional infrastructure when used. VC investment in this part of the value chain is much less than investment in production. This is mainly due to the very large amount of capital required.

The most promising uses of green hydrogen to date are industrial processes (including iron, iron and chemicals) and long-distance transport (integration of hydrogen fuel cell technology and hydrogen technology into commercial transport). In 2021, Swedish startup H2 Green Steel raised $ 105 million in Series A funding to decarbonize steel production. Investors included European investment companies such as Exor and FAM, Italian steel company Marcegaglia, and Swedish entrepreneur Cristina Stenbeck.

A wave of capital is beginning to flow into the climate technology sector. However, as the development of the hydrogen economy shows, building a strong and self-sustaining ecosystem requires cooperation between governments, businesses and investors. When the government announces incentives, intentions to invest in a particular technology, or efforts to create new functional markets, companies follow their own investment plans.

At COP26, the government agreed to strengthen its emission reduction commitments each year. This is positive news and can help mitigate the risk of companies investing in low-carbon and zero-carbon technologies, products and services. But an important next step is for governments and businesses to work together to create incentives to invest in technologies that have the greatest impact on decarbonization. This aligns the investor’s capital with its commercial and environmental impact. Doing so will close the carbon funding gap, increase investor confidence and accelerate the investment cycle for next-generation climate innovation. It’s good for investors, businesses, and the planet.

Author Profile: Emma Cox is PwC’s global climate leader. She has worked on various climate-related projects in both the public and private sectors. She is a partner of PwC UK and is based in London. Leo Johnson leads PwC UK’s disruptive and innovative approach and is the presenter of Hacking Capitalism on the BBC Radio 4 program. Based in London, he is a partner of PwCUK. Denise Chan specializes in advising clients on sustainability and climate change issues. Her focus is on sustainable urbanization, technology for good, and helping businesses achieve their Net Zero commitments. Based in London, she is a senior manager at PwCUK.

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