Venture Capital Inflows Will Keep Green Investments Buoyant To 2030

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Venture capital inflows directed at green technologies, throughput efficiencies and energy transition solutions will likely keep sustainable investment pathways buoyant to 2030 despite prevailing headwinds, according to experts in the sphere.

Market data on total green investments in 2024 painted a vivid picture on the direction of travel using various metrics. Investment in the energy transition worldwide grew 11% to hit a record $2.1 trillion last year, according to Bloomberg NEF.

Concurrently, LSEG data pointed to more than $1.5 trillion of sustainable finance issuances in bonds and loans, while a Morgan Stanley year-end report recorded $3.56 trillion in assets under management with sustainable funds. Encouragement provided by VC funding was at the heart of many green moves.

But an uncertain macroeconomic climate and a noticeable political blowback against green initiatives in several countries, has many wondering if the pace of VC investments will likely slow down.

Admittedly, for an industry that often provides the springboard for investment raises by green startups, 2024 was not a particularly good year. VC inflows recorded by PwC declined nearly 16% to $673 billion last year. However, anxieties of about declining levels of investment to the end of this decade may turn out to be unfounded.

A Smarter VC Ecosystem For Green Start-Ups

Whether you speak to a traditional financial VC firm or a corporate VC, most talk of a smarter VC-backed ecosystem for emerging green technologies.

Herbert Mangesius, founding partner at Munich, Germany-based, Vsquared Ventures, said political and economic headwinds of the sort green technologies are currently witnessing, or phases of heightened interest previously seen in the Covid years are phases that come and go.

“What remains constant is the need for the deployment of patient capital whether we are talking of a nascent software platform to make electricity grids smarter to a net zero aviation start-up.

“Our investment philosophy is not altered by cyclical developments. Rather our due diligence of investment cases becomes smarter and more informed. VC firms are key participants that not only join the dots in the wider green finance and investment ecosystem, but also bring a level of smartness and agility.”

In such a setting, the quest for throughput and energy efficiencies remains a continual pursuit that is unlikely to be halted, said Thurston Cromwell, Head of Emerson Ventures, the strategic investment arm of Emerson.

“In fact, it’s a business imperative. Every quarter, I sit down with colleagues across our operating segments to explore the technologies they would like us to invest in, and the early stage players (and investments) in those focus areas that would be advantageous to our business. That’s never going to change.

“Of course, we do want to achieve, on a portfolio basis, top quartile VC returns which I benchmark at 25% internal rate of return. We continue to look for strategic assets offering good returns, and when we find that investment we double down like any good financial VC would, with the added difference of ultimately incorporating it into our products and services suites.”

After the high mark of VC investments during the Covid years, many believe a correction in subsequent years is to be expected. But one trend that has become clear is the investment push towards a software-led green future.

Green Software Enticing Investment Dollars

The nurturing of industrial and energy software is just as important as a paradigm shift in hardware solutions and design efficiencies, something both financial as well as corporate VCs claim is playing an instrumental role in keeping the market buoyant.

Daria Saharova, founding partner of Munich, Germany-based World Fund VC, said: “We view solutions for decarbonisation at scale and improving efficiencies of heavy industries as a growing opportunity. They can be hardware revolutions or software codes – what matters to us as investors is the march to net zero carbon emissions.

“We have developed our own in-house science-based methodology to suss out green startups, and only go for those with a high climate performance potential (of at least 100 metric tons of annual CO2 emissions reduction). These are often increasingly software premised concepts offering a very clear glimpse of the direction of travel.”

Amit Chaturvedy, global head of SE Ventures, Schneider Electric’s VC fund, said many, if not all, of his team’s climate and industrial technology investments happen to either be software-led or software premised.

“Whether we are talking accelerators or late stage ventures, there is enough anecdotal as well as empirical evidence of an AI, IIoT, Advanced Analytics led startup ecosystem with a steady stream of potentially viable ideas that could reshape the way we carry out our own, and SE customers’ processes, make and deliver things.”

