This is Dana Perkins and you're listening to Switched on the B and AF podcast, and today we're talking about climate tech investment. During the third quarter of twenty twenty four, climate tech companies raised over ten billion US dollars in equity across public and private markets. So is this a
lot of money? Well, it's not insignificant, but it represents a decline from the same period in twenty twenty three and is a fraction of the almost forty one billion that was raised in twenty twenty two, so zooming out. The story is different depending upon where in the world you are. In China, clean tech manufacturers had over capacity in industries like solar and energy storage, so this resulted
in a collapse in funding. Meanwhile, in India there was an increase in equity funding in Q three this year, rising by one hundred and fifteen percent. But if globally it looks like there is a decline, what do clean tech investment trends tell us about the future and should we be even comparing current numbers to previous peaks like
that scene in twenty twenty two. Well, today to answer those questions and more, I am joined by Mark daily Head of Technology and Innovation at BNF, and he talks about the recent report titled Investment Radar three Q twenty twenty four funding drop Again. BNF subscribers can access this report at BNF go on the Bloomberg terminal, and at BNF dot com. Now, let's talk about climate tech investment. Mark, thank you for coming on switched on today, Thanks for
having me. We're going to talk about well equity funding for climate tech. So these technologies that have the potential to change the way that the energy transition is playing out and the future of decarbonization. And in twenty twenty two, our research showed that there was one hundred and twenty seven billion of US dollars in companies, but that fell in twenty twenty three to eighty four point four billion.
So thus far, if we're looking at twenty twenty four, and I know we're bowling out three quarters in, but we're in that last quarter, where are things trending and where is twenty twenty four stacking up? Is it more like twenty twenty two or is it more like twenty twenty three.
So it's unfortunately not really like either of them. So we've continued to see a drop off in terms of what we say corporate equity funding for climate tech, And that's important part of the word, because a lot of the equity that goes into climate tech that people would think about is project equity for solar implants. And what we're really talking about here is companies that are issuing stocks in order to finance their business operations and grow.
So in terms of how much of a decline are we seeing, it's probably going to end up to be about half of what it was last year, so at a point of about eleven billion dollars per quarter this year. Why is that, you might ask, I think you probably have a lot of people in this podcast to come on and talk about growth and things, and I have to present this chart all the time, and it's always a bit counterintuitive, but the reason is basically that corporate
equity funding is highly highly linked to company valuations. If your company's were more money, and the stock market sees it that way, then you're going to be able to raise bigger rounds to grow your operations more quickly. And over the past couple of years, if you look at the stock market, and Bloomberg has covered this pretty extensively from started twenty twenty two, the entire stock market dipped a little bit, the SMP, the NASDAK, and clean energy
and clean transport indices. But since then the general stock market has recovered quite a lot. But if you separate out clean transport and clean energy, they really haven't. Part of the reason for this is there's been a little bit of trouble in the industry. You constantly see negative headlines about electric vehicles and the wind industry. Personally, I think that's a little bit overwrought compared to the reality of the situation, but it's definitely impacting perceptions of companies,
and so that's depressed a little bit. But also interest rates have been high. High interest rates mean that companies that are growth stories, which is all climate companies, really they're going to have more of their profits out there in the future discanted at a higher rate, and so that's depressed them. Is it all bad going forward? Not necessarily. We've actually seen a little bit of recovery in company valuations. But I also say to people that this number of
being big isn't good or bad. It's largely a function of like what companies need to raise money to do, and lots of the really mature climate tech sectors like solar and wind and energy storage. The companies that were raising a load of capital over the past few years actually have built a lot of the manufacturing capacity to sell and manufacture all the products they need to sell to get to net zero, and so the industries have
a lot of oversupply in terms of manufacturing capacity. So additional capital being raised is actually just making all of these companies unprofitable because there's even more competition. And so that's another reason that we've seen a big drop off in funding, is because the companies that needed to raise the money to build these really capital intensive facilities just don't need to do it anymore.
