Companies are increasingly using their venture-capital arms to pour money into startups that could help them profit from the energy transition.
Last year, corporate venture funds invested $23.2 billion in businesses in the climate-technology sector—a broad category spanning renewable energy, energy storage, electric vehicles and more—according to PitchBook Data Inc. The amount invested more than doubled from 2020, outpacing growth of 85% for all corporate venture deals. The climate-technology funding was spread across 210 deals, up from 165 a year earlier, according to PitchBook.
These early-stage investments come with financial risk as clean-tech startups’ valuations come under scrutiny. The rush of deals illustrates the pressure companies are under to show that they are committed to meeting carbon-reduction targets, said Stefan Gross-Selbeck, global managing partner at BCG Digital Ventures, an arm of Boston Consulting Group that incubates and invests in startups alongside corporate venture funds.
Mr. Gross-Selbeck said calls for climate action from big investors such as BlackRock Inc. have shown companies “there’s a risk of them not being funded anymore if they don’t develop a kind of sustainability strategy.” Venture investing is one way to take action. An Ernst & Young LLP survey published in January found that a quarter of U.S. chief executives saw improving their company’s environmental, social and governance profile as the main rationale for deal making.
In many industries, greener replacements for polluting products and services are in early stages of technical and commercial development. Companies such as cement maker Cemex SAB de CV and shipping giant AP Moeller-Maersk A/S are among the carbon-intensive businesses that use venture investments as a tool to get nascent technologies off the ground.
United Airlines Holdings Inc. announced the launch of its venture arm in June, targeting startups that could help it meet its goal of eliminating its carbon emissions by 2050. The venture arm has made five investments since its inception.
“Using existing technology by itself isn’t going to get us there. We need to innovate,” said Michael Leskinen, president of United Airlines Ventures.
United’s climate plan relies on drastically scaling up the supply of alternatives to kerosene made from biofuels, waste products or hydrogen. In September, it invested alongside industrial conglomerate Honeywell International Inc. in Alder Fuels LLC, a company that says it has developed a cheaper way of converting biological materials into low-carbon aviation fuel.
United’s Mr. Leskinen, a former aerospace analyst at JPMorgan Chase & Co., said United uses its corporate venture arm as “a little special forces team to go in and shake things up.” Corporate venture investing allows ambitious companies to get the jump on their competitors, especially in areas such as aviation fuel, where there has been a dearth of innovation, he said.
United in December participated in a $35 million funding round for hydrogen-electric jet-engine developer ZeroAvia Inc., alongside other investors including Alaska Air Group Inc., Amazon.com Inc.’s Climate Pledge Fund and others. The deal came with a conditional agreement for United to buy up to 100 of ZeroAvia’s engines, which it said could be used on its planes by 2028.
United’s venture strategy stands out with its focus on climate. It is more common for sustainability to be one investing theme among many.
Wade Sheffer, managing director of General Motors Co. ’s venture arm, said GM Ventures targets software and hardware companies that could bring GM closer to three goals—“zero emissions, zero crashes, zero congestion.”
He said GM Ventures acts as a scout for the auto maker, seeking out technologies that could eventually become mainstream, with the expectation that GM will be the startup’s “first and most valued customer.” Last month GM Ventures participated in an $11 million funding round for Soelect Inc., a developer of solid-state electric batteries that Mr. Sheffer said could be used in next-generation electric cars.
Companies aren’t just making bets on technologies that could one day transform their own operations. Venture investments can also be a way for businesses to use their industry expertise to benefit from rising demand for sustainability services.
In 2018, the venture arm of logistics real-estate company Prologis Inc. invested in Redaptive, a startup that provides data and artificial-intelligence tools for reducing buildings’ energy use in areas such as heating, ventilation, lighting and air conditioning. Prologis began using Redaptive’s tools in its own warehouses, including for an LED lighting program. Other Prologis tenants have signed up to use the tools, too.
Redaptive, which filed for an initial public offering in November, said its tools have avoided 1 million tons of carbon-dioxide emissions.
Will O’Donnell, managing partner of Prologis Ventures, said Prologis is well positioned to spot products that could take off industrywide. The company’s strategy is “to set market standards around sustainability, and then really push change across the industry,” Mr. O’Donnell said.
That illustrates a broader shift in attitude toward sustainability-related investments, Mr. Gross-Selbeck said. Where companies were previously focused exclusively on their own emissions, they are now increasingly thinking, “How can I make investments to build products and services which help others as they look at their value chains,” he said.