Such a market may experience expected occasional bouts of caution, Chaturvedy added. “However, it will likely continue to grow steadily. For me, the question is not if it will grow, but by how much and at what pace. We embrace that opportunity with cautious optimism.”

Let’s Talk Deals

This palpable change is being felt across the energy and industrials sphere. The ongoing drive to invest in low-to-zero carbon emissions technologies and improved throughput margins that many deem to be joined at the hip, is getting bigger by the minute.

With trillions at stake and net zero targets in mind, everyone wants in as evidenced at industry trade shows and exhibitions in general, and ADIPEC in Abu Dhabi, United Arab Emirates, in particular.

Regularly billed as the world’s largest energy event of its kind, it attracts nearly 200,000 visitors every year. Since 2022, dmgevents – ADIPEC’s organizers – have been reporting rising numbers of climate and energy VCs, sustainable fund managers, investment bankers and hedge funds among the attendees.

Noticing this shift, dmgevents has introduced a dedicated finance content stream to ADIPEC proceedings in 2023.

Christopher Hudson, president of dmgevents, described investments in energy efficiency gains, climate tech and improved throughput margins as the “new frontier” and a “macro shift” that the global energy networking and events industry cannot lose sight of.

“We see this duly reflected in the content across our energy and industry events portfolio, and particularly so in the case of ADIPEC which is one of the largest global gathering of its kind.”

Hudson added ADIPEC’s finance content streams are not only a recognition of this but that of the event serving as a place to network and do business in a changed investment landscape for the energy sector. “Furthermore, the host city of Abu Dhabi has a robust presence on global climate finance and technology space and that serves as a magnet.

“Out of a ‘buffet’ of content, we find discussions on topics like financing carbon removal and sequestration, clean energy and electrification, climate data and analytics, and circular economy are now just as pertinent for those who attend ADIPEC, as traditional longstanding subject matter on wider energy resource prospection, management and security.”

The dmgevents president, who’s at the heart of leading nearly 30 energy events a year, admits that not all of them replicate ADIPEC’s level of energy and climate finance content for the industry.

“But its a testament to the direction of travel that two of our most high profile events – ADIPEC and Gastech – now offer best-in-class discussions on it, and have been doing so for some time now.”

In 2024, ADIPEC not only attracted delegates from some of the world’s largest climate VCs, sustainable funds and private equity firms, but also those from the 20 leading investment banks. Over $10 billion in deals were inked at the event, and a higher number may be anticipated this year.

“The finance industry goes where there is opportunity. The same financial institutions that sent a few representatives to ADIPEC ten or fifteen years ago to what was then an oil and gas show, now send 40 people to a global comprehensive energy solutions event to hunt for opportunities ranging from traditional resource maximization to the green transition. That’s the true audience that we bring in.”

Patient Capital Not Instant Gratification

As the market and its participants grow in a challenging, often politically emotive investment climate, many emphasize the green space is not about instant gratification but rather a much longer return on investment horizon.

Hitoshi Kaguchi, president and CEO of green solutions at Mitsubishi Heavy Industries Group, said his company often looks at a 20 year-plus horizon from the sustainability startups it backs.

“Often, we’re not necessarily seeking capital gains. We want to be partners in the progress and the technology. We investment up to 10% at each stage of the raise. We want the startup to be successful and scale up with them.”

Offering a case in point, Kaguchi said MHI Group has invested in 15 startups in energy decarbonization till date. While one has failed, the remaining 14 are still in play. “This is a sphere that requires patience. We get that from the wider VC ecosystem when we work with them on a consortium raise for a startup.”

Kaguchi agreed with his peers that while the figure of investment may go up or down in any year, a steady inflow of capital, often initially cobbled together by VC firms, would continue to the end of the decade in line with global commitments toward net zero goals.

BloombergNEF has predicted this required energy transition investment level to be $5.6 trillion each year from 2025 to 2030. Venture capital firms will likely serve as anchors for that funding, and, thus far, appear to be in a cautiously optimistic mood.