Impact investment actually experienced growth during 2022 despite geopolitical and macroeconomic headwinds that disrupted capital markets worldwide.
Impact investing is an effective tool for mobilizing capital to tackle climate change. Yet its success requires special expertise: engineers and designers must craft new technologies into business models that transform industries, markets and daily behavior.
Impact Investing in Climate Tech
Climate change is the world’s greatest risk – and investors who commit themselves to combating it have an unparalleled opportunity to create meaningful social impact while reaping financial returns. As our world grapples with resource scarcity, natural capital loss, increasing insurance losses and fossil fuel depletion – sectors such as energy, food and water urgently require innovation and funding; plus stakeholder pressure makes impact investing an appealing proposition.
There are, however, significant barriers to investment. According to the report, developing climate technologies at scale and making an impactful difference require “massive amounts of growth capital”. This includes research and development (R&D) funds as well as people – engineers and designers, commercialization experts, marketers and sales people, contractors and lawyers.
Reaping the benefits of artificial intelligence (AI) in driving down costs by speeding research, improving design and development efficiencies and speeding innovation is no small challenge, yet one which can be overcome. According to this report, 71% of respondents identify AI as key driver for climate tech adoption, many using it already in this manner.
Investors looking to join the sector can benefit from a range of support mechanisms – incubators and accelerators as well as global networks of climate tech investor platforms are providing essential assistance, helping drive new deals while supporting more entrepreneurs, especially in underserved locations.
Though investment in climate technology may have declined since 2021, there remains significant momentum. This decline reflects global events such as Russia’s invasion of Ukraine, emerging market turmoil and declining oil prices; it does not indicate an end of three-year period of expansion.
Some sectors have fared particularly well despite the slowdown, including alternative energy, carbon capture and utilization, green hydrogen production and storage technologies. Furthermore, renewables are benefiting from unprecedented government programs in both Europe and America that aim to direct capital into renewable energies such as electric vehicles and battery storage technologies.
Identifying Impact Investment Opportunities
Investment in climate tech can provide solutions to address the pressing challenges brought on by climate change. This is particularly crucial, given that a significant funding gap exists for reducing greenhouse gas emissions and mitigating climate impacts; according to estimates by the UN this shortfall is estimated at between $1.6 trillion and $3.8 trillion per year through 2050 in order to meet mitigation targets under the Paris Agreement.
There are an increasing number of impact investment opportunities for investors to consider, with over 330 new sustainability, environmental, social, and governance (ESG), and impact funds focused on climate technologies and solutions being launched last year alone. These funds present investors with an attractive chance to align their capital with solutions which offer both social and financial returns.
Many of these opportunities lie at an early-stage and high-risk phase, and require patience as entrepreneurs build their businesses. But they also hold great potential to generate significant and sustainable returns – particularly those designed to accelerate clean technology development. A growing number of impact investors are coming together to “top off” funding rounds for climate-focused entrepreneurs faster and more efficiently, thus helping them raise larger amounts more quickly and easily.
One attractive climate investing solution for family offices and high-net-worth individuals is impact-first funds, which offer more liquid entry points. Often structured as private equity or venture capital funds, impact-first funds aim to achieve social and environmental impact while yielding financial return; examples include Prime Coalition’s Prime Impact Fund, Southeast Asia Clean Energy Facility and NatureVest from Nature Conservancy.
Investors can also explore climate-focused business and projects via traditional private markets, which may include increasing carbon sinks through forest conservation, climate-smart agriculture practices, or investing in renewable energy technologies like solar, wind or hydropower.
As investors explore opportunities to create a more sustainable future, they need to stay abreast of developments in this space. Thankfully, many organizations provide research and analysis of impacts, risks and opportunities associated with climate smart investing; these organizations play a vital role in supporting stakeholders develop policies and make investments which help transform our economy.
Impact Investing in Energy
Energy technology represents a substantial portion of impact investments in climate technology. This category covers technologies that produce, transport or conserve energy as well as supporting infrastructures; examples include solar PV generation; clean transportation technologies like electric vehicles and car sharing services; as well as renewable energy efficiency technologies.
Many of these investments focus on developing and scaling innovative solutions that will reduce carbon emissions to help halt climate change. Acumen invests in entrepreneurs using cutting-edge science to bring affordable and sustainable electricity access to 1.6 billion people; Sila Nanotechnologies creates next-generation battery materials that make low-carbon electricity production cheaper.
Investor interest in this sector remains high despite investors remaining wary amid COVID-19 pandemic and uncertainty around global economic growth, evidenced by numerous specialist funds such as Amazon’s $2 billion “Climate Pledge” venture fund and Unilever’s $1 billion Climate Innovation Fund, in addition to numerous corporate venture capital plays.
At the same time, it is critical that investments in these sectors be targeted toward areas that will have maximum impact. According to the World Economic Forum’s 2023 Global Risks Report, natural disasters, water scarcity and climate change pose the greatest threats to sustainable development; as solutions designed to meet Paris climate accord’s goal of net zero greenhouse gas emissions by 2050 should receive particular consideration in this effort.
Target sectors where climate-resilient solutions would offer maximum benefit to society and businesses, such as regenerative agriculture or carbon capture and storage technologies. You could also invest in solutions that address multiple climate risks.
Climate tech start-up funding may be down, yet there are signs of resilience. Solar and wind power have seen investment increase by 24 percent each since 2022; other sectors, including green hydrogen which saw 64 percent more investment and carbon capture use and storage which saw 39 percent.
Impact Investing in Agriculture
With one third of human-caused greenhouse gas emissions attributed to food production, agriculture must embrace change and adapt. Impact investors and their networks can play an integral part in supporting projects with long-term potential that offer financial returns alongside positive environmental and social impacts.
Accessing capital that will fund investments in new technologies remains one of the primary challenges in developing countries, so impact investors have emerged to meet the needs of small farmers who struggle to afford equipment necessary for more sustainable farming practices.
At its heart lies one of the most promising opportunities: sustainable and resilient crop cultivation that helps mitigate climate change. An investment in water-saving irrigation systems may enable farmers to produce higher crop yields with less water consumption while adapting better to changing climate patterns.
Investments may assist farmers in forming groups or cooperatives to pool resources and realize economies of scale, which can lower costs, negotiate better terms with buyers, and strengthen overall resilience.
Collaboration with agricultural extension services to train farmers on sustainable practices, sound business practices and opportunities to add value to their products can lead to higher incomes and greater security – plus help make farmers more resistant to climate change effects.
Over time, an increasing number of impact investors are targeting food and agriculture investments as a key focus area. According to a survey of 294 impact investors conducted by Global Impact Investing Network (GIIN), food and agriculture was identified as having received the highest percentage of funds intended for investments.
As more impact investors allocate capital to agriculture, it’s imperative that they are equipped with the data and tools required to evaluate investments effectively. This requires understanding crop production, commercial calendars, risk profiles of investments in this space as well as having a framework in place for measuring social and environmental impacts such as changes in farmer income or land sustainability metrics.
