The financing of climate fintech will reach a record high in 2022

VCs just can’t get enough of climate fintech right now. Investors poured $2.9 billion into climate fintech companies globally in 2022 – a record high – up from $1.2 billion in 2021, according to a new report from VC firm CommerzVentures.

And Europe takes a big slice of the cake – the continent’s climate fintech startups brought in 1.4 times more funding than their US counterparts.

So where does the money go?

France leads the way

France came out on top as the country whose climate fintech startups secured the most funding in Europe in 2022 – a total of $770 million. Although it was backed massively by sustainability assessment company EcoVadis’s massive $500 million raise last November.

Other major French rounds included Paris-based carbon accounting startup Sweep’s $73 million Series B round.

France also had a strong 2022 for climate finance across the board, which gives 2.7 billion dollars, the highest amount in Europe, according to Dealroom data.

Carbon accounting is the best funded sector

Carbon accounting is a software strain that helps companies measure their carbon emissions by collecting the company’s environmental measurements on a platform and calculating the associated emissions.

Carbon accounting includes software that helps companies measure their carbon emissions, by collecting the company’s environmental measurements on a platform and calculating the associated emissions.

It is the most “established” sub-sector within climate fintech, having historically been the investor’s entry point to the sector and the area that has attracted the most funding. Last year was no exception, when carbon accounting startups raised a total of $970 million globally. The best-funded player in the sector in Europe is Sweep, a French company that secured a Series B round of $73 million last year.

Carbon offsetting is the fastest growing sector

Carbon offsetting startups were the second best funded of all climate fintech subsectors. They raised $505 million globally last year – three times the amount they will raise in 2021, also making it the fastest growing sub-sector in terms of funding.

Carbon compensation is when a company buys carbon credits that represent the removal, or prevented emission, of CO2 from the atmosphere. It is a common tool used by industries struggling to reduce emissions directly, such as aviation. Credits are generated from things like direct air capture, forestry projects or algal carbon sequestration – where algae are used to remove carbon from the air.

These credits can be bought on the voluntary carbon market, where a number of startups have emerged in recent years that promise to assess or determine the quality of a credit, or act as a broker or marketplace that helps companies buy the credits.

“Greenwashers are increasingly being called out and will find it harder to attract funding”

The best funded European startup in the space is UK’s BeZero, which assesses the quality of the carbon offset.

But the fast-growing sector already has its problems. There are risks around double counting, reliability and durability of credits. And due to a lack of universal monitoring standards, determining whether a credit is “carbon neutral” is more of an art than a science.

But this does not seem to deter investors. “Some of the companies in the carbon offset sector are working to address these issues,” Paul Morgenthaler, managing partner at CommerzVentures, told Sifted. “Greenwashers are increasingly being called out and will find it harder to attract funding.

“From an investment perspective, these are clearly the most interesting companies for us.”

A growing sector

Globally, the majority of climate fintech companies that raised last year were early-stage startups: 56% raised a seed or pre-seed round. Only 18% raised a Series B round or later.

Morgenthaler predicts that the entire sector will perform well through 2023, with new sub-sectors such as biodiversity and natural capital looking particularly interesting.

“In addition to the climate crisis, we have a biodiversity crisis. We see many interesting new approaches to investing in natural capital and conserving biodiversity, and we expect some very successful companies to emerge in this space over time.”

Companies are working on tools to measure the financial consequences of biodiversity loss on businesses, symbolize biodiversity gains and build “biocredits”, equivalent to the existing carbon credit.

Freya Pratty is a senior reporter at Sifted. She tweets from @FPratty and writes our climate technology newsletter — You can register here.

Amy O’Brien is a reporter for Sifted. She tweets from @Amy_EOBrien and writes our fintech newsletter — You can register here.