Green financing is flooding climate-focused sectors

Climate change awareness is growing, and it’s starting to bring more capital along with it.

Global issuance of sustainable bonds and loans hit record highs of over $1.4 trillion in 2021 and could reach over $7 trillion annually by 2025, according to the Institute of International Finance. 

Low-carbon energy transition reached a record $755 billion in 2021, up by more than a quarter year-on-year, according to a new report from BloombergNEF. 

Venture capital dollars have also been flooding climate tech over the last year. Here, startups raised around $40 billion across venture deals, with funding rising 20% sequentially over each quarter. Around 1,400 investment firms joined at least 1 climate tech deal in 2021, according to Climate Tech VC. 

The wider macroeconomic and political environment has been contributing to this surge in interest. The current US administration has been putting climate change at the forefront of its agenda, promising to commit trillions of dollars towards climate-related investments and tasking regulators to assess the country’s resilience towards climate risks that threaten the economy as a whole. 

However, for the world to be on track for net zero emissions by 2050, transition-related investments need to accelerate from current levels to around $4 trillion annually by 2030, according to the International Energy Agency. 

And if we actually meet this target, there would be enough pieces of the pie for everyone. The agency estimated that the cumulative market opportunity for manufacturers of wind turbines, solar panels, lithium-ion batteries, electrolysers and fuel cells amounts to $27 trillion – larger than today’s oil industry and its associated revenues.

These potential new investment prospects, paired with the pressures coming from the public and regulators, are driving up interest in sustainable investing. There is a new status quo on the horizon – one that includes a portfolio with climate-related investments or an ESG stamp on it. 

Where is the money going?

The bulk of VC investments went to mobility, energy, food and water sectors, accounting for 90% of total 2021 climate funding, according to ClimateTechVC data. These sectors are also the most mature, with nearly 50% of investments going towards Series B, C and growth stages. 

Source: ClimateTechVC

However, it looks like investors are developing an interest not just in established companies, but also innovative ones in early stages of development. The largest year-on-year growth was recorded in the carbon sector, which deals with management and removal of emitted carbon, up ten times from H2 2020 to H2 2021. 

This also represents the ‘youngest’ investment sector, alongside climate (data, intelligence and risk associated with climate change) and consumer (circular economy solutions, ESG investing and fintech). In these three sectors, nearly 50% of funds went to startups at seed stage, and another 30% were funding Series A rounds of investments. 

Source: ClimateTechVC

Guiding today’s investor in the green economy

This flow of money is also creating new economies around it. New companies are coming in to service investors that want to go green, but don’t know where to start. These firms aim to connect capital to sustainable products, recognizing that capital markets can be part of the solution. 

“We can deploy a significant amount of capital to existing sustainable technologies. I believe that there are structures that could accommodate those, so you can get the return and have the right counterparties. We've done it before in other markets, we can do it again,” Trenton Allen, CEO of Sustainable Capital Advisors, told Tearsheet. 

However, this new world of green investments can be confusing to navigate, particularly for new investors. There are many ESG metrics and methodologies, scattered data, and investors fear the issue of sacrificing profits in order to ‘do good’.

This is why Allen’s company is working on an online platform to assist investors in redirecting their capital to positively impact the client in a way that’s fruitful both economically and environmentally. It’s focused on solving three key issues for investors: information, engagement and activation. 

“It's thinking about people who may be interested in moving their capital in a way that has a much more positive impact – how they can identify the types of investments that would be able to do that while achieving their objectives from a financial standpoint,” he said.

The first purpose of the platform is to help all investors, including retail, understand the climate-friendly investment universe and inform them on what products are available and how they work. This provides an educational component, on top of which the company wants to build an engagement piece, nurturing a community of people interested in how to use capital to benefit the climate, Allen said.

The last piece of the puzzle is activation – moving more capital to investments that have a positive climate impact. 

“The capital that we need to address climate change exists in the system, we don’t need new money. If we can activate this capital that exists, then we have the ability to meet the challenge of climate change,” he said. 

And there are ways for investors of all sizes to participate in this. Capital doesn’t have to come just from traditional commercial banks or even investment banks; smaller banks can play a role as well by supplying the demand for intermediary capital for smaller projects, Allen noted.

When it comes to retail investors, there is significant interest in doing something with a positive impact as opposed to window dressing. SCA found that three out of four investors would pick a financial product with a positive environmental impact and good return over an investment that promises a great return but no environmental impact. 

Looking ahead, Allen expects environmental performance to become embedded in the underlying financial performance of investment products. While this doesn’t happen universally today, it will become crucial as the industry grows – fully integrating environmental impacts into financial products.

“Now the question becomes, if it's not performing from an environmental standpoint, how does that impact the value of the investment from a financial angle?”

While there are still many questions to be answered, the trajectory is clear - money has started to flow towards green projects, and the investment community is hungry for such opportunities.