The need for substantial investment in climate technology is increasingly critical. Governments, corporations, and investors are all striving to close the funding gap required to advance sustainable innovations. The challenge lies in quickly mobilizing capital to develop and deploy technologies capable of reducing greenhouse gas emissions at the rate needed to reach COP28’s stated goal of net-zero emissions by 2050.
EquitiesFirst, a global financing firm, offers an equities-based financing model that could play a role in freeing up capital to support climate tech development.
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The Need for Climate Tech Investment
The global push toward decarbonization demands massive investment in climate technology. According to the International Energy Agency, about 35% of the emissions reductions needed to reach net zero by 2050 must come from technologies not yet commercially deployed.
However, financing climate tech development at this pace is challenging, especially as interest rates remain relatively high. Bloomberg New Energy Finance reported that climate tech companies raised $51 billion in venture capital and private equity funding in 2023, spread across more than a thousand deals. This figure, although substantial, represents a 12% decrease from 2022. While less severe than the 35% funding drop across startups overall, it’s concerning when many would argue that funding needs to increase over time to reach sustainability and emissions reduction goals.
Climate technology often requires more investment in the short term to support eventual commercialization, mainstream adoption, and cost reduction. Between 2010 and 2022, the worldwide average costs for solar power plummeted by 89%, and the expenses for wind energy decreased 69%. These technological advancements, bolstered by substantial investments, have positioned solar and wind energy to rival fossil fuels. It is anticipated that by 2025, renewable energy will surpass coal in electricity generation globally. However, rather than serve as a signal to stop investing in clean energy solutions, this success story should be a proof of concept for other investments in new clean tech.
For example, sustainable aviation fuel is currently approximately 2.5 times more expensive than regular jet fuel, and green hydrogen costs up to 12 times as much as gray hydrogen produced from natural gas. These technologies require significant investment to achieve commercial viability and compete with traditional, less sustainable alternatives.
Funding Gaps
The distribution of climate tech investments also shows a mismatch between funding and emissions impact. The industrial sector, responsible for up to 34% of emissions, receives only 14% of climate tech investment. Similarly, food production and land use, which account for 22% of emissions, receive just 8% of climate tech investment. This disparity highlights both the need for funding climate tech aimed at these high-emission sectors, and a financing opportunity to support that unmet need.
Unlike software-focused startups, many climate tech companies require substantial upfront capital for hardware development and infrastructure. They face longer paths to profitability and must navigate complex regulatory environments, but there remains a consistent long-term demand for the solutions they can provide. Traditional venture capital models, which favor quick returns and lower capital expenditure, often struggle to accommodate these realities. This has contributed to a $2 trillion financing gap for climate tech.
EquitiesFirst’s Financing Model
EquitiesFirst provides financing secured by publicly traded equities. The model allows clients to transfer shares of publicly traded securities to EquitiesFirst in exchange for financing.
It’s an approach designed to free up capital. Once the shares are transferred, clients receive financing that can be used for strategic investments, such as funding climate tech projects. At the repayment of the financing, EquitiesFirst returns the same number of shares. This model provides flexibility, allowing clients to maintain long-term equity positions and avoid the pressure of short-term repayment schedules typical of traditional venture debt.
EquitiesFirst’s model can potentially serve various purposes in the climate tech sector. For example, climate tech companies nearing key milestones or awaiting the close of a funding round can use equities-based financing to bridge the gap. This allows them to continue their development and operations without interruption.
Institutional investors and family offices can leverage their equity portfolios to invest in climate tech, enabling them to leverage their long-term holdings to support sustainable projects in the near term.
Climate tech projects often have longer development timelines. Equities-based financing provides the necessary capital without the repayment schedules of traditional loans, making it suitable for projects with extended timelines.
While specialized financing models like EquitiesFirst’s can play a crucial role, they are part of a broader solution needed to address the climate tech funding gap. A comprehensive approach involving multiple strategies and stakeholders is essential.
Government policies are vital in creating favorable market conditions for climate tech deployment. Production credits, carbon pricing, and green procurement initiatives can incentivize investment in sustainable technologies. The impact of such policies is already evident in markets like the United States, where the Inflation Reduction Act has spurred increased investment in clean energy technologies.
The private sector also has a significant role to play. Traditional banks have tightened lending standards, making it harder for climate tech firms to access capital. This has led to an increased role for alternative capital sources, including private credit and specialty finance. These sources provide the flexible funding needed for the deployment of low-carbon technologies.
Emerging Opportunities in Climate Tech
Despite the challenges, there are several emerging opportunities in the climate tech sector. The carbon-tech segment, which includes carbon-capture startups and firms developing software for emissions measurement and accounting, could be particularly attractive for early-stage investors. Other promising areas include electric vehicles, innovations that reduce emissions in manufacturing, and sustainable agriculture.
In addition, BloombergNEF identified startups in three main categories: software solutions to optimize renewable energy projects and manage battery storage; building or retrofitting properties with energy-efficient temperature control and lighting systems; and innovations focused on new net-zero fuels.
The transition to a low-carbon economy necessitates substantial investment in climate technology. EquitiesFirst’s equities-based financing model offers a viable solution for mobilizing the capital needed to support sustainable innovations. The role of alternative financing models may prove to be a key piece in solving the complex puzzle of climate tech funding.
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