The Chancery Lane Project publishes third edition of its Climate Contract Playbook
There has long been a disconnect —even a conflict— between economic growth and environmental protection. Today, as the window to prevent irreversible damage to the planet from climate change becomes smaller and technological advances accelerate, they are finally aligning.
Innovation is key to delivering net zero carbon emissions. The right investment conditions are now present to enable ground-breaking “climate tech” ideas to come to fruition.
Significant investment opportunities exist, but this emerging area is fraught with pitfalls. However, there is an eroding baseline too: inaction is itself a risk, both in terms of failure to de-risk existing investments and in missing out on opportunities.
This report, titled Innovating to Net Zero: Funding climate tech from concept to commercialisation to critical mass, gives context to the issues, signposts options and provides food for thought on key issues for decision-makers, from the very earliest steps of investment to the practicalities of getting deals done. By marrying our expertise in corporate deal-making with extensive experience helping clients to build climate change resilience, Clyde & Co is well-placed to deliver insight in this area.
Partner, Clyde & Co
2 September 2021
Africa, Americas, Asia Pacific, Middle East, UK & Europe
2 September 2021
Africa, Americas, Asia Pacific, Middle East, UK & Europe
The climate tech investment opportunity
“Climate tech” refers to technologies that contribute to tackling climate change, either by helping to reduce greenhouse gas emissions into the atmosphere directly (such as via renewable energy or carbon capture) or by facilitating or automating behavioural and operational changes essential to reducing global warming.
Climate tech can be seen as both a vertical sector in its own right, and as a horizontal market spanning almost every industry sector. Energy, transport, agriculture, manufacturing, construction and property are the most obvious, but there are opportunities in other areas too including financial services and insurance, to hospitality and leisure.
Growth potential for the climate tech market is significant. Research by PwC indicates that climate tech investment levels in this sector have grown at five times the rate of VC investments since 2013. In many sectors, it will be necessary to disrupt the status quo in order for new climate tech products and services to gain traction.
Rapid growth is being driven by a combination of hard and soft pressures, including:
A fundamental shift in consumer attitudes is underway – a major driver being that younger generations are more inclined to “walk the walk” on climate action. This will spur rapid market growth in many sectors, creating a raft of investment opportunities.
Nigel Brook, Clyde & Co Partner, London
The drive for asset managers to take a more sustainable approach to investment has begun. Climate tech is a clear area of interest, but there are several considerations investors should bear in mind to create resilient investment strategies, identify suitable opportunities and secure the best deals.
Paths to climate tech investment for investors
Since the scope of climate tech is so broad, deciding on a position is the first step for potential investors.
After researching the market to understand the different sub-sectors and their growth potential, and taking existing experience into account, investors will wish to develop a clear approach to climate tech, either as part of an existing investment strategy or as a new standalone thesis.
Companies with good ideas, solid business models, demonstrable proofs of concept, and significant growth potential are popular prospects in any sector, but in the climate tech space, demand is such that entrepreneurs can often pick and choose from several suitors.
Thinking about your financial and climate-specific priorities and how a potential investment will sit within your investment or business portfolio may have a bearing on how you approach a potential deal.
Front of mind will be how to de-risk investments in this emerging sector. Investors should bear their overall climate risk mitigation strategies in mind when selecting investments and give advance thought to the importance of measuring and monitoring non-financial performance.
There is a large and expanding pool of capital ready to back and scale the climate tech innovations.
Paths to investment for climate tech companies
Ask yourself what sort of investor(s) would add the most value to your business model and map out your requirements.
Businesses and investors need mutual understanding and aligned objectives – never more so than in the climate tech space. A degree of knowledge about, and enthusiasm for, the sector or product concerned will be important criteria for many climate tech entrepreneurs, so ask about the investor’s investment thesis.
Be clear about your goals and how you will achieve them, as well as how you differentiate yourself from the competition and how what you are offering is new. Be upfront about what your financial proposition is, and what your non-financial proposition is (and why it’s important).
Be realistic about what you promise investors and what you require of them. Define your (climate-related as well as purely financial) criteria for success and think about to what extent those criteria need to be incorporated formally into the deal itself to create a resilient framework for your ongoing working relationship.
While equity investment can have many benefits, so too can grant funding. Government has a key role to play in seed funding new projects, providing gap funding for projects which would otherwise not be deliverable, and to provide Research and Development funding. Many different types of grants are available. Some provide funding specifically to projects designed to tackle climate-related issues. Others are generalists in nature.
There are some important differences when it comes to deal-making in the climate tech space compared to deals in other sectors. Due diligence may need to be adjusted to ask deeper or broader questions around climate-related issues that go well beyond the standard compliance-focused questions.
Data is almost always going to be central to the success of a climate tech business. By their very nature, climate tech companies will typically either generate data through their operations, or their business models will rely on using third-party data.
Tackling climate change and meeting net zero commitments cannot be achieved without significant investment in climate tech innovations – investment which must be appropriately directed and managed. The scale of the challenge is vast but so too is the opportunity set: from software that can re-shape consumer behaviour to technologies that deliver a fundamental structural shift in how many industry sectors operate.
In many ways, climate tech represents a new frontier for risk and reward: for entrepreneurs, investors, and the world at large. Resilient deal structures will be central to capitalising on good ideas for the good of society and the environment, as well as for financial gain. Clyde & Co’s position as a thought leader on climate change issues and our deep expertise in the corporate investment space, advising clients around the globe, puts us right at the heart of these issues.