Climate investing: Growth continues during challenging times


Climate investing: Growth continues during challenging times

Investments in climate technology are continuing to rise, defying the challenges impacting most capital markets. Due partly to new policies n the US and EU targeting zero emissions by 2050, this growth is expected to continue this year, despite the ongoing economic challenges.

The recent political and economical challenges resulted in a slowdown of markets and suggested the previous period of growth in climate technology was ending. That downturn hasn’t appeared, instead, climate investment exceeded the broader market in 2022 in capital deployment and flow. The momentum is expected to continue this year as governments, investors progressively focus on climate technologies that provide energy security, affordability and opportunities to achieve sustainability goals.

Climate technology has secured an added boost from government measures in the US and Europe that will enable more capital flow to support net-zero goals by 2050. The US Inflation Reduction Act (IRA) will provide over $370 billion in funding to tackle climate change, and the EU Green Deal could allocate over $1 trillion in public and private funds. These measures combined could generate significant opportunities for investors in a market that studies suggest could exceed $9 trillion in investment by 2030.

Climate investment witnessed a strong period of growth in the last few years. From 2019 until 2022, private market investors introduced over 300 sustainability, ESG and impact funds. The combined assets within these new funds grew considerably from $90 billion to $270 billion.

According to PitchBook, investments in energy transition technologies and other climate solutions increased from $75 billion in 2019 to $196 billion in 2022. The performance of climate-related markets is a sharp contrast to the overall performance of other private-market deals.

Navigating through challenging times

The performance of private-market investments in climate technologies eluded the economic and geopolitical challenges that cause many capital markets to decline. In 2023, climate investment continues to face hurdles that have impacted investor sentiment and the overall economic outlook, impacting capital markets. High inflation, rising interest rates and supply chain constraints are challenges for this year. The heightened focus on energy security has also impacted sustainability efforts, as governments and businesses explore gas and coal supplies to create their reserves for the winter months.

Despite the challenges, climate investment is well-placed to continue growing. In response to the current energy crisis, many countries have refocused on fossil fuels, yet more companies are pledging to reduce their emissions and implement net-zero targets. As of the end of last year, nearly 140 countries proposed net zero targets that make up about 90% of global emissions.

Today’s commitments go well beyond the early pledges for adopting renewables in the earlier days of solar and wind development. New agreements and plans for renewable energy and low-carbon materials are key indicators of continued demand for climate and decarbonisation technologies. Furthermore, the energy crisis has shown the importance of creating a diversified energy supply. Climate solutions, especially in the power industry have grown considerably. In the US, the demand for clean energy via corporate power purchase agreements (PPAs) has grown considerably in the last few years to nearly 20 GW.

Supporting policies and regulations

Governments worldwide have taken considerable steps forward in legislative and regulatory support for climate and energy transition measures. The Inflation Reduction Act (IRA) in the US will provide $370 billion in tax credits and other subsidies for new energy solutions. Government actions, whether mandates (like emissions reductions), subsidies (investment or production tax credits) or market design (carbon pricing), continue to be driving forces for climate solutions. 

Several established climate solutions like utility-scale wind or solar have reached cost parity compared with another fossil-based alternatives. Emerging solutions like grid-scale storage or hydrogen still require green premiums, but these are declining and are expected to continue with increased deployment. The cost of clean hydrogen has recently increased, mainly due to rising construction costs but a McKinsey study suggests there will be significant reductions in cost through the 2030s leading to cost parity between green and grey hydrogen. Other studies suggest the total cost of ownership for battery electric vehicles will be lower than internal-combustion engine vehicles as early as 2025.

Despite market conditions, the broader financial systems and their associated asset owners remain focused on financing the energy transition. Large, established investors in energy, industry and infrastructure are focusing on investment opportunities in climate technologies, and many are introducing their solutions to pursue these investment plans. Investors have shown the capacity to reduce the cost of capital for climate technologies as they develop, such as the case with solar and wind projects. They must now adopt a similar plan for the next wave of climate technologies. 

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