Climate change is changing more than global temperatures. From buying organic to electrifying homes, consumer behavior is shifting in response to increasingly alarming reports of floods, fires, and heat waves exacerbated by anthropogenic climate change. But paper straws and Teslas only get us so far. In order to achieve the UN 2030 Sustainable Development Goals and hold global temperature rise below 1.5°C, our collective mitigation efforts will need some technical muscle behind them.

Investing in sustainable solutions to avert the climate crisis is an imperative of the highest order, so it's great news that ensured future demand and high-profile signals from world leaders are lighting a proverbial fire under the industry; the recent passage of the landmark healthcare, tax and climate bill by the US Senate is pushing the need for climate tech to forefront of our collective consciousness.

But the growing awareness of climate tech's potential isn't just about the altruism and nobility of saving the planet. It's also rooted in the fact that urgency feeds unprecedented opportunity.

Climate change tech defined

In general, climate change technologies fall into three categories that together reflect the policies and priorities of governments and communities around the world:

  • Technology solutions that reduce or capture CO2 emissions or help cut future emissions
  • Climate change tech that supports adaptation and resilience in the face of climate change impacts
  • Solutions that collect, analyze, and track data on climate change

"Climate tech" is both a sector unto itself and one that is incorporated into other sectors. Companies that reduce greenhouse gas emissions through carbon capture, or deliver sustainable solutions for transportation, energy, geoengineering, and manufacturing all qualify as working in climate tech, but so do companies that work in supply chain (e.g., Nautilus Labs, which decarbonizes ocean shipping with AI) and sustainable construction (e.g., Solar Analytics, which helps homeowners optimize solar performance). But so does climate-smart agriculture (e.g., Agrosmart, smart farming software with remote monitoring of agro-economic data and Sensoterra, which produces IoT soil moisture probes) and food production (e.g., plant monitoring Bowery Farming and lab-grown Mosa Meat).

This is part of what makes climate tech innovation so exciting — with imagination, dedication, and capital, it can touch every sector and just about every part of our lives.

Climate change tech investment heats up

From a market perspective, governments and companies who are committed to decarbonization are among the biggest players in developing climate change technology solutions. As this essay in the MIT Technology Review articulates, by promising future demand, the public and private sectors incentivize more rapid investment and innovation.

That strategy is paying off. A climate tech venture funding report by HolonIQ, a leading platform for impact intelligence, finds that global climate tech investment is booming. VC investment has risen from $6.1 billion in 2016 — just after the Paris Climate Agreement was signed — to $37 billion in 2021, a more than 6x increase.

While there was some stagnation in investment from 2018-2020, investment surged by 64% between 2020 and 2021, which is heartening. Global funding now stands at 2.5x pre-pandemic levels (3x in the US).

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While VC fundraising in China has historically led the majority of climate tech funding, US VC quickly caught up and then surpassed it in the past three years. Indeed, competition to be the world leader in climate tech investment has heated up between the two countries: According to PitchBook, VCs in China are betting big on climate tech while Bloomberg reports that in 2021 China had $47 billion in climate tech fund assets (an increase of 149% over the previous year). It's looking more and more like each year, China and the US will try to outdo each other on the climate tech investment front, and that’s a good thing.

But it's not just the total amount of VC being poured into climate tech that reflects the sector's growth. Deal value has consistently grown, too. According to PitchBook, total deal value in climate tech doubled from 2020 to 2021 (from $22.1 billion to $44.8 billion) and deal count increased by 32% in the same time period, from 855 to 1,130.

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It's too soon to know how the economic downturn of 2022 will affect the climate tech VC environment, but according to Bloomberg, as of July 2022, while the total number of climate tech deals declined 30% in Q2 compared with a year earlier, $27.9 billion in investment in Q2 marked a 47% increase over the same period. Bloomberg's take? It's possible that investment in companies that aim to decarbonize are somewhat resistant to what's going on in the stock market and VC generally.

More good news: The number and average size of megadeals (venture funding rounds of $100M+) are also growing, as well as the number of climate tech unicorns (companies with a valuation of $1B+). According to HolonIQ's climate tech funding report, there were 61 megarounds in 2021; the company's recent list of climate tech unicorns states that 28 startups joined the unicorn herd in 2021 and that as of July 2022, the total number of climate tech unicorns reached 47. Climate tech unicorns are collectively valued at $131B+.

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COP26, the most recent UN climate change conference, highlighted the importance of developing climate tech innovations in the most carbon-intensive sectors, especially transportation, energy, manufacturing, and food production. When you look at VC investment in climate tech in 2021, as we did in our recent State of Startups Report, you can see just how much the UN's agenda points investment just where it's needed. Together, the mobility, energy, and food & water sectors accounted for more than 90% of total VC funding into climate tech startups in 2021.

Climate tech VC funding by sector:

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According to the PwC 2021 State of Climate Tech report, mobility & transport remains the most heavily invested "challenge area," accounting for about two-thirds of total climate tech investment. Transportation is also leading in growth rates with a CAGR of 133 percent. Due to its key role in combating greenhouse gas emissions and suppressing climate change, sustainable transport will continue to grow, with electric vehicles and other low-emission vehicles dominating the sector.

The energy sector, along with transportation, manufacturing, and construction, is responsible for three-quarters of global emissions, while energy production makes up 13.6 percent of total GHG emissions, according to the PwC report. This sheds light on one of the toughest, but potentially most high-impact opportunities for startups: developing renewable energy solutions, including green hydrogen, smart grids, and energy storage, that can accelerate energy transition from fossil fuels to low-carbon alternatives.

Food production is assumed to account for about 20% of global emissions, PwC reports. Agriculture, land use activities, and livestock farming are the largest contributors to carbon emissions, so there's increasing demand for sustainable food systems and land and water management solutions. Increased risk of food and water shortages has spurred investors' interest in technologies focused on meat and dairy alternatives, food waste management, afforestation, and low-GHG farming practices.

A new kind of tipping point

The Inflation Reduction Act of 2022 recently passed by the US Senate — the biggest piece of climate legislation in history — promises to be transformative: It features nearly $370 billion in climate and clean energy funding and aims to direct investment toward areas of climate innovation that thus far have been neglected, including incentives for smart agtech practices, tax rebates for energy-efficient home retrofits, and rapid deployment of clean energy solutions. That's game-changing for climate tech startups.

But the massive shift in what policy makers and investors are finding compelling is also apparent in the very fiber of tech: its talent. Some "traditional" tech leaders are leaving their high-profile positions to work in climate tech, like Meta's former CTO, Mike Schroepfer, who is now making philanthropic grants to support research on how the ocean could store carbon ("carbon removal"). Other tech workers are also jumping ship to become climate warriors.

Climate tech, it could be argued, is the best place to be in terms of challenging work, opportunity, and social responsibility on a global scale — and over time, that fundamental shift in professional values and career gratification could be every bit as important as increased funding from government and VCs.