Clean Tech Investment Post-Paris: Which Way Is the Wind Blowing?

As world leaders left Paris in December, many surely felt a sense of satisfaction at what they had just accomplished: a universal, legally binding agreement setting out ambitious goals to tackle climate change on which the world could agree. They would return to their respective countries, hailing the achievement as momentous and praising their states’ participation in its arduous drafting and tense negotiation. But how many envisioned the challenges that would follow?

The Paris Agreement is not solely a political negotiation. Attaining its ambitious goals requires not only political tact, but also momentous capital mobilization. The International Energy Agency projects that $13.5 trillion USD needs to be invested in low-carbon technologies by 2050 in order to implement the political bargains of Paris. The Business Council for Sustainable Energy puts this number closer to $45 trillion USD for new energy infrastructure (by 2040). One thing is clear: governments cannot mobilize this capital alone. Without bringing in venture capital and private investors to finance clean energy projects and infrastructure, the world will not see the energy transition it requires.

Will Paris be the financial boost clean technology so desperately needs?

To begin with, clean tech investment lags far behind where it should be. According to the World Resources Institute, global investment in renewable energy hit $286 billion USD in 2015, barely over a quarter of the investment necessary to achieve the Clean Trillion. In an effort to stimulate dramatic further investment, governments spelled out one of the core aims of the Paris Agreement as making all financial flows consistent with a pathway towards low-emission, climate-resilient development. Did these political assurances aid investment in the clean tech sector?

To find out, we ran mid-year analyses of deals in the clean tech sector, as provided by the Cleantech Group and i3 Connect. Using the first Q1-Q2 of 2016 (immediately post-Paris) as our baseline, we analyzed investment in the following sectors to offer a taste of how much capital is being deployed post-Paris to clean tech companies in the following fields:

  • Biomass generation
  • Biofuels & biochemical
  • Energy efficiency
  • Energy storage
  • Fuel cells & hydrogen
  • Geothermal
  • Recycling & waste
  • Smart grid
  • Solar
  • Water & wastewater
  • Wind

Our 2016 baseline found 359 deals completed during Q1 and Q2, for a total investment of $6.8 billion USD. The same timeframe in previous years, however, saw far greater investment:

  • Q1-Q2 2012: 792 deals for a total of $27.2B invested
  • Q1-Q2 2013: 895 deals for a total of $20.5B invested
  • Q1-Q2 2014: 642 deals for a total of $14.4B invested
  • Q1-Q2 2015: 426 deals for a total of $12.6B invested

In this representative sampling of industries, pre-Paris outlay is significantly greater than the months following the trumpeted agreement. This year’s Q1-Q2 saw a 46% one-year drop in investment in the clean tech sectors surveyed and a 75% decrease since the spring of 2013. With so much hype, how can we explain this lack of action?

We posit three rationales as to why the clean tech “boom” has not taken off post-Paris, namely:

  1. Government and regulatory uncertainty looms as states decide in which ways to support these emerging industries;
  2. Industry maturity leads to attrition as weaker players are weeded out; and
  3. Chinese investment slowed, curbing post-Paris figures and expectations.

With this analysis in mind, which way is the wind blowing? With investment in the clean tech sector trending downward, Paris has not been the panacea many had hoped. Barely seven months removed from the negotiations, we are already witnessing a need for strong regulatory and government support of clean tech investment if the Clean Trillion is to be a reality anytime soon. Moreover, the need to drive accountability in the clean tech sector has accentuated the importance of structuring enterprises to properly measure and report on the reduction standards envisioned by Paris.

However, certain firms and investors are already succeeding at leveraging private investment into the clean technology sector post-Paris. Aligned Intermediary, a mission-driven Delaware public benefit corporation focused on sourcing transactions in the climate infrastructure sector, has already raised $1 billion in pledges of private capital following its launch heralded by the Obama Administration.

Moreover, accounting for investments in the clean energy sector will be equally important as increasing raw capital invested. Structuring investments to permit robust measuring, reporting and verification of carbon emission reduction will be essential to driving the impact of private dollars into the post-Paris climate investment environment.

Subscribe to MoFo Impact for further analysis as we continue our looks at Paris in the months ahead!