Their ev is about the first wave of clean tech – wave 2 will solve

Out of the ashes of Clean Tech 1.0 emerged an evolved class of investors, armed with lessons learned and relevant operating expertise. Today, clean tech investors are supported by a network of climate tech peers across asset classes and investment stages; many are specialists who cut their teeth as investors or operators during Clean Tech 1.0. The field is not only dominated by venture capitalists providing catalytic capital to emerging technologies, but also encompasses growth equity investors with capital and expertise to scale commercially viable technologies, as well as real asset investors with the ability to deploy and use these technologies at scale in real world projects. Late-stage private equity managers are raising record capital with the ability to sustain the climate tech space beyond venture, unlike Clean Tech 1.0. In addition, sustainable infrastructure managers have ramped up to provide critical and compellingly structured capital for projects and companies that in Clean Tech 1.0 were otherwise funded by inexperienced venture capitalists. This league of climate tech investors provides an opportunity for asset owners to build a balanced portfolio of climate tech investments across stage and asset class.

From a sector expertise perspective, these Climate Tech 2.0 investors have taken a more measured approach to technology risk with more emphasis on software and optimization solutions, which are easier to scale and less capital intensive than hardware (e.g., carbon capture, fusion energy, hydrogen, etc.)—the primary focus of Clean Tech 1.0. While climate tech software presents competitive investment opportunities, hardware technologies are a crucial component in accelerating global decarbonization. Once de-risked, the surviving late-stage climate tech hardware companies face significant barriers to entry. Therefore, catalytic mission-aligned investors, as well as select sector specialists continue to fill the gaps by investing in necessary hardware technologies. In addition, strategic corporate investors are joining forces with traditional investment managers to invest in climate tech companies and add valuable technical and sector expertise as active board members as their own business models evolve with the energy transition.

On top of this more robust network of investors, Climate Tech 2.0 appears to be benefiting from multiple macro factors. One of the most significant of these factors is the drastic decline in the cost of renewables and batteries, 2 which is enabling the energy transition at a speed and scale that was not achievable during Clean Tech 1.0. The cost decline in renewables has been so dramatic that solar and wind are frequently cheaper than fossil fuels in many locations. This has resulted in new capacity in renewable energy outpacing traditional power sources (Figure 3), a trend that is likely to continue to accelerate. Tangential technology cost declines across a variety of areas—such as sensors, hardware inputs, general business start-up costs—and the adoption of information technology and software have all benefited Climate Tech 2.0, as it has for other start-up sectors of the economy. All of these technology cost declines have significantly improved the unit economics of many Climate Tech 2.0 business models and have helped climate tech start-ups compete with the traditional industries they are attempting to disrupt.

Meanwhile on the policy side, public support—backed by concrete net zero commitments from governments and corporations alike—is at an all-time high 3 and is creating the demand for fast and scalable climate tech solutions. For example, the US Inflation Reduction Act of 2022 will increase US government climate spending by $369 billion. 4 Together with the CHIPS and Science Act and Infrastructure Investment and Jobs Act, US policy spending on climate will be over twice as much in the next five years as it was during Clean Tech 1.0. 5 Outside of the United States, the European Union has pledged over 30% of its budget, roughly $633 billion, on climate-related spending through 2027. This policy support is likely to continue to strengthen as rising geopolitical risks heighten the demand for energy independence and security.

Finally, not to be understated, is the talent migration to climate tech companies. As public concern over the climate crisis has grown, so too have individuals’ desires to work in climate careers. For example, according to some surveys, 40% of business school students across the globe want to pursue careers in environmental sustainability. 6

As a result of these momentous shifts, climate tech investment performance appears to be improving and is now comparable to the broader private equity and venture capital universe (Figure 4). Early data on capital loss and impairment ratios provide additional evidence of performance parity with the broader private investment universe (Figure 5).