Silicon Valley Bank in the U.S. was a favourite for climate tech start-ups. So its recent collapse inevitably raised questions over whether those start-ups and by extension the whole climate innovation ecosystem was much more fragile than previously thought. Rushad Nanavatty, Colm Quinn and Amy Yanow Fairbanks at RMI explain why that’s not the case. Instead, it was an old-fashioned bank run caused by poor risk management, weakened regulation of midsize banks, exacerbated by rapid interest rate increases, and an interdependent customer base. The authors point at the fundamentals, which are that climate start-ups are not facing these problems elsewhere in the world, and investment in both start-ups and the mature energy transition keeps rising. That’s because the world is committed to decarbonisation. So new clean tech will be a smart investment choice for decades, even if you’ll always need to keep a close eye on the banks behind them.
The collapse of Silicon Valley Bank (SVB) has brought out the doomsayers. The demise of the bank, which counted hundreds of climate tech startups among its customers, has raised the question of whether it went too big too soon on climate tech and has prompted fears that capital will retreat from the sector in general.
For those cursed (or paid) to see everything through a culture war lens, this was comeuppance for “woke capital.” In their telling, the bank overstretched itself, investing in risky climate tech in order to gain the praise of liberals but with no plan to turn a profit.
The truth is more banal. SVB’s demise wasn’t about climate tech: poor risk management, abetted by weakened regulation of midsize banks and exacerbated by rapid interest rate increases, combined with a strongly networked customer base, led to an old-fashioned bank run.
Fundamentally, the energy transition is the biggest investment opportunity in history
This is undoubtedly a pain for climate startups who, like any nascent company, need cash to keep their dream alive. But more banks are already lining up to take their business and VCs will continue to pour money into the sector. The reason is simple: the energy transition is the biggest investment opportunity in history.
This is a deep, global, multi-sectoral, nonpartisan effort that will last many decades. This makes it anti-cyclical and resilient to shocks. If any investor chooses to ignore these fundamentals, that’s their loss.
The 1,500 climate startups caught up in SVB represent only a fraction of a thriving, global ecosystem. Fifty percent of energy transition investment in 2021 was in Asia, and RMI’s climate tech accelerator, Third Derivative, counts more than 100 countries in its startup portfolio.
Globally, VC early-stage funding almost doubled to $70bn last year
The movement of capital to climate startups is well underway worldwide. Globally, venture capital funding for climate tech increased 89 percent from 2021 to 2022 ($37 billion to $70 billion), with the majority of the funds going to companies outside the United States.
Despite these encouraging signals, more investment is needed for proven, sustainable technology to make it out of the laboratory and into commercial use. The International Energy Agency lists over 400 technologies that need to become market-dominant to reach net zero, but as of now only about 40 percent of those are fully commercialised.
Total transition investment is now measured in trillions, and growing
SVB’s troubles should not obscure the fact that promising clean technology will both need and get more investment. An estimated $755 billion was invested in the energy transition in 2021. According to BloombergNEF, that amount needs to triple by 2025 and then double by 2030 if the world is to reach its net-zero goals.
And these aren’t just goals. They are the north star guiding policies and markets in every corner of the world, from the Inflation Reduction Act (the climate bill passed in 2022) in the United States and REPower in Europe to the GX Strategy in Japan, the Panchamrit Strategy in India, and the latest 5-Year Plan in China.
In the United States, provisions in the Inflation Reduction Act, CHIPS and Science Act, and Infrastructure Investment and Jobs Act represent a quadrupling of climate spending. No matter what you’re trying to decarbonise, these government actions have made the task easier and more profitable.
…including from the private sector
The push by government is being matched by the private sector. Investors are creating nine-figure advance market commitments for emerging climate technologies and eleven-figure funds for more mature ones. Major industry coalitions, like the First Movers Coalition and Mission Possible Partnership, are taking on the hardest decarbonisation challenges — in steel, cement, plastics, petrochemicals, heavy trucking, maritime shipping, aviation, and food systems. And the financial sector is aligning behind them — for instance, the Glasgow Financial Alliance for Net Zero has pledged nearly $130 trillion toward the transition.
Altogether, these moves are accelerating an energy and climate transition flywheel that had already been gathering speed for years. Climate policy is improving climate tech economics, better climate tech economics is attracting more investment and effecting technology improvements, more investment and better technology is begetting more support for climate policy… ad infinitum.
The result? Overall fossil fuel consumption has peaked. New wind and solar are the cheapest sources of power in 96 percent of the world, EVs have reached price parity with gas-fueled vehicles, and green hydrogen will soon be cost-competitive with polluting feedstocks.
The benefits are widespread, meaning the political support will be too. There will always be Twitter trolls, but the energy transition is bipartisan: red states account for the highest per capita climate tech investment and the largest share of clean energy production.
These market shifts are inexorable, the policy shifts are durable, and the support for them will eventually be universal. The SVB implosion has caused some short-term pain, but it will, ultimately, be no more than a blip for climate tech companies and investors who align with bigger, broader economic and social forces — and with the future.
Rushad Nanavatty is a Managing Director and leads on Third Derivative and Urban Transformation at RMI
Colm Quinn is a Senior Editor at RMI
Amy Yanow Fairbanks is a Strategic Communications Manager, Third Derivative, at RMI
This article was first published on RMI.org, and has been reprinted with permission