When you're talking about equity and valuations of existing companies and raising fur their money for new projects, this perfectly makes sense. And what I want to know though, is is this market largely focused around a few big players or are we also seeing IPOs of companies and new entrants into this listed space also tracking a lot the same lines of what you're seeing in twenty twenty two, twenty three, twenty four.
So really hawk eyed listeners will I don't know, maybe have read the description and see my title at PNF is head of Technology and Innovation, and they might be wondering why I'm talking about IPOs. The reason for that is because the data set that this report is built on is a corporate equity deal tracker, and our team has ended up doing the venture deal tracking at PENF.
The venture deal tracking is a lot of the work in terms of tracking this sector or this kind of group of financing because most of the deals that happen are in private markets that are pretty small or maybe like five to ten million dollars or even less than that.
Most of the actual funding that we're talking about here is raised in like really really big deals, so they can be massive growth equity or they're probably going to be IPOs, And it's kind of that most I think is a Pareto rule where it's like eighty percent of the money comes from about twenty percent of the deals. So it's a really really big spectrum of So if there's like seed rounds in here, there's IPOs, there's secondary offerings.
We don't really have a lot of SPACs anymore, but yeah, that's the kind of portfolio of what's in there.
Why was twenty twenty two such a big year and why is this the year that we keep comparing everything too? Because you're right, Mark, Like we talk so much about charts where everything is up into the right. We're reaching record breaking investment levels in various parts of the energy transition, and here where we're looking at equity funding, we're seeing potentially the second year in a row. Like it was a peak. We're coming down off a slide. Yeah.
So actually this data set starts in twenty twenty two. We tracked it before at PNAF, but we basically built this data set to have a slightly different deal source. But if we were using the old methodology, you see actually probably twenty twenty one was the peak, and it's actually nothing really to do with climate specifically. People will be very familiar with the term zero interest rate phenomenon. Virtually all private capital markets were like booming in that
time period. There's just massi amounts of enture money going into everything simultaneously. There was a bit of a bump in climate at the time relative to the overall capital markets, but it really wasn't anything fundamental to climate or energy.
So you think that bump that occurred when you saw a lot of different companies embracing ESG ratings that hadn't before, and you saw a lot of funds being raised to actually focus on climate or even things with a sustainability lens that didn't previously exist around twenty twenty, that didn't have as big of an impact, and you think that maybe that's here to stay.
I think like funders of these things, they just have capital and they're looking for something to deploy it into. At the time, climate was one of the hottest topics in capital markets. Now we actually go into this in this quarter's report. We track what is climate as a share of total private capital markets, and I think it peaked in late twenty twenty two at about a quarter of all private market funding per quarter. Now it's down
to about ten percent. And part of that is because climate has been depressed a little bit relative to the tech market, but it's really been the rise of generative AI.
And if you interview climate specific venture investors, they're saying that, oh, there's actually a bit of a drop off an interest because general venture investors, who do everything, generative AI is not the thing that they want to invest in, and it's a lot more attractive to the typical venture investor because it's much more similar to mobile web than it is a climate, which everyone knows is a pretty tough industry to make the kind of VCS returns that people expect.
So let's have a little bit of a discussion around the regions and things to watch around the world. So much of our time on this show is talking about China and the incredible amount of manufacturing capacity that they have, and then also the US the Inflation Reduction Act has been a big part of it. But it also makes sense that these are traditionally the largest markets for clean tech investment because they're also number two and number one
in global GDP respectively. So outside of these two behemoths in the industry, what other parts of the world are emerging is really innovators and looking at clean tech investment, and are we seeing equity funding in other parts of the world, You know, what should we watch?
