Climate Funding Gets Squeezed by Volatile Markets
3 min read
29 Mar 2023, 06:05 PM IST
Green startups were steadily raising cash until this quarter’s slide
PremiumThe interest-rate increases and market volatility that hit risky investments last year have finally caught up with green startups.
The sector, which includes everything from renewable energy to speculative climate technology, had steadily drawn in cash through last year during a record-breaking streak of fundraising. In the first quarter, funding for these companies has fallen almost as much as total venture-equity funding.
Clean-energy startups have privately raised about $8 billion in equity in the first quarter, a drop of nearly 40% from a year earlier and the lowest figure since 2020, PitchBook data show.
Activity in the market for sustainability-linked bonds and loans has also softened in line with the overall market amid rising interest rates, dragging down the amount of debt larger companies are raising for climate projects to the lowest level in more than two years, according to Dealogic. Companies in the oil-and-gas industry and other sectors are also raising much less cash than they did in recent years.
“People thought the climate industry was immune. That’s not true at all," said Apoorv Bhargava, chief executive of San Francisco-based WeaveGrid, a startup that sells software to manage the surge in electricity demand from electric cars. Mr. Bhargava, who is also an angel investor and adviser to some climate technology companies, said more financing rounds have been canceled, delayed or downsized recently.
The weakness in climate funding marks a shift from last year, when the sector largely avoided the worst of the market slowdown and got a boost from the law known as the Inflation Reduction Act, which promises to inject hundreds of billions of dollars into the industry over the next decade. The recent failure of Silicon Valley Bank—which had some 1,500 clients in the industry—and pressure on other lenders are hurting the sector.
Analysts expect the divergence to benefit large companies with the cash to ride out economic turbulence and take advantage of the new climate law.
“The earlier stage a deal might be, the more likely it is that the senior decision makers are suggesting a pause or to review the valuation," said PJ Deschenes, co-head of sustainability-focused investment bank Nomura Greentech. “Those are the things that can slow down markets and kill deals."
Many investors and businesses are also pausing some climate activity while the Treasury Department completes its rules for how tax credits in the Inflation Reduction Act will be implemented. The law sparked a wave of initial investment announcements after it passed in August, but executives say there is a lull while companies wait for clarity on rules dictating what components qualify as made in the U.S. or what projects will count as clean hydrogen.
Funding for risky companies is cyclical and will likely rebound when rates stop rising or start falling. Green funding has grown so fast recently that it is hard to predict how long the slowdown will last.
A prolonged financing drought could make it harder to cut planet-warming emissions. Governments have increasingly turned to the private sector to supply cash and technology to address climate change. Recent record annual financing figures above $1 trillion were still well short of what is needed to meet global climate targets, a United Nations climate finance group says.
Many companies took advantage of low interest rates and are now in no hurry to raise money for climate projects, said Ana Carolina Oliveira, head of sustainable finance in the Americas for ING Group. The average time it takes for companies that are attempting to raise debt in the sector is increasing because banks are being more careful and business executives are preoccupied with rising costs or other financial matters, she said.
“There are other more pressing or immediate topics right now," she said.
Private-equity funds focused on climate have raised significant amounts of money recently. Firms such as Brookfield Asset Management Inc. and TPG Inc. are still putting cash to work.
Brookfield raised $15 billion for its first energy transition fund and is trying to raise much more than that for its next one. It recently bought the half of Madrid-based renewable developer X-Elio it didn’t already own from KKR & Co.
TPG is a big backer of solar-technology firm NEXTracker Inc., which raised $638 million in early February after pricing its initial public offering above expectations in one of the biggest IPOs in recent months. Shares have risen more than 35% from the IPO price. The gains have bucked a modest drop for clean-energy stocks broadly in the first quarter.
