Where’s the Money Flowing for Climate Action Planning?

Climate action spending is steadily accelerating, with equity transactions in private markets hitting $196 billion in 2022, up from $75 billion in 2019, according to climate investment data platform PitchBook. Investors set up more than 330 sustainability; environmental, social, and governance (ESG); and impact funds in that same three-year window.

McKinsey projects the rapid growth will continue as private and public sectors around the world prioritize the deployment of climate technologies. Annual spending could hit $9 trillion to $12 trillion by 2030, with the decarbonization push carving pathways for new markets and expansion of existing ones.

On the government front, U.S. and European polices in particular “will unleash a flood of capital” in the race to net-zero emissions by 2050, McKinsey anticipates. The U.S. Inflation Reduction Act allocates more than $370 billion in funding to mitigate climate change, and the E.U. Green Deal could potentially jumpstart more than €1 trillion ($1.12 trillion) in public and private funds.

But which sectors are getting priority, and where will the lion’s share of the money flow into the future?

From 2019 through 2022 power attracted most of the capital – 50% of it, representing a spike from $40 billion to $100 billion, with a major attractor being large-scale renewables, according to McKinsey’s report, “Climate investing: Continuing breakout growth through uncertain times.” Power sector projects are coming online faster in response to increasing demand – to the tune of an eightfold increase in corporate purchase agreements since 2015.

From 2019 through 2022, transportation came in on the heels of power, with a 370% rise in capital from $6 billion to $30 billion, driven largely by acceleration of electric vehicles (EVs).

Hydrogen and carbon management are gaining traction too, albeit they’re relatively small fish in the renewables pond, representing 3% of climate-related private-market equity investments in 2022. But what’s noteworthy is the clear growth pattern: hydrogen experienced a 460% increase in investments since 2019, and carbon technologies saw a 1,400% spike—excluding corporate investments in both sectors. Today, about 99 green-hydrogen projects are operational or underway in the United States, Europe, and China, with players in this space announcing several hundred more proposed projects.

McKinsey’s climate investing report shows that the most prioritized categories (in 2022) include industrials, waste, consumer, building, oil and gas, hydrogen, carbon, agriculture, water, transportation, and power (see Exhibit 3 for the breakdown of monies flowing to each sector).

Energy companies are among the major investors. Some of the headlines as of late are bp America’s $4.1 billion acquisition of renewable natural gas (RNG) provider Archaea, and Chevron’s $3.2 billion purchase of low-carbon fuel producer and supplier Renewable Energy Group.
Pulse, a venture growth equity fund, is homing in on three sectors:  Food and agriculture, mobility, energy, and infrastructure—all major greenhouse gas emitters with potential to have impact at scale. Pulse has invested over $15 billion in hedge funds since 1996, with a large focus on climate. 

Tenzin Seldon, founder and managing partner, Pulse Fund, points to technologies’ potential role in tackling climate change. She highlights artificial intelligence, with its capabilities in predictive analytics, data analysis, and machine learning. AI-powered platforms to support sustainability decision making are already garnering funders’ attention.

Seldon also references carbon credit and accounting software platforms, commenting they “have long been a staple in venture capital.” And she projects hardware (such as that facilitating direct air capture) will be important in climate action.

The U.S. Department of Energy (DOE) just announced in June 2023 $135 million for 40 projects to help decarbonize the industrial sector, prioritizing areas such as technologies around process heating operations in the food and beverage sector; energy efficiency in chemical manufacturing; decarbonizing ore-based or scrap-based iron and steelmaking operations; next-generation cement formulations and carbon capture and utilization to address emissions from cement and concrete production; and innovations in the paper and forest products industry focusing on paper- and wood-drying technologies and pulping and paper forming technologies. 

What’s in the pipeline looking ahead?

Using a hypothetical simulation [a Net-Zero 2050 scenario from the Network for Greening the Financial System (NGFS)], McKinsey estimates impact of policies and investor preferences, among influencers, on demand for certain goods and services, diving into trends in specific sectors. By the simulation, three sectors would account for 75% of spending on physical assets: mobility, power, and buildings.

By 2050, sales of new battery-electric and fuel cell-electric cars would jump from 5% in 2020 to 100% by 2050, while internal combustion engines would disappear from the market altogether.

Steel manufacturers could expect to see a 10% increase in production demand, and almost all of that demand would be for low-emissions steel.   

Clean power would stay on its fast-paced trajectory, more than doubling from today until 2050. Hydrogen and biofuels businesses would see more than tenfold the demand between 2021 and 2050. And developers of carbon capture and storage technologies would also continue to cash in on tailwinds.

As much of the world eyes 2050 as a hopeful target to hit net-zero emissions, climate investing sits on a sturdier foundation. But McKinsey analysts heed: “Yet a new quantum of capital deployment will be required in the next chapter to meet the commitments of private- and public-sector leaders around the globe. Much more remains to be done to scale up.”