So I would say the point I was making earlier about manufacturing over capacity, that point actually links directly into this topic, and that's because the huge boom in twenty twenty two. Actually, if you look at the regional chart breakdown of where the boom was happening, it was in inland China and that's because the entire manufacturing supply chain for things like solar and batteries and a lot of
electric vehicles is based in mainland China. So these are the companies that I was talking about that don't need
to build any more manufacturing capacity. And in fact, we've heard that, particularly in the solar industry, the government's really discouraging people from raising additional capital to build out more manufacturing to prevent a I don't want to say death spiral, that's a bit over the top, but like just make sure the companies are not driving each other out of business and making sure that they can generate some profits. So China's seen a huge drop off. The United States
is relatively stable. The United States market is pretty different than China in the sense that it's a lot more private capital oriented. It's a lot more diverse across different areas of climate. So yes, some energy, but also things
like industry decarbonization and ag tech. But yeah, in terms of there's not a huge amount of markets that are big enough in order to have trends in this data set, because there's you if one country has like one really big deal that can give it like its biggest quarter ever by ten x, so there's only some economies like maybe the major European ones. Something notable that we saw this quarter is that in India was ranked as the
second biggest market for the first time. So the reason that this is a pretty interesting story is because it's kind of indicative of this broader trend of the on
shoring of supply chains. People that I speak to because I'm based in Europe, often think about it in the European and the US context, but actually the same thing is happening in India, and there's content requirements around solar modules that are going to qualify for subsidies, and so the valuation of companies in India in the solar value chain has actually been They've performed really really well in stock markets since they've all gone public this year, and
you can see a kind of gradual and then all big sudden increase this quarter in funding. This quarter in India, a climate tech company's raised bout two point four billion dollars. In the context of China, that would be low over the last two and a half years or three years, but just Chinese funding is now so low that it's kind of fallen down the ranking a little bit. So that's in terms of regional trends, the most interesting thing happening right now.
So, if India is really becoming a much more dominant layer in this clean tech space, what parts of the industry are they known for. Is it going to be on the battery and storage and vehicles part of the supply chain? Is going to be more on the clean power traditional wind solar? You know, what are the industries and the sectors actually that they're most involved.
In right now? The companies that drove a lout of the funding that we've seen over the last few months, it's definitely been solar. Solar manufacturing is a lot easier to scale in a country than battery manufacturing. European companies are struggling a lot to scale battery manufacturing. It's just a lot more complicated. If things like scrap rates get higher, the materials and more expensive, the equipment's more expensive, so there's a lot more opportunity cost to being bad at
doing it. And so that's definitely the focus right now in India.
So what are some of the reasons you think India is experiencing such an incredible rise compared to previous years and is really shown up on a lot of your charts more recently.
So I think the biggest thing is the fact that the government is pretty acting the domestic clean energy industries. So there's tariffs unimported solar modules now a forty percent, which is pretty expensive. So even if domestic manufacturers can't compete with the Chinese companies, who are definitely the leaders in this, they can still compete in India, which is a really huge market that they can build and grow
and become better at manufacturing for. I think there's kind of a broader lesson to learn here for people who are looking at the energy and climate capital markets, which is that protectionism if you believe that it's bad for the economy and it's making decarbonization more expensive, which means it's bad for trying to mitigate climate change, but it's not necessarily bad for investors' returns because protectionism creates opportunity
for certain companies to make money. The thing I was mentioning earlier about manufacturing over capacity, there's globally a huge manufacturing over capacity for things like batteries and solar, and we still need some additional build out in like the next decade, but like right now it's kind of a
bit oversupplied, but that's really because of China. And so if you're based in the US and all of a sudden you can't buy Chinese energy equipment for whatever reason, all of a sudden, there's now a shortage of supply, and that's actually good if you're a manufacturer. So cynically, I think there's actually an opportunity to make money if you're an investor from productionist policies.
I mean, tariffs were certainly one of the topics that were at the forefront of the recent US election, So we would anticipate in the coming administration that you would see an increase in tariffs on a number of things, both in the energy transition and in other industries. So do we expect to see them these investment and these valuations that you're talking about, would you expect to see a bump from that if tariffs do indeed go up in countries like the US.
