Sustainable business and ESG investment have become the norm since 2020. Large corporations are all now issuing sustainability reports and most global companies are integrating Net-Zero into their business models. In 2022 investment in ESG accelerated across all industries, and according to Bloomberg, sustainability assets under management (AUM) in 2023 reached $38 trillion. Bloomberg anticipates that ESG AUM will reach $50 trillion by 2025. This means that roughly every three dollars invested, one will be invested in sustainability. To further demonstrate the shifting investment trend, it is remarkable to check what Black Rock’s CEO Larry Fink said in 2021 in his investment letter to shareholders “There is no company whose business model won’t be profoundly affected by the transition to a net zero economy…companies not quickly preparing themselves will see their businesses and valuations suffer”. This essentially means that climate risk is becoming as valuable as investment risk and investors are acting accordingly.
Green Start-up Riding the Wave
There’s no part of the economy untouched by sustainable innovation and investment. This includes the proliferation of green or climate tech early-stage ventures. In recent years, some of the fastest growing companies are climate tech, including plant-based proteins, renewable energy, low-carbon steel, green concrete and coal, and electric batteries. Climate tech accounted for more than one quarter of all venture dollars invested in 2022, according to recent data analyzed by PwC. In terms of the highest valued billion-dollar companies, according to HolonIQ (an industry leader), as of January 2023, there are 83 Climate Tech Unicorns around the world for a total value of $180 billion. This is an impressive growth compared to 2022 when we had only 44 Climate Tech companies valued at 1 $ billion or more. Despite the market challenge and recent crisis, Green Unicorn will continue to scale and create value. They will likely continue to reach unicorn status much faster that the startup in other sectors as witnessed recently. Based on my analysis, green startups have taken an average of 4 years to reach Unicorn status (the billion-dollar valuation), as opposed to the 7 years for startup in more conventional sectors.
The Cost of Capital will Stay High
While there continues to be momentum around sustainability start up investment, higher interest rates could stall investment flows in riskier early-stage companies. As money have becomes more expensive throughout 2022 (with 7 interest rates raise in the US alone), early-stage projects may not be able to raise capital to fuel their growth as investors become more risk adverse and selective. There are in fact signs that investors are seeking opportunities with higher credit worthiness and more experienced executives. Early-stage disrupters will have to adjust to the new market constraints and must sacrifice higher valuation and give away more equity to attract investors with robust liquidity profiles.
Rising Carbon Prices
Investors and entrepreneurs should also take note of the raising carbon prices. Recent Net-Zero legislation and Global Climate Summits COP26 and COP27 (that respectively took place in the UK in 2021 and in Egypt in 2022) are securing carbon trading partnership and leading to higher carbon pricing. Furthermore, most countries have strong Net-Zero commitment by 2050. The European Union, which is ahead of the game, reached a deal in April 2021 to reduce greenhouse gases 55% by 2030 compared with 1990 levels, and to reach net-zero emissions by 2050. Carbon prices more than doubled since the approval of this legislation. Changes in the carbon market will affect every segment of the economy, increasing the price of everything from electricity to food and gasoline. Higher carbon prices will force companies to adopt cleaner technologies and decarbonize their operations. As carbon prices rise, and low-emissions technologies become more efficient and affordable, we will continue to see an increase investment in climate tech, and more companies will participate in the carbon market to trade their decarbonization efforts.
The US Inflation Reduction Act Impacts
The Biden Administration Inflation Reduction Act is the largest climate investment package ever approved by any country and it is changing climate tech investment forever. The nearly $370 billion climate and renewable energy package is streamlining carbon reduction across the board while accelerating climate investment globally. The bill aims to reduce greenhouse gas emissions by electrifying activities that are based carbon intensive fossil fuels and generating more electricity from renewable sources such as solar, wind and green hydrogen. This law is essentially sending a powerful message to the market and acting as a force multiplier of green investments across all segments of the economy.
The Cost of Climate Induced Disasters
Another element accelerating clean tech and sustainability investment, is the high cost of climate change. As disasters such as floods, forest fires or megadroughts became more frequent and intense, there is stronger evidence that climate events are linked to human carbon emission. Based on the data available from NOOA (National Oceanographic and Atmospheric Administration), the US may have been losing 1-2 % of GDP per year due to climate induced disasters over the last decade. This has acted as a catalyzer for climate mitigation and adaptation investments. Just to keep temperature increase at 1.5C compared to pre-industrial times (and thus limit the risk of catastrophic climate events), almost $30 trillion dollars needs to be invested by 2050 globally. This equals roughly 4 percent of annual GDP (in 2021 money). While the price tag for adapting and mitigation climate risk is high, the alternative is much higher. According to the Reinsurance Group Swiss-Re climate could cause $23 trillion in global GDP losses corresponding to 11 to 14 per cent off global economic output per year. With these massive losses, there are massive opportunities and financial markets, and entrepreneurs are going after this unprecedented market opportunity.
While ESG and clean tech investments are very promising, the market is still demanding more standardized ESG metrics and more regulation coordination to ensure high quality tools, harmonized carbon pricing, and effective resilience investment strategies. On the green start up front, we will continue to experience accelerated capital inflows toward these types of deals, even though doubts persist about the unproved economical profitability of green-tech startups. Rest assured though, we are in a strong market for sustainability investment and the regulators will continue to provide the market signals that will allow climate investment to thrive.