Will climate tech survive the market downturn?

Venture investing has slowed dramatically in 2022. With less capital flowing into the startup venture capital ecosystem, it is almost inevitable that innovation and growth will slow in turn as startups are forced to cut back or shut down. However, one industry that seems poised for success despite the broader slowdown is climate tech.

Climate tech has been an outlier by continuing its rapid pace of investment and growth from 2021. Venture capital funding for climate tech topped $37 billion in 2021, almost double the prior year. Through the first half of 2022, climate tech fundraising was off to a record start, with $26.8 billion raised, pacing to surpass the sector's $37.0 billion total in 2021 and already beating the $22.6 billion raised in the entire 2020 year. Id.

The reasons for climate tech's continued success are many. Over the last few years, there have been a confluence of events and circumstances that are fueling encouraging levels of interest in climate tech space and are good reasons for optimism. Key factors include mainstream adoption and increasing consumer demand for greener products, a growing focus on ESG investing, war in Ukraine and related mineral shortages and potential threat to Taiwan, to name a few. Two trends in particular are likely to buoy climate tech funding in 2023 and beyond: (1) a shifting regulatory and policy landscape and (2) growing interest and investment from newer market entrants.

Climate tech has benefitted massively from shifting regulations and policies that make tremendous amounts of capital available to clean tech companies. In 2021, Congress passed the $1.7 trillion Infrastructure Investment and Jobs Act (IIJA), and in August 2022 came the Inflation Reduction Act (IRA), the most substantial climate bill in U.S. history. The IRA seeks to fight climate change specifically by making $369 billion available through tax credits, grants, loans, rebates and other funding initiatives. These funds are available to companies in climate tech sub-sectors, including clean energy, direct air capture, buildings, supply chain technology, electric vehicles and agriculture. Not surprisingly, startups have taken notice and are eagerly pursuing this pool of capital. Companies are beginning to see the windfall benefits these programs can bring as they allow companies to accelerate their growth without having to go through an investor fundraising process or give up more control to investors. Founders and investors alike also love government funding because it can replace traditional venture financings that would result in the issuance of new stock and dilution to all existing stockholders. Founders, startups and investors are all therefore eagerly thinking about ways to seize these funding opportunities.

As strategic counselors to startups and venture investors, corporate lawyers are seeing this play out first-hand in real time every day as this is a frequent topic of conversation in board meetings and other strategic discussions. In addition, lawyers must work with regulatory colleagues to advise startup clients on preparing applications for government funding and navigating what can be a daunting process. Climate tech startups are indeed starting to reap these benefits. A prime example is Ascend Elements, an engineered materials and battery recycling company that was recently awarded two grants totaling $480 million from the Department of Energy through the IIJA.

Ascend Elements also recently completed a venture financing that is illustrative of the growing amounts of interest and capital from newer market participants, another trend in climate tech. Almost simultaneously with receipt of the IIJA grants, Ascend Element's completed a $200 million Series C financing that included equity investments from an international group of strategic and financial investors. Traditional venture capital firms have been active in clean tech for decades, but more recently other types of investors have started to flood the space, including corporate venture capital investors (CVCs), sovereign wealth funds and private equity funds. CVCs often have many reasons to invest in climate tech beyond pure financial return. They may need to invest to satisfy ESG requirements or net-zero emission commitments.

Many corporates are also facing existential threats from clean tech, and they need to keep investing as a way to keep up with rapid innovation, which is often seen in automotive OEM investments in electric vehicle and battery startups. Ascend Elements' Series C financing included investors from corners of the venture ecosystem. The round was led by venture capital fund Fifth Wall and joined by SK ecoplant, the environmental unit of South Korean conglomerate SK Group, sovereign wealth fund Oman Investment Authority and corporate venture investors Hitachi Ventures, Jaguar Land Rover's InMotion Ventures and TDK Ventures, among others.

With more money than ever being unlocked and deployed in climate tech by the government and a diverse set of highly motivated investors, there is good reason to be optimistic. If the current trends continue, the climate tech boom will rage on even through the current economy, fewer companies will perish and innovation and growth will continue to grow.