Yeah, that's a really good question. I this is the indicator I'm watching the most from the election in terms of like direct change in policy. Will notice quite quickly in terms of the impact is going to have on manufacturing companies inside the US. I'm not familiar enough with the industrial base compared with the demand. Obviously there's going to be unexpected changes to the demand for these technologies
in the US. Now. People think that the Inflation Production Act is relatively protected in a narrowly split Congress, but it's very up in the air at the moment.
Well. And so then let's talk about the other big country in this space that we've mentioned a few times, which is China. Their government has provided a stimulus injection for stock valuations. So how has this impacted the stock market when it comes to these energy transition focused companies.
Yeah, So, as I said, this whole funding market is very linked to public market valuations of companies because obviously that's what investors see is their like ultimate exit opportunity and the kind of comps that they can look at.
The Transport Index in particular, notice, had a big uptick this quarter for the first time since we started charting it in twenty twenty two, and it's kind of an artifact of the fact that the Chinese government just injected huge stimulus across the entire economy, and most of the transport's supply chain in that index is based in China. So it's more of a generic bump from the economy than it has anything to do with transport related companies.
So you mentioned that this is a part of what you spend your time focused on, which is the venture capital and private equity end of the market. So how is climate tech placed as a share of this? Is it growing or is there less investment in kind of some of these really early stage, more disruptive technologies.
The share of it as the total venture capital and private actory markets is declining a little bit. So reached a peak of about a quarter at one point about eighteen months ago, and now it's kind of gently declined down to round ten percent. That's not low if you look at energy transition spending across the whole economy and compared to global GDP right about two percent. So obviously the venture capital and private actory market is more forward
oriented than the rest of the economy. So it makes sense that it's a little bit bigger if you look at the public market size of things. It's smaller than private capital, but it's bigger than the economy more broadly, because again public market fundraising, it's four companies that are growing. They're just growing in a kind of later stage than
metro capital companies. So that's at about five to seven percent of total public market raising right now, that's a bit flatter, that's not really declining or growing.
So just taking kind of the temperature in the room, if you will, is your view that this is a perfectly reasonable amount of money to be going into these spaces, and we should not be expecting additional money to be flowing really dramatically into the venture capital private equity space when it comes to clean tech, because the way I'm looking at it is so often we're talking about net zero goals, and I look at how close we are to twenty thirty, so we're kind of halfway through this
critical decade. And I would then anticipate that if we accept this fundamental premise that decarbonization is something that most countries in the world are interested in seeing come to fruition and are therefore writing policies that would then support it, we would see an increase in funding. Now, there's the scaling of late stage technology like renewable energy sources, and that is one end of the market, but there are still parts of the emissions pie that need technology development
in order to meet them. We often refer to them as hard to abate when we talk about them, but it's those things as really complicated parts of things. Agriculture is another one of them where there is a need for technology development, And so why is this not blowing up as big as you know, maybe I would naively expect it to.
Yeah, So in terms of like is this the right amount of money, or like are we going to see it grow in future? We talked about a peek in twenty twenty one. We're still much higher than we were in like twenty nineteen, say, and it's still a huge
amount of money that's flowing into these companies. In terms of if I could wave my magic wand and funnel one hundred billion dollars into this sector every single quarter for these harder to abate industries, I actually don't know if that would really help us get to net zero at all. Maybe a little bit. But the problem is it's not venture capital, private equity, or people who invest
in IPOs. It's not their job to develop technology. And even if they did develop the technology, if there's no demand for the ultimate product, you're never going to be able to bootstrap an industrial tech solution to like actually solve the problem in the long run if people aren't going to pay you, because there's market structures that exist to kind of incentivize the adoption of technology. There's no amount of venture money that can develop a product that's
going to solve climate change. And so so yeah, it's just not the job of these financiers to do that, and you need policy to support it. So for hard to abate. We have some of that, particularly in the US. The forty five V for hydrogen, the forty five Q for carbon capture really really important and it's generating a lot of demand for those products. Doesn't exist everywhere in
the world for things like agtech. My personal thing that I always talking about is like, if you believe in that we need something to decarbonize protein production like cows and chicken, there's no support for any technology that would decarbonize that value chain you think is something like lab grown proteins. Not only is there no subsidies for it, consumers don't want it, they think it's bad for their health.
