Climate tech is one of the areas generating the most significant interest, and attracting the most investment, in UK startups today. This interest has gone against the broader investment trend that has seen venture capital investment slow down in recent years in the wake of an investment surge through 2021 and 2022.
While the UK economy saw growth of just 0.5% in 2023, the UKs net zero economy – the subdivision comprising businesses that aim to reduce greenhouse gas emissions to zero by 2050 – grew by 9%. London climate tech startups raised $3.5b in 2023, a significant increase over the £2.2b raised in 2022, putting the UK third globally for VC investment raised in 2023, and London second in the world for climate tech investment, behind Stockholm.
As the realities of climate change have become more apparent, and the threats it poses more tangible and immediate, there has been a shift of terminology, from green tech, through clean tech, and into climate tech.
In the arena of environment impact industries – ‘green tech’ encompasses a broader scope of companies that generally work to reduce negative impacts upon the environment including renewable energy, green mobility, recycling and sustainable buildings. ‘Clean tech’, is focused on creating cleaner versions of existing systems to reduce their ecological footprint. ‘Climate tech’ is the most recent, and focused, categorisation.
As a sector, climate tech refers to companies developing technologies that are specifically designed to engage with climate-change related problems. It covers everything from climate modelling to prediction tools, carbon capture technologies, climate-resilient infrastructure and climate risk data analytics.
So what’s got investors so excited?
“The big shift is that people have stopped asking ‘why do we need to do something’ and started asking ‘how,’ says Nicky Dee, Co-founder and CEO of Cambridge-based, climate tech-focused VC fund and venture builder, Carbon 13.
“Part of that is very pragmatic, as people now understand that the cost of inaction exceeds the cost of action, meaning we’re now seeing commercial drivers in this space. But there’s a recognition that climate tech isn’t going away. All stakeholders are missing their net zero targets and this isn’t going to change in the near term, which creates some certainty for investors that there is a rising tide of demand for solutions.”
Why is investment activity in climate tech ramping up right now, what are the key triggers for the timing?
“We’ve had bubbles of activity in this space before, largely under the pseudonym of clean tech. The re-branding to climate tech marks a different era in this space where the focus is less on technology, and more on the commercial drivers. In turn this has helped resolve concerns about exits as indicated by a 45X increase in combined enterprise value in a decade.”
To what extent are government initiatives like Net Zero and Cleantech for UK, or others making it easier for UK climate tech startups to flourish, and attract investment?
"The FCA have followed European regulation (Sustainable Finance Disclosures Regulation - SFDR) in their Sustainability Disclosure Requirements (SDR) which will hopefully lead to a similar trend in anti-greenwashing and fund of fund commitments to ever more sustainable investments. Secondly there is renewed evaluation of how to unlock scaling in climate tech through access to different financing mechanisms, from non-dilutive, to debt to equity. This is particularly relevant for hardware based solutions which are recognised as essential for delivering material reductions in greenhouse gas emissions. Of course the reality is that we do see our ventures exploring other countries if it means accelerating opportunities to scale."
To what extent is AI accelerating interest in climate tech, in your view, and does AI unlock new potential across products, growth and scalability for climate tech startups, that investors might consider to be of particular interest?
"There is a lot of talk about AI at the moment, and a challenge is unpicking the different solutions this encompasses. It’s become much easier to put together a flashy pitch deck which makes it all the more important to have the subject matter expertise so the team can be interrogated! We know there is a lot of talk on co-pilots and generative AI, and see some low hanging fruit to support deployment of environmental technology and the development of “green” skills. And then there is of course the ability to use and make sense of data so that we can really take account of tracking greenhouse gas emissions, mitigation and adaptation opportunities.
But where I probably get most excited is how AI is disrupting the trajectory of hardware and materials development. For example, Materials Nexus from one of Carbon13’s previous cohorts is using AI to make superior materials faster than ever before – without being dependent on only going into a lab. This has led to the development of a radical new magnet in just three months. Similarly Sunbear Bioworks is using AI to accelerate work in the lab to produce alternative high value commodity fats and oils."
Is there a case to be made that investors in UK startups should consider investment in climate tech ahead of other sectors, both for impact and for commercial reasons?
"We work with our ventures with the expectation they will scale and develop globally recognised solutions. There is an urgency to address net zero which I believe will escalate as we continue to miss targets and witness, as well as pay for, the effects of climate change. I believe this will force commercial drivers to crystallise and align desperately needed impact with significant returns."
Which areas of climate tech are seeing the most investment?
"Renewable energy, carbon capture, and sustainable agriculture. Decarbonising heat in homes as well as industrial heat will remain core challenges. Energy storage and demand side responses continue to be essential to renewable energy deployment and grid stabilisation. There is increasing appetite for carbon dioxide removal and utilisation, and a need for better data on nature based solutions and their ability to be a sink for CO2e especially with volatile weather conditions and escalating temperatures. Blue carbon is seeing significant interest as we recognise untapped opportunities, but also explore how we should be using land."
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