Looking back at 2023 to look ahead to 2024
Green ventures raised less capital last year than seen in either of the two preceding years (see chart). The total value of private investment was down on levels seen in 2022, ranging from 12% lower, at $51 billion, according to BloombergNEF to a 30% deceleration (at $32 billion), according to CTVC. In both cases, it was the first slowing in investment seen since 2020. That said, investment in the overall start-up market plunged by 38% in 2023.
Facing a challenging macroeconomic environment with both higher interest rates and more uncertainty, many investors have decided to “wait-and-see” and many entrepreneurs seem to be conserving their existing capital and not coming to market, for now.
Turning to 2024, many of the same headwinds face investors, albeit they’re potentially abating. Four factors, however, might point to this year being an opportune moment to allocate to climate tech.
1. Ventures at attractive valuations
First, valuations are likely at more attractive levels than seen for some time, if at all. Last year’s slide in overall investment was driven more by reduced deal size (down 28% on average) than deal count (down 3%).
Entrepreneurs coming to market or earlier-stage investors needing to exit positions will find it more of a struggle to raise capital, compared with the buoyant markets of prior years. For the “2024 Climate Tech Oracle” roundtable, six of seven industry players expected “more flat or down rounds in climate tech compared with 2023”. For newer investors, this, in turn, creates more favourable investment conditions.
2. Governmental support accelerates
Governments will continue to accelerate their focus and support for cleantech – as much for potential economic growth opportunities, energy security and international standing, as for environmental principles.
For example, in response to the US Inflation Reduction Act (IRA)’s $369 billion of funding, in February the EU agreed the Net Zero Industrial Act (NZIA) to strengthen Europe’s net-zero technology products manufacturing industry and build on the Green Deal Industrial Plan launched in 2023.
Moreover, the “UAE Consensus” that emerged from COP28 establishes a range of global commitments, such as tripling renewable energy capacity by 2030 or doubling the global average annual rate of energy efficiency.
While the path may not always be smooth, governmental policy and regulatory incentives continue to improve the environment for green tech companies to start and scale.
3. Illiquidity portfolio benefits
Allocating to early-stage green tech can also capture the illiquidity benefits of private assets. Given that the outlook for 2024 is one of subdued growth, investors might seek to enhance returns by adding assets that extend the time horizon of their portfolios.
Moreover, from a behavioural finance perspective, as explained in ‘Diving into private assets and the liquidity conundrum’, the illiquidity associated with private markets can help investors to stay the course in the face of short-term uncertainty and volatility, supporting one’s long-term goals.
New environmentally focused funds and vintages closing in 2024 will have a blank scorecard in terms of performance, and, as noted above, a more attractive roster of potential ventures from which to select. As well, the cleantech companies that have weathered the recent tougher times will likely be leaner and positioned for growth over the next decade.
4. Building a family legacy
Finally, while not purely a financial rationale, investors may consider investing for “emotional returns” as well as benefits for family legacy and intergenerational continuity.
Investing in green companies likely to prosper from long-term growth trends, and helping to address urgent global challenges, can be personally satisfying. As found in the last survey for the Investing for Global Impact report, over three-quarters of wealthy individuals, families and family offices engage with impact investing given a sense of “responsibility to make the world a better place”.
It can also enable family unity and continuity, 53% of wealthy families say sustainable investing is helping to bridge the gap between generations, and 80% say involving younger generations will help prepare them to take on family responsibility.
All that glitters isn’t green gold
While allocating to early-stage green technologies has noteworthy potential, investors also should be aware of risks by the nature of asset class and thematic focus.
As outlined in ‘Venture capital: What’s the big deal?’, investing in early-stage companies has inherent challenges around informational barriers, risk of failure and liquidity.
Furthermore, for environmental challenges the “best” solution is subject to research, competition and debate that rages across the science, technology as well as business. Picking the winning companies is not easy.
As well, the breadth of opportunities across cleantech, climate tech, green tech, nature tech and the like, is significant. This provides a range of opportunities, and challenge of understanding, often in deeply technical fields. Those interested in potential ideas can refer to ‘Five sectors for long-term green growth in 2024’.
Practically, for investors, these risks can be mitigated through seeking deep expertise, focusing on fund selection and diversification of investments both across themes and vintages.
Another critical year
This is another critical year of a “Decisive Decade” to limit global temperature rise, and protect and regenerate nature and biodiversity. Investors with sophistication, risk appetite, and moreover desire to use their wealth to influence tomorrow may find benefits for both their portfolios and the planet in allocating to green-tech ventures.
