The Brief

The Brief: Seven climate investing trends we’ll be watching in 2025

ImpactAlpha · December 17, 2024

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In today’s Brief:

  • Searching for signs of climate progress in 2025
  • Playbook for plugging gaps in adaptation finance

Finding impact alpha in climate: Betting on the low-carbon transition, against the odds. If not a miracle, it’s going to take something close to reach what scientists say is a crucial milestone for climate action by 2030. At the midpoint of the decade, the election of Donald Trump, who has vowed to rescind support for electric vehicles and charging stations and reverse emissions policies, would seem to make even more remote the necessary reduction of emissions by the end of the decade. Not so fast. Falling costs curves are driving the adoption of clean energy, even in states like Texas and North Dakota that have long been associated with fossil fuels. In the US, renewables now make up as much as 90% of new energy capacity. And investors are estimated to have put up nearly $2 trillion for the climate transition this year. Tech titans like Eric Schmidt and “world positive” investors like Obvious Ventures are counting on artificial intelligence to supercharge the search for new materials and processes that can speed up innovation. Question of the year: Will the pace of the transition be fast enough to stave off the worst of the climate catastrophe? Rather than falling by a compounding 7% per year as needed to meet 2030 deadline, greenhouse gas emissions are… still increasing. 

Here are some stories we’ll be watching in 2025:

1. Policy tailwinds become headwinds for climate action. Climate tech investors have long insisted that climate-friendly policies such as subsidies and incentives are just an extra sweetener for cleantech investments that make sense on their own. That proposition is about to be tested. EVs and wind power – another Trump bugaboo – may be out, but geothermal energy, carbon capture and storage, nuclear energy and critical minerals are in. The climate tech crowd is banking on the fact that the bulk of the factories, jobs and investments generated by the Inflation Reduction Act have gone to Republican-led states and districts. US Energy Secretary Jennifer Granholm, at a recent Department of Energy gathering, declared, “It would be political malpractice to undo the incentives that are causing all of this economic activity in those red states.”

2. Acquisitions and IPOs could give climate LPs an exit ramp. A lack of exits and liquidity has been hanging over climate tech and making LPs restless. That could change in 2025 as dealmakers gear up for a more lenient Trump administration that is expected to slash regulations and environmental reviews. The policy reversals that are prompting outcries by climate activists could nonetheless reignite M&A and IPO markets. Renewed market activity would be welcome news to climate tech fund managers who are sitting on some $86 billion in dry powder as their LPs agitate for returns on their capital. “For sustained progress, you need capital to keep going toward servicing more solutions, reinforcing the things that are working,” said Stonly Baptiste Blue of climate tech venture firm Third Sphere. “The next wave of capital will likely come from the returns of this first wave.” 

3. Investors ❤️ infrastructure. Institutional capital seeking steady, low-risk returns is flooding into sustainable infrastructure. Such funds made up nearly 60% of the new climate capital raised in 2024. A handful of asset managers, from firms such as Brookfield, BlackRock and TPG, have scooped up the bulk of the infrastructure capital. The mega-funds are hunting billion-dollar opportunities, such as industrial decarbonization and utility-scale clean energy to power data centers. Brookfield is looking to raise as much as $25 billion for its second Global Transition Fund. The shift to a distributed, clean energy economy also creates opportunity for smaller projects. Investors increasingly are keying in on mid-sized projects, from wastewater treatment to municipal fleet electrification to community solar. At the local level, the US Greenhouse Gas Reduction Fund has stood up a green lending network to finance place-based projects such as building retrofits and electric school bus fleets in communities across the US, including rural and low-income places long overlooked by investors.  

4. Global climate leadership from unlikely places. Wealthy nations can’t seem to muster the funds, or the will, to help low-emitting, emerging economies adopt clean technologies and adapt to the changing climate. The US, the world’s largest historic emitter, has played a key role in climate negotiations, but is once again expected to withdraw from global climate cooperation under Trump. That creates an opening for China to step up. Deep-pocketed global investors flush with oil money also are looking to polish their climate cred. And Global South nations are looking to assert themselves.

5. Collapse in biodiversity puts natural capital on the agenda. The Nature Conservancy this week helped Ecuador, one of the most biodiverse countries on the planet, refinance $1.5 billion of its sovereign bonds to free up up to $460 million to protect the Amazon. It was TNC’s sixth “debt for nature” swap in its Nature Bonds series. “We’re expecting to be able to unlock $1 billion dollars through these six projects,” TNC’s Melissa Garvey tells ImpactAlpha. A number of the investors participating in the new debt package, like Legal & General, are repeat debt-for-nature swap investors. TNC’s fifth deal, in the Bahamas, brought in Lukas Walton’s Builders Vision as a catalytic investor. Such deals aren’t enough to satisfy the global need for biodiversity and conservation finance, says Garvey, “but they are no longer so niche.” 

6. Folks are funding FOAKs as well as NOAKs to bridge the ‘missing middle.’ For hardware-intensive climate tech companies, the need for project finance for yet-to-be commercially proven ideas is often referred to as the “Valley of Death.” Finding funding for first-of-a-kind projects is the most fearsome phase of growth as companies make the leap from innovative technology to pilot projects and first commercial plants. Project finance is not always suitable for VCs, yet other mainstream investors find such first-, second- and up to nth-time (or NOAK) plants too risky. Elemental Impact, which estimates the “scale gap” at $150 billion a year, created a funding vehicle, the development-SAFE, to help innovative climate tech projects make the leap. The Valley of Death is getting a little shallower as more investors get comfortable with FOAKs, or at least NOAKs. “The more the merrier,” Elemental’s Dawn Lippert tells ImpactAlpha. Private equity giant KKR, for example, sees opportunities in the “missing middle” between early stage innovation and later-stage growth. TPG Rise Climate, too, is looking to fill the gap. Early stage investors are spinning up continuation funds to see their fledglings through. “That Valley of Death is closing from both sides,” says Tim Latimer of geothermal startup Fervo Energy. 

7. And finally, the worse things get, the better climate adaptation investments look. Climate adaptation has long been a stepchild to mitigation technologies such as clean energy, making up just 5% of global climate finance flows. Investors are starting to pay attention (see Signals, below). Institutional investors “are seeing the impact of climate change on their investment portfolios,” said Lightsmith Group’s Jay Koh. Climate-related disasters such as floods and droughts have caused over $3.6 trillion in economic damages since 2000. The dark irony: the worse the climate catastrophe gets, the more valuable climate adaptation solutions become. Under Trump, companies may face lower “transition risk” as regulations are dismantled, but “the physical risk may actually increase,” Peter Cashion of the California Public Employees’ Retirement System told the pension fund’s board. “Although this may be unfortunate, it does create investment opportunities in the area of resilience.” SJF Ventures has identified three major adaptation investment themes: hazard analytics and response, resource preservation and owned-asset protection, and sub-categories such as climate risk analytics, climate insurance, fire tech and water resource management.

Keep reading, “Finding impact alpha in climate: Betting on the low-carbon transition, against the odds,’ by Amy Cortese on ImpactAlpha. 

Signals: Climate Adaptation

Mind the gap: Plugging the holes in financing climate adaptation. Climate adaptation has a capital and innovation problem. Tailwind Climate has a plan to solve it. Part state-of-the-market report on the emerging adaptation economy, part guide to scaling up finance and entrepreneurship, its plan aims to equip would-be climate-proofers with the data and insights they need to navigate the tech and investment landscape of adaptation and resilience, or A&R in the parlance. The 112-page “Adaptation and resilience innovation playbook” was released by Tailwind, a Berkeley, Calif.-based advisory and investment firm co-founded by Emilie Mazzacurati and Katie MacDonald. “It’s not hard to imagine entrepreneurs lifting slides from the playbook for their investment pitches, or funders borrowing stats to help with capital raises from big asset owners, philanthropies and high net-worth individuals,” Louie Woodall writes for ImpactAlpha.

  • Blind spots to bright spots. The report groups adaptation innovations in three buckets. “Bright spots” include sectors and activities with proven demand and are most likely to attract VC investors. “Hidden gems” include areas where demand is strong but where there is “limited access to capital and stunted innovation ecosystems.” “Blind spots,” arguably the most challenging for investors and entrepreneurs, include areas where climate impacts are expected, but have yet to manifest in ways that drive demand or investor interest. While a “bright spots” company might be a surer bet commercially, a “blind spots” play may have a higher payoff in the long run. Mazzacurati is most excited by the hidden gems (think flood risk solutions). “This kind of gap to me screams opportunity to invest in some really good businesses and  fill a big gap in terms of societal and economic needs,” she says.
  • Keep reading, “Mind the Gaps: Plugging the holes in financing climate adaptation,” by Louie Woodall on ImpactAlpha. 

Agents of Impact: Follow the Talent

Simon Rawson, previously with ShareAction, will join the Taskforce on Inequality and Social-related Financial Disclosures, or TISFD, as executive director in February… Regeneration.VC taps Amanda Parkes of Pangaia, one of its portfolio companies, as a global advisor… The London School of Economics’ Marshall Institute welcomes Carlos Miranda of UK-based impact consulting firm IG Advisors, as a practitioner in residence. 

VamosVentures, which invests in Latinx and diverse founders, promotes Ashley Ryder to partner… Inclusive Prosperity Capital hires Jessica Salas, previously with the Chicago Zoological Society, as an associate for its Smart-E Loan program… Great Lakes Protection Fund is hiring a finance and administration vice president… GAWA Capital seeks a senior investment officer.

Microsoft is on the hunt for an ESG senior manager… Volunteers of America is looking for a social impact investing intern… responsAbility has an opening for a portfolio and restructuring credit analyst… NY Green Bank is recruiting an investment and portfolio management vice president… Blue Owl seeks a structured credit investments analyst… Enduring Planet and Planeteer Capital are co-hosting a 90-minute webinar on government funding for climate tech today at 1pm ET / 10am PT.

👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.

Thank you for your impact!

– Dec. 17, 2024