A Look Into ClimateTech’s Evolving Market Landscape

 In 2023, global temperatures reached a critical threshold, recording an annual average 1.45°C above pre-industrial levels and making it the warmest year on record. The impact of this warming is visible across various metrics. Sea levels have risen by about 0.3 inches from 2022 to 2023, and we have been exposed to intense and frequent extreme weather events, including hurricanes, droughts, and wildfires. 

As the impacts of climate change grow more apparent, the push for bold, innovative solutions becomes urgent. ClimateTech, with a total addressable market (TAM) is expected to reach $185 billion by 2033, offering a cohort of opportunities to mitigate these impacts and adapt societies and economies to a changing world.

Why ClimateTech?

ClimateTech encompasses a range of technologies designed to address the most pressing environmental issues of our time. From renewable energy systems and smart grids to advanced materials that capture and store carbon, the scope is vast. These technologies are not just about conservation but pave the way for a new, sustainable economic paradigm.

But why should we – as investors – pay attention to ClimateTech? The answer is a convergence of necessity and opportunity. Policies like the U.S. Inflation Reduction Act have catalyzed significant investment in ClimateTech. This year, in the U.S. alone, climate has attracted $14.6 billion in funding from VC/PE firms​. But despite significant investment, there is an imbalance in funding. Sectors such as Low-Carbon Industry, Building, and Agriculture are underfunded relative to their emissions contributions​. For instance, Building received 4% of funding in 2023 despite making up 6% of emissions. Meanwhile, significant investment is directed into already overfunded verticals. The transport sector – which contributes 17% to global emissions – received 27% of climate-tech funding.  Regulatory frameworks around the world are tightening, consumer preferences are shifting towards sustainability, and the economic penalties and risks associated with ignoring climate change are soaring. For investors, this translates into a market ripe with potential for significant returns and the chance to drive real, impactful change.

Lucid raised more than $1b from Saudi Arabia’s investment fund

State of the Union

In his 2024 State of the Union address, Biden emphasized his administration’s commitment to addressing climate change, highlighting efforts to significantly impact climate policy through large-scale investments such as those stipulated in the Inflation Reduction Act and the Bipartisan Infrastructure Law. The Inflation Reduction Act includes climate investments that allocated around $369 billion to boost clean energy through various means, such as tax incentives for renewable energy projects (including solar and wind power installations) and tax credits to encourage the adoption of EVs to make clean transportation accessible. States such as California, Texas, and New Mexico, which already have significant solar and wind resources, are likely candidates for expansion. Changes to the Bipartisan Infrastructure Law include allocating funds to enhance the U.S. power grid’s capacity to support renewable energy sources. Part of the grid support includes funding for energy storage technologies, which are crucial for managing the intermittent nature of solar and wind power. Projects include battery storage systems that can store excess energy generated during peak wind and solar production times and discharge it when there is higher demand.

Where are investors looking?

Driven by demand for sustainable solutions and supported by increasing investment in green technologies ClimateTech is expanding. In Q3 2023 alone, venture capital investment into Climate startups surpassed $16 billion. Despite economic setbacks and deal slumps, there is a continued interest and a dynamic market environment for ClimateTech. Financial influx to this sector underscores growing investor interest and confidence in ClimateTech as a critical area of innovation and impact.

Key verticals within the ClimateTech landscape include:

1. Carbon Capture and Storage:

Captures carbon dioxide emissions from  power plants and industrial processes and stores it underground or converts it into useful products to prevent it from entering the atmosphere

2. Electric Vehicles & Sustainable Transport:

Focuses on the development and proliferation of electric vehicles (EVs) and other sustainable transport solutions that reduce dependency on fossil fuels and decrease emissions from the transportation sector.

3. Water and Waste Management:

Improves the efficiency and sustainability of water use and waste management, including recycling, waste-to-energy systems, and advanced water treatment technologies.

4. Renewable Energy Generation:

Enables development and deployment of technologies that generate energy from renewable sources such as solar, wind, hydro, and bioenergy, which do not emit greenhouse gasses during energy production.

5. Smart Grids & Energy Storage:

Uses systems that use digital communications technology to detect and react to local changes in electricity usage, along with energy storage systems that help balance energy supply and demand by storing excess energy and releasing it when needed.

6. Green Building Technologies:

Integrates building design and construction that improve energy efficiency and reduce the environmental impact of buildings, including materials that enhance sustainability and systems that minimize energy and water use.

7. Agricultural Technologies:

Increases the sustainability and efficiency of agricultural practices, including precision farming, biotech crops, and systems that reduce the environmental footprint of farming operations.

8. Plastic Solutions:

Uses technologies and solutions that offer renewable use cases for the disposal, redistribution, and reuse of plastic materials.

Each vertical represents a facet of the ClimateTech ecosystem. As the market evolves, these segments are expected to attract capital and drive further deployment of critical solutions worldwide.

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If you are a builder, investor or researcher in the space, I would love to have a chat – please reach out to me at amit.k@thelotuscapital.com