How venture investment is helping to scale climate tech

In many industries, innovative technologies will be critical to unlocking the pathway to net zero emissions. Investors recognise the opportunity to help start-ups and early-stage businesses scale up their operations: the global volume of climate-oriented equity transactions in private markets — from pre-seed to buyout — soared to about USD196 billion in 2022 from USD75 billion in 2019.¹

As the climate crisis becomes increasingly urgent, debt and equity providers are exploring new ways to mobilise funding for the climate tech market.

“The International Energy Agency says 45% of the technologies that we need to help us get to net zero by 2050 are still under development and at a low level of technology readiness. Investors have a critical role in ensuring these technologies scale up,” said Peter Hirsch, Head of Sustainability at 2150, a venture capital fund focused on urban sustainability.

The traditional approach to financing start-ups and early-stage innovation is venture capital, but lending is playing an increasing role.

Banks and debt investors traditionally steered clear of asset-light or pre-profit technology companies. That attitude, however, has changed: many of the world’s most valuable businesses today are technology companies, and the role of debt funding is increasing.

Lenders are looking to create scalable and low-cost debt facilities that can complement equity and enable start-ups to build more diverse capital structures and balance sheets, said Bailey Morrow, Managing Director for Consumer, Frontier and Climate Tech at HSBC Innovation Banking.

“We aim to provide working capital so that start-ups are not always beholden to venture capital firms, which do not want them spending all their money on infrastructure or hardware – that is a great use of debt,” she added.

The key challenge for lenders, however, is the level of risk involved in growing a technology business. This risk is particularly acute where companies are yet to become profitable, as their ability to reach a commercial scale is dependent on external funding.

So, rather than taking the traditional venture debt approach, by simply providing finance for the company to spend how it chooses, HSBC Innovation Banking is more specific about its expectations for what the money should be used for, she added. “By targeting a clear return-on-investment, we can get more comfortable committing capital at an earlier stage.”

HSBC Ventures also works as a financial and non-financial partner to early-stage technology companies. Its offering includes introducing climate tech companies to the bank’s large corporate clients, with a view to helping them reach net zero more quickly, said Martin Richards, Global Head of Sustainable Finance for Commercial Banking at HSBC and President of HSBC Ventures.

Scaling different technologies also involves working with companies and governments across different markets and regions.

“I don’t think we’re going to get to net zero by everyone staying in their corner and working on their piece. We will get there much quicker by working together,” said Richards. “It’s an ecosystem play.”

Another obstacle to scaling climate tech is the lack of standardisation of measurement and reporting. Venture capital firms generally require half-yearly disclosure of metrics from their portfolio companies, which creates a heavy administrative burden.

“It might take two or three weeks for their teams to pull all the data together, and the requirements will be different from each investor,” said Hirsch.

A common framework for such metrics would allow companies to focus more of their time on growth.

A good example of the huge shift that is taking place in climate venture investment is real estate, traditionally an emissions-heavy and slow-moving industry.

“Real estate is significantly increasing the adoption and investment into climate tech solutions, and that is translating into the deal flow and activity we are seeing in the European climate tech market. When we started Fifth Wall in 2017, the focus was on the digitisation of the real estate industry and the innovation around new business models. Right now, a large part of that focus has shifted towards technologies that will help decarbonize the industry, which is also translating into very significant deal flow in that space.” said Miguel Nigorra, partner at Fifth Wall, a venture capital firm.

“There’s been a massive shift in corporate attention and adoption from digitising to decarbonising a very old-school industry, as that is the largest challenge that any asset manager or real estate investor will face in the coming years” Nigorra added. That makes sense, given the size of the opportunity: property groups will need to spend USD18 trillion to achieve net zero by 2050, he said.

Technological innovation has the potential to help many industries reduce emissions and accelerate the transition to net zero. Investors across the financial sector are focused on ensuring innovative businesses can access the capital they need to achieve sufficient scale.

Today we finance a number of industries that significantly contribute to greenhouse gas emissions. We have a strategy to help our customers to reduce their emissions and to reduce our own. Find out more: https://www.hsbc.com/who-we-are/our-climate-strategy

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