Climate Tech update: acquisitions in the space are on the up with London as the epicentre of deal making

Background

Climate Tech Investing covers an array of technology solutions designed to address climate change and its environmental effects. This can be done by reducing greenhouse gas emissions (mainly C02 and methane) or adapting our systems to environmental changes. Climate Tech covers a broad range of industries whether renewable energy supply, utilities infrastructure, transport, recycling innovation through to B2C businesses and circular economy. Climate Tech is now very much a mainstream economic area - at the macro level it now represents 17.8% of all global technology funding and represents a mature and growing investment sector*.

London leads in M&A

First of all, M&A activity is on the rise as you would expect given the market dynamics of this area. This is good news for venture capital investors as it provides a liquid exit environment and likely faster exits than some other sectors. The three main Clean Tech areas for M&A funding are currently energy, transport and circular economy. London leads the way in M&A by a large margin - 82 Clean Tech M&A deals happened in London in Q.2 2023. San Francisco came in second place with 23. Europe in general represents 60% of all M&A activity**.

Corporates also represent 50% of all acquirers as they implement net zero strategies. Another important factor underpinning the market. 

So, what are the main factors behind corporate M&A activity?

Net zero targets; companies across industries are increasingly setting ambitious net zero goals. To achieve these targets, they are acquiring climate tech start-ups with innovative solutions that align with their environmental objectives. For example it is now estimated that more than 70% of European corporates are now using some form of scope 3 carbon reporting (i.e. disclosing the carbon in its total footprint/supply chain)***. This in turn has created a huge ecosystem of specialist software businesses focused on this area.

Access to Innovation; established companies recognise that acquiring start-ups is a strategic way to gain access to cutting-edge technologies and talent. Climate Tech companies often offer unique solutions that can enhance the acquirer's competitiveness and make early acquisition of start-up very likely.

Regulatory pressure; as governments worldwide implement more stringent environmental regulations, corporations are acquiring climate tech start-ups to ensure compliance and stay ahead of the curve. It is often faster to acquire these operations than run them in house. A good example of this is the extended producer responsibility regulation in the UK (EPR) which is driving huge changes across recycling in the UK’s consumer landscape. Large corporates often struggle to innovate in these areas due to the sheer critical mass of their existing operations.

Knowledge transfer; acquiring start-ups bring valuable knowledge, talent, and innovation into larger corporations, fostering a culture of sustainability and accelerating the development and adoption of climate-friendly technologies.

London placed 3rd for capital deployment into Clean Tech

In terms of funding for Clean Tech ventures, London came in 3rd behind Mumbai and Boston with $588m USD of funding for Q.2 2023. Regarding the global picture of Clean Tech funding, the USA leads the way with over $6.0b in funding with Europe following at $4.5bn.****

There has been a down-turn in venture capital funding across most sectors in the last 12 months, and Clean Tech is no exception. Although this is mainly driven by the USA with European Clean Tech funding up 7% on the last quarter. Also within Climate Tech there has been significant long term growth around energy investment and more recently built environment technologies which have spiked 52% quarter of quarter in 2023.***** 

The OnePlanetCapital view

Overall, we see a huge sense of urgency from corporates which is driving both corporate interest in start-ups providing Climate Tech solutions, but also leading to well defined M&A strategies. The M&A environment is likely to lead to shorter exit timelines in cases where early-stage companies have unique IP that can drive corporate growth.

It is great to see London and the UK generally playing such a big part in the Climate Tech industry and the UK continues to punch above its weight here. The space increasingly provides a more mature investment area for venture capital with many more founders coming to the market as they see the market opportunities and the level of corporate activity in the market.

*page 24. State of Climate Tech Q2 23. Net Zero insights

**page 13. State of Climate Tech Q2 23. Net Zero insights

***source WRI.org. June 4th 2022

****page 13. State of Climate Tech Q2 23. Net zero insights.

*****page 38 State of Climate Tech Q2 23. Net zero insights.

For further information contact Matthew Jellicoe matt@oneplanet.capital