Last December, the COP28 summit seemed to signal a promising future for clean energy firms and their investors. Representatives from nearly 200 nations committed to tripling global renewable energy capacity by 2030 and doubling efficiency improvements. Achieving these goals could dramatically boost the growth of companies involved in reducing energy emissions.
However, this expected growth is taking longer to arrive than many hoped. For instance, the iShares Global Clean Energy ETF, which includes a wide range of climate technology stocks, fell by 6.5% over the year leading up to November 4, while the FTSE World index rose by 26%.
Private market statistics paint a similarly disappointing picture. A study by Sightline Climate found that climate tech startups secured $11.3 billion in funding during the first half of 2024—a decline of 20% from the previous year.
Several economic factors contribute to this slowdown. The clean energy sector emerged during a time of historically low interest rates, which helped facilitate the development of wind and solar projects financed with debt expected to be paid off over many years using revenue from generated power.
As central banks raised interest rates starting in 2022 to combat inflation, the financial burden for developers increased significantly, disrupting their business models. “This is the first time that large-scale renewable investing has faced a raise in rates,” notes Matthew Ridley, co-manager of Greencoat UK Wind, the UK’s largest publicly traded green energy investment entity.
The surge in interest rates has caused a broader slowdown in venture capital investments. Additionally, climate tech companies are competing for funding against a rapidly growing number of artificial intelligence startups, which captured 35% of all US startup investments in the first eight months of this year, according to Crunchbase.
The upcoming US presidential election also poses challenges for green tech investments. If Donald Trump wins in January, he is expected to adopt a less favorable stance toward clean energy compared to President Joe Biden’s administration.
Nevertheless, some investors remain optimistic due to the Biden administration’s Inflation Reduction Act, which potentially offers around $369 billion in tax credits for clean energy investments. Carmichael Roberts, who co-leads the investment committee at Breakthrough Energy Ventures, emphasizes that this legislation has sent a strong positive message to both entrepreneurs and investors.
Despite these positive stories, the rise of green protectionism adds further complexity to the landscape. The United States and the European Union have implemented significant tariffs on clean technology imports from China, reflecting concerns over unfair subsidies and China’s role in the green energy supply chain. Critics warn that these tariffs may lead to higher costs for low-carbon technologies in the US and EU, complicating global efforts to transition to cleaner energy sources. However, American companies that compete with Chinese firms have benefitted from the tariffs; for instance, shares of US solar-panel manufacturer First Solar have skyrocketed by over 150% since the beginning of 2022.
Internationally, while the International Energy Agency anticipates a 6% rise in investment in clean energy, reaching around $2 trillion in 2024, this amount falls short of what is needed to meet the emissions reduction goals outlined in the 2015 Paris Agreement. Furthermore, major banks continue to lend more to fossil fuel companies than to renewable energy projects, according to research by the Sierra Club and other organizations.
The financing gap is especially pronounced in developing countries, which host a significant portion of the global population and future energy needs. The IEA estimates that meeting the COP28 benchmarks requires doubling investment by 2030, and a quadrupling in emerging markets outside China.
Startups often face challenges in securing the large amounts of funding needed to construct initial plants based on their low-carbon innovations. Yet some companies have successfully attracted significant investments, like Sweden’s H2 Green Steel, which raised $5.2 billion this year to develop a large-scale plant using hydrogen to process iron ore.
Venture capital billionaire John Doerr warns investors about the necessity for patience, indicating that building impactful climate companies may take five to ten years longer due to various market and regulatory challenges. “I’m ready for that, and even more importantly, the entrepreneurs are ready for that,” he states.