So like it's on a totally different field. So I we're so far away from venture investors needing to develop the technology. Obviously, there are startups out there. Maybe they will make some fundamental breakthrough that will change public perception of it, but until that happens, I don't know that there's going to be a huge uptick in funding for it.
So let's talk about some of the sectors very specifically. And you had already addressed solar and the manufacturing over capacity China and how that's really risen in India. We often talk about batteries, but I actually want to pivot to the clean fuel space because we hear a lot about sustainable aviation fuels at the moment, and actually quite recently at our summit in London, there was a panel
focused on this topic. So there were some things that came out of that, and I want to know from you, Mark, what is your view on well, given what you're seeing in terms of investment in these sorts of companies, how big of a deal is the clean fuel space?
So relative to equipment manufacturing and clean power development, it's still small. Sound about maybe a billion dollars every half year in the sector compared to like I'd say maybe ten to twenty billion dollars for clean power specifically, So it is small, but it's growing. It's one of the areas that if you work at BNF you probably get a lot of client inquiries about it, which I always find is pretty funny. It's a nice leading indicator when
you get a lot of client inquiries about something. Biofuels historically has been the biggest part of this sector, but this year specifically, we've seen a lot of interest in e fuels companies, which just to define it for maybe some of listeners who don't know, E fuels are hydrocarbon drop in fuels that have been derived from clean hydrogen and a net zero source of CO two. So I
think the industry is I think it's controversial. I don't know if everyone thinks it's controversial, and BNS to publish research on this, so I encourage everyone to use the platform and read this if they're interested in hearing more. But e fuels over the long term are very, very energy intensive, and I don't think they have a huge chance of becoming cost competitive with just combusting fossil fuels offset with direct air capture. People think, oh, direct air
capture is really expensive. How is that going to be competitive? If an e fuel is net zero, the carbon has to have come from something like direct air capture, and so that's actually irrelevant to the point of the cost competitiveness.
We're going to be needing to capture carbon from somewhere, But creating all the hydrogen that's needed for an e fuel and then smashing it together in an electrolyizer with CO two is really really energy intense of you lose a lot of hydrogen in the process, so you need a massive amount of electricity supply to actually create the production side. So I think long term the serious competitiveness issues. Now, speaking to people who operate in the market right now,
I'm sometimes a been too long term oriented. The reason that we've seen a lot of amendument in the industry is because there's a lot of strong policy that supports it. So this goes back to the point I was saying earlier. When there's policy to support demand for something, people will kind of finance whatever they can and get their hands on. Probably the strongest force in this industry right now is the European Union has created a mandate for the use
of E sustainable aviation fuel in aircraft. It's not really coming into force anytime soon, but people see, oh, in ten years if I can. Airlines are starting to procure some of it now, and I've spoken to startups who said, yeah, it's like it's really expensive to make, but these mandates mean that people will pay me a lot of money to do it because there's not a lot of production capacity right now. So some people I think might just be doing it as a short term way to finance
other technology development. Others maybe have more long term ambitious skills. But yeah, it's a pretty pretty exciting sector to be tracking right now.
So just to be fair and balanced, Mark, as you've been very clear on your stands on hydrogen and that is a really popular topic here, do you think the rest of our team would agree with your view on e fiels?
So no, not every BNEF binalists would agree with my perspective on e fuels. And I think one of the more compelling counter arguments I have heard is that, oh, it's cheap to produce fuel like the way we do right now because of the portfolio of products that are refinery creates. But if there's no longer any road fuel to create, it would actually be very expensive to produce just jet fuel, and so basically current refinery portfolios won't work.
And actually that makes economics relatively competitive for ethiels, so it is still a little bit of an open question. I'm sometimes a little bit hyperbolic in terms of the way I phrase the lack of competitiveness. The reason I talk about it, though, is because it is getting a lot of policy support, and we can't just endlessly support things with policy to try to get them off the ground, because not everything. You can't just subsidize everything forever. Not
a huge amount of political support for doing that. So we want to make sure we're subsizing the right things and just actually sometimes we'll subsidize stuff in it won't work, and that's fine, but we should constantly be asking ourselves that about the things that we're trying to get off the ground. And so that's why I always make this point about it, you feels, because it's a complicated question.
So let's make a pivot to another technology that has a critical role to play in renewables rollout. So we often talk about the lcoees, so the levelized cost of electricity for wind and solar and how incredibly low it is. But then there's the intermittency question. It rears its head, whether it's seasonal or hourly and energy storage is sitting right there as something that we need to think about. And you see that reflected in how battery technology has
been developed over the past few years. It's benefited vehicles, but it's also benefited this intermittency aspect of renewables. So energy storage is something that has been so incredibly important to the energy transition. Is it reflected then in what you're looking at.
Yeah, if you look at the data since twenty twenty two, I think energy storage by itself is the biggest sector. So it's bigger than transport, it's bigger than clean power, both manufacturing and development. Most of it is for lithium batteries, which are the biggest product by a mile. There's a surprising amount for other types of batteries, so flow batteries, thermal batteries, et cetera, and a lot of stuff m
battery recycling. I'd also say that most of the money that's raised is to build products that don't go into the grid, Like over ninety percent of batteries go into cars right now, and even in a net zero scenario, most of the batteries that we end up building go
into cars. And I'd also say that the impact of the sector on decarbonization is lower for energy storage compared to something like solar because manufacturing is so expensive for lithium batteries, like the capital intensity of the equipment's bigger. They're more expensive to make, and so you need to raise more money to kind of get a factory off the ground. And that's why the sector has been so big. And this quarter, actually energy storage is down quite a lot.
The reason for that being kind of the same as all the other equipment sectors is this is a huge oversupply in terms of manufacturing capacity. One interesting point actually is that like and this this probably applies across the entire clean clean energy manufacturing sector is people think overcapacity means you can't make money in sector. Not necessarily true. C at L is a very big company. They control a huge share of the entire battery market, and they
can make money manufacturing batteries. So most companies probably struggle because it's a huge overcapacity. But the people who are really good at it, they're the ones who are driving a lot of the price trends, and so doesn't mean no one's making money in the sector just because there's over capacity.
So we talked a little bit about how there was an increase in eyes, whether it's an ESG screen or in new funds that were raised to really look at some of the clean tech focused parts of the market,
and that give it gave it a bit of a boost. So, if we're trying to think about what's going to happen in the future and what equity funding for climate tech is going to look like going forward, are you seeing any signs that there are funds being raised and that interest in this space is increasing or decreasing, or are flat.
And so I'm often asked to produce a forecast of this number, which I always say is impossible because the numbers are so lumpy. It's like one massive deal can really change a quarter. So I can't say it's definitely going to go up or down, but I can tell you that one of the indicators that we look at as a team internally is to check how many new funds that are climate focused are closing every quarter. It's not representative of the entire pool of capital available to
climate companies. There's lots of generic investors to invest, there's lots of corporate venture funds to invest, But this kind of metric of how many venture funds are closing. Climate focused per quarter over the last few years is actually
reasonably flat. Some quarters it goes up by quite a lot because there's a megafund, but there's not been a huge drop off, So there's definitely still a lot of capital and a lot of investors out there who are dedicated to this vertical specifically, and so I don't see it disappearing as a theme anytime in the next couple of years.
It's about matching the right technologies with the right profitability into the write investors hands. Well, Mark, thank you very much for explaining all of these different trends and for coming on the show today.
Thanks for having me.
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