Green Startups Funding Hits Lowest Level Since 2020
Interest in clean-energy startups continues to fade amid poor macroeconomic conditions and rate hikes. In the first quarter of the year, green startups raised about $8 billion in equity, the lowest figure since 2020, the Wall Street Journal reported, citing PitchBook data.
Green Startups Fundraising Dropped 40%
The green energy sector, including everything from renewable energy to climate-related technological innovations, has seen funding run down in the year’s first quarter. According to a report by the WSJ, green companies raised about $8 billion in equity in Q1, down by 40% compared to the previous year.
Sustainability-linked bonds and loans market has also seen a drop in activity. According to the financial analytics platform Dealogic, the debt raised for climate projects hit the lowest level in the first quarter of the year in more than two years.
The shift in sentiment comes as environmental, social, and governance (ESG) funds were all the rage over the past couple of years. An estimated $120 billion was poured into ESG investments in 2021, more than double the $51.1 billion captured by such funds in 2020, according to a report by Conservice ESG.
The sector also managed to avoid a downturn last year courtesy of the Inflation Reduction Act, which includes nearly $370 billion in climate change incentives that could be injected into the green industry over the next decade.
However, investors are now ostensibly reevaluating their exposure to the sector amid market volatility and the recent failure of some major US lenders that is putting pressure on clients in the industry. PJ Deschenes, co-head of sustainability-focused investment bank Nomura Greentech, said:
“The earlier stage a deal might be, the more likely it is that the senior decision makers are suggesting a pause or to review the valuation. Those are the things that can slow down markets and kill deals.”
Furthermore, investors are waiting for the US Treasury Department to release its guidance on sourcing requirements for the Inflation Reduction Act’s clean energy incentives. The guidelines will determine how hundreds of billions of dollars in new EV tax incentives will be distributed.
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Investors Withdraw $4 Billion from iShares ESG ETF in One Day
Investors pulled out $3.9 billion from ESG-focused iShares ETF in one day at the beginning of last week, bringing down the fund’s total assets under management to $14.4 billion. The redemptions mark a steep drop in the AUM of the fund, which saw another $1.6 billion in net outflows last year.
Nate Geraci, president of the ETF Store, told the FT that the redemptions may have occurred because BlackRock rebalanced its model portfolios. Notably, the iShares MSCI USA Quality Factor ETF (QUAL) added $4.8bn in net inflows on the same day. A BlackRock spokesperson said:
“As we actively manage our models to capture opportunities in the market, some ETFs included in BlackRock model portfolios experience inflows or outflows, driven by advisers who trade their clients’ portfolios in line with BlackRock’s models.”
Analysts also noted that the swap might indicate that interest in ESG products is weakening. “ESG ETF inflows have waned over the past year due to a nasty combination of underperformance, political backlash and investors generally questioning the overall merits of such an approach,” Geraci said.
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