The state of climate tech Q3 2022

Looking for the latest updates on climate tech? Check out our Q3 2022 report for insights on the industry's current state and trends. From renewable energy to carbon capture, we cover it all. Stay ahead of the game with our comprehensive analysis.

On the right track? State of climate tech Q3 2022

Are climate tech investments on track?

2022 has been a good addition to this so far eventful decade, and this week, we will start its last month. Leading up to COP27, several data platforms released their analyses on the Q3 funding numbers of climate tech start-ups. So after our review of 2021 and the predictions of 2022, it's now time to have a look at the numbers of the climate tech scene of the 2nd half of the year. With the big question: are we still on track?

The state of climate tech in 2021 - 2022
Discover the latest breakthroughs and challenges in climate technology. Explore how cutting-edge solutions are shaping the future of sustainability in 2021 and beyond. Read now on Noldev.

Resilient market

In the record year of 2021, climate tech start-ups raised $68b in total. Although we probably won't beat that number this year, 2022 still presents good numbers. According to Dealroom, impact start-ups have already raised $35b in 2022, which is more than the $31b of 2020, and it is estimated that the total will be $47b. Net Zero Insights reports even higher numbers, namely $59b invested between Q1-Q3 2022 in Europe and the US alone and a predicted total of almost $80b for the entire 2022. According to their numbers, climate tech is set for a new record.

In Q3, climate tech start-ups raised between $12b and $14.5b in Q3 2022. This is 19 cents per VC dollar. 26% of the overall VC capital has gone into climate tech start-ups in the past 12 months, based on Pitchbook data presented by PwC. Only 327 deals were made, a difference of 39% compared to Q3 2021. This drop is in line with the continuous decline in investment levels and deal activity witnessed since Q3 2021.

This decrease in investments and YoY value is not because of a lesser interest in climate, but due to heightened market volatility and general VC pullback. Much of the surge in 2021 was achieved with SPACs and a handful of megadeals, which we have seen less this year.

Europe most climate-focused

The US is still the leader in climate tech funding. Despite the continuous drop in funding and deals, they continue to increase their average ticket size. In Q3 alone, the North-American region raised $8.7b.

Europe has become the most-impact focused region: 18% of VC funding goes into climate and impact tech, according to Dealroom. For the US and Asia, this has decreased to 8% and 4% respectively. For the past 3 years, Europe has been the region with the most rounds, usually with smaller deals than the US. But many small deals add up to a lot of money: in 2022, European start-ups raised $14.2b, which is very close to the US counterpart of $16.3b.

This activity has made it the only region with YoY growth (+14%) compared to Q3 2021, despite a negative QoQ growth of -27%. US and Asia on the other hand have seen their YoY growth being halved (-47% and -49%), but observe a very positive QoQ growth due to a lower Q2 2022. For Asia, it is even an QoQ growth of +200%!

Table with climate tech investment numbers per quarter in 2021 and 2022
Europe is the only region where climate start-ups raised more money in Q3 compared to Q3 2021 (Table based on Dealroom)

The other regions of the world show a mixed image: together, they have a QoQ growth of -50%, and a YoY growth of -70%. However, Africa is starting to invest a lot more in impact and is now the fastest growing region, followed by Europe. For Q4, numbers are promising: Oceanian start-ups have jumped from $35.1m in Q3 to already $100m in Q4, and Africa has increased its efforts from $4.7m to 7m. South-America on the other hand has a big fallback and went from $52m in Q3 to currently only $266k.

Clean energy and mobility were the most popular sectors in Q3 and received 43% and 17.7% of overall climate funding. More specifically, EVs and batteries raked in good deals: they are responsible for 27% ($3.9b) and 20% ($2.9b) of Q3 funding alone! US companies raised $2.6b in Q3, almost double of Q2, and regained their leading position in EV funding.

The new cool kid on the block is CCUS: carbon removal start-ups reported a YoY growth of 1,118% compared to Q3 2021 thanks to a few big deals. The total funding in the first three quarters of 2022 is already almost double compared to all of 2021.

Bar graph with investments in US$ and number of deals in carbon capture technologies
Investors have shown an increased interest in carbon capture, utilization and storage technologies in the past years (Source: PwC)

Another rising player is climate fintech, which had a 68% increase in funding in Q3 2022 despite a slight decrease in deals. This increase is mainly thanks to the US, which knows a QoQ growth of 120%, but European start-ups have had their investment peak in Q1 already.

Problem: an inefficient investing market

In their eagerness to solve climate change problems, investors' overfocus on a few solutions has distributed capital unevenly across the market. The flow of capital is not in proportion to each sector's contribution, because the majority of capital currently goes into the sectors with a lesser amount of GHG emissions. Mobility and Energy are responsible for 15% and 12% respectively of global emissions globally, yet have received 48% and 27% of the funding in the past 12 months. This means that 85% of emissions receive 52% of funding. If we leave out Energy, the number is even more disproportionate: 73% of emissions receive only 25% of the funding.

Bar graph with percentages of global emissions per sector versus their share of investment
The different sectors don't receive funding proportionate to their global emissions, though the situation is improving (Source: PwC, based on Pitchbook data)

Especially the funding for Industry and Built environment is too little for their carbon footprint. However, the situation is improving: in 2021, 85% of emissions (energy included) received only 39% of funding.

This focus on certain sectors has also led to technologies with the highest decarbonization potential to remain underfunded. Mobility solutions like EVs and micromobility have received the lion's share of investments, whereas waste management and carbon capture are getting more attention only now. Even though these mobility technologies are necessary for a sustainable future and their development has led to helpful insights for other industries, VCs should inject more money in maturing technologies with an immediate decarbonization impact as well.

Graph showing the amount of funding that went into climate tech solutions, based on maturity and emissions reduction potential
The climate tech solutions that received a lot of funding are now more mature, but don't necessarily have the biggest decarbonization impact (Source: PwC, based on Pitchbook data)

Another worrying trend PwC notices, is the decreased volume of early-stage funding. The amount and total value of small deals has dropped since the start of 2021, even though those are critical for early-stage start-ups bringing new innovation. Later stages are doing better, but the risk of this gap between the initial pre-seed and the later series A and B could mean that soon there won't be enough start-ups to move from earlier rounds to funding for later phases. A possible reason for this gap might be that reporting requirements for ESG funds are cumbersome, and the funds for early stages often don't have the capital to cover these transaction costs.

Graph with the amount and the total sum of climate tech deals under $5m
Since Q1 2021, both the amount of deals and the total size of small deals have been steadily dropping (Source: PwC, based on Pitchbook data)

What's coming next?

It has been estimated that in 2022 a total between $47-80b would be raised. At the moment, the deal counts and raised amounts of Q4 in Europe, US and Asia have been lower than Q3. To reach the projected amounts, we would need a few big rounds in December.

Climate and impact tech proves to be a resilient and growing industry with still a lot of unlocked potential. The sectors with most emissions only get a fraction of funding, and are now the sectors that attract VCs' attention. We will see more and bigger deals there in the next years. It's an evolution we're very interested in, and we hope it brings out the creativity of many future entrepreneurs.

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