At first sight, the outcome of last December’s COP28 summit promised to give a major boost to the world’s clean energy companies and their investors. Negotiators from nearly 200 countries agreed to pursue a tripling of global renewable power capacity by 2030 and to double the rate of efficiency improvement.
Meeting these targets would mean a surge in growth for the companies developing, and deploying, technology to lower global energy emissions.
Yet this upswing has proved slow to materialise. The iShares Global Clean Energy exchange-traded fund, which holds a broad basket of climate tech stocks, declined 6.5 per cent in the 12 months to November 4, against a 26 per cent rise for the FTSE World index.
In private markets, too, the numbers have disappointed. Analysis by research company Sightline Climate found that climate tech start-ups raised a total of $11.3bn in the first half of 2024 — down by a fifth from a year earlier.
Part of the problem stems from macroeconomic factors. The industry came of age in the second decade of this century, which was a period of extraordinarily low interest rates by historical standards.
Renewable energy projects were set up to build wind and solar plants using debt finance, which would then be paid off over decades as they earn cash from the power generated.
But, when central banks began to increase borrowing costs in 2022 to tame inflation, developers’ repayment bills soared — a major shock to their business model. They are still adjusting to that reality.
“This is the first time that large scale renewable investing [has faced] a raise in rates,” points out Matthew Ridley, co-manager of Greencoat UK Wind, the UK’s biggest listed green energy investment fund.
Higher interest rates have been a big factor in the slowdown in venture capital investment, more broadly. But climate tech ventures have also had to compete with a boom in artificial intelligence start-ups. In the first eight months of this year, 35 per cent of all investment in US start-ups went to AI companies, according to data provider Crunchbase.
Green tech funding from the US venture capital industry has been further constrained by the US presidential election, says Sightline Climate.
When Donald Trump returns to the White House in January, he is set to take a far less supportive stance on clean energy than the outgoing administration of President Joe Biden.
Some investors, nonetheless, have maintained a bullish tone, due in large part to Biden’s Inflation Reduction Act, which offered an estimated $369bn in tax credits for clean energy investment.
The legislation has had a “tremendous” impact, with a positive long-term signal sent to entrepreneurs and investors, says Carmichael Roberts, who co-leads the investment committee at Breakthrough Energy Ventures — a vehicle founded by software tycoon Bill Gates and one of the world’s biggest green venture funds.
However, the rise of green protectionism has added another obstacle. The US and EU have imposed steep tariffs on cleantech imports from China, citing concerns about supposedly unfair subsidies from Beijing and its hold on the green energy supply chain.
But critics have warned that these levies will push up the costs of low-carbon technology in the US and EU and slow the energy transition worldwide. The tariffs have, however, boosted some American and European companies with direct competitors in China. Shares in US solar-panel maker First Solar, for example, have risen more than 150 per cent since the start of 2022.
Globally, figures paint a mixed picture. The International Energy Agency predicts investment will rise roughly 6 per cent, worldwide, to $2tn this year from 2023, bringing it to about double that estimated in fossil fuels in 2024.
But that 2:1 ratio of clean energy to fossil fuel investment is far short of what will be required to eliminate emissions and meet the goal, set out in the 2015 Paris Agreement, of keeping the rise in the global surface temperature to well below 2C and ideally to 1.5C above preindustrial levels.
The world’s biggest banks, meanwhile, continue to provide more finance to fossil fuel clients than they do to renewable energy businesses, according to research by the Sierra Club and other non-profit groups.
Financing gaps can be starkest in the developing nations that are home to most of the world’s population and future needs. The IEA estimates that meeting the COP28 goals will require a doubling of investment by 2030 — but a quadrupling in emerging markets outside China.
Start-ups face a shortage of funding around the stage where they need several tens or hundreds of millions of dollars to build a first working plant based on their low-carbon innovations. Some have succeeded in attracting such finance, notably Sweden-based H2 Green Steel, which raised $5.2bn this year from an international group to build the world’s first large-scale plant using hydrogen to process iron ore.
However, investors will need a strong stomach and a long-term perspective, warns venture capital billionaire John Doerr.
“It’s going to take longer to build great climate companies — by five to 10 years — than companies that are not dealing with such entrenched incumbents, regulatory approval, market risk, technology risk,” he says. “But I’m up for that and, more important than me, the entrepreneurs are up for that.”
