It’s been a confusing year for those investing in the energy transition.
On the one hand, the policy shifts that followed President Donald Trump’s election have limited growth in the sector — especially in the wake of cuts to Inflation Reduction Act tax credits. Investments in clean manufacturing have been slowing, venture capital funding for climate tech is at its lowest level in years, and investor sentiment has weakened. Just 23% of North American investors now describe climate change as significant to their investment strategy, down from 61% in 2023 and 35% last year, according to a Robeco survey released this summer.
On the other, though, major climate- and energy transition-focused funds have held prominent closes. Brookfield and Blackstone each raised $20 billion and $5.6 billion for their latest transition vehicles, respectively. The artificial intelligence boom — and the resulting load growth — have flooded certain parts of the sector with money, especially in the U.S. And globally, clean energy stocks have been doing particularly well.
The turbulence, for many in the sector, is uncomfortable. But according to some investors, it’s also a symptom of a sector maturing out of its exuberant teenage years, and learning to pivot and compromise. Tariq Nanji, a climate investing partner at Boston Consulting Group, describes this shift as moving past the early “climate euphoria” to focus on longer-term market developments over trends. “This is no longer thought of as a niche momentum play, but a structural demand tailwind that is underwritable,” Nanji told Latitude Media.
‘Shock to the system’
This shift, perhaps inevitably, is coming with growing pains.
According to Matthew Nordan, co-founder of climate investor Azolla Ventures, some clean energy subsectors that were heavily reliant on policy and subsidies support, like alternative fuels and direct air capture, and others subject to the administration’s overt hostility, like pure play wind, “are clearly in danger.”
“The bigger backlash we’re going to see is against things that have any major measure of regulatory or policy dependence,” Nordan said. Recent data by the Clean Investment Monitor, a joint project of the Rhodium Group and MIT’s Center for Energy and Environmental Policy Research, for instance, found that industrial decarbonization technologies such as hydrogen, clean fuels, and green cement have been undermined by project cancellations and the termination of hundreds of DOE federal awards.
“It’s a lesson that the finance community — all the way up to the alpha predators of finance and the LPs at the top of the pyramid — relearns every ten to 20 years,” Nordan added. “They get seduced when there is a seemingly unstoppable head of steam around a theme, and then they kick themselves.”
The backlash and uncertainty created by the policy changes, which Nanji describes as a “shock to the system,” is creating some frustration among the investors who have raised money under a friendlier climate environment, and are now being forced to reconsider their strategies.
“Investors who deploy capital in sectors that were heavily linked to many of the policies that were in place via the IRA are now trying to figure out how to safe harbor assets and how to get things moving in the next two years, and get stuff out the door in a way that doesn’t hurt them in the long run,” Nanji said. (In the short term, at least, those efforts have mostly succeeded. A recent report found that 76% of solar projects and 86% of wind projects slated to come online by the end of 2028, accounting for 33 gigawatts of capacity eligible for tax credits, were already safe-harbored as of November.)
The frustration is especially being felt by impact investors who have made their LPs promises that the policy reshuffle is now making difficult to fulfill.
“What do you do if you’re a growth stage investor with a thematic and a private placement memorandum, and one of the things you said you were going to invest in is hydrogen or the transition in fuels?” Nordan said. “That’s a little tough… They might throw their hands up and say, ‘What to do now?’”
The pivot
For investors with dry powder, however, there are still many opportunities to invest.
As Sophie Purdom, founder of VC fund Planeteer Capital and co-founder of market intelligence platform Sightline Climate, put it, there are headwinds pushing investors away from green-premium assets, but there are also new tailwinds. “The climate tech space is lucky that demand growth showed up at a time when demand for green-premium assets fell off,” she said.
The unanticipated AI-related load growth has come with an urgent need for more generation and supporting energy infrastructure — as well as new investors with deep pockets and a willingness to spend. One recent projection found that U.S. peak load growth is now estimated at 166 GW over the next five years, quadruple what was expected just two years ago.
And as a result, sectors providing baseload power, like nuclear and geothermal, — and, to some extent, energy storage — are now Trump administration priorities. That offers an in for investors.
“Renewables may be structurally challenged right now,” Naji added. “But there is a massive opportunity for private capital sponsors to look at the connective tissue that makes the clean economy work.”
This also includes the adaptation and resilience space, which is becoming an increasingly important part of the climate investment landscape, and a crucial area for capital deployment.
The co-existence of both thriving and structurally challenged subsectors within the same climate investment category rewards investors with the ability and willingness to pivot. “Those with broader mandates are rewarded in an environment like this,” Nordan said. “But then comes a question of whether you have the skillset and network to invest in things that are a little different.”
Additionally, investors willing to accept some risk and wait longer for returns might find the market particularly appealing. According to Nanji, if you “have a 10-year view on the market, not a three-year view on the market, maybe you can buy low, and sell high in 10 years.”
Sanjeev Krishnan, managing partner at climate-focused investor S2G, agrees. “A lot of investors look at venture capital as being really hard in the climate sector,” he said. “But if you have long-duration capital and different internal rate of return expectations, you can accrete ownership when others are fearful and finance businesses to become cash flow positive. Then you can do really well.”
Few companies made it through the first internet boom of the early 2000s, but the ones that did — Amazon, Google, and PayPal, to name a few — went on to perform extraordinarily well, he added.
Long term view
This need to pivot reflects the general broadening of what it means to invest in climate and the energy transition. Some “investors are convincing themselves that the opportunity is shifting outside of the core thesis… [of] decarbonization,” Purdom noted.
Superficially, this can mean companies skirting around climate or green language in their branding to appease those who perceive the rhetoric as politically risky — without necessarily changing their strategy. Nordan, for example, knows of at least one company that was asked to drop some climate-friendly language from its name while renewing a federal contract.
But the shift may also signal a real change in perception. Climate investment is increasingly not a specific set of sectors dedicated to the mitigation of the consequences of climate change, but rather a much broader category encompassing the energy, infrastructure, and adaptation solutions needed for society to advance and thrive.
“Our view is that the climate transition is a 10,000 year economic megatrend,” Krishnan said. “It’s taking useful energy and turning it into useful materials — we did it with fire, photosynthesis, fossil fuels, and then whatever comes next. It’s an all-of-the-above approach to whatever comes next, given the current political reality and the current economic reality.”
As we’re already witnessing, this uncertain and at times frustrating evolution is likely going to result in less capital allocated to the U.S. climate sector, at least in the short term.
“We’re going to lose two-thirds of the firms, we’re going to have massive turnover in the LP base, and at least half of the startups are going to disappear from operations in the next two or three years,” Nordan said, adding that it’s a healthy outcome, given that the field had gotten overgrown with “me-too propositions” too dependent on tax credit and the green premium. One example: This fall, Danish manufacturer Topsoe decided to pause work on its $400 million electrolyzer factory in Virginia, partly as a consequence of the sunsetting of a federal tax credit that promised to jumpstart the green hydrogen sector.
But this short-term pessimism may give way to a rosier long-term outlook.
“In areas that are administration priorities, like clean firm power or critical materials, we’re going to have a bunch of billion-dollar companies with long-term contracted offtake… that will mint a new generation of public market leaders and will create the track record for the next cycle of this field,” Nordan said. “Long term, man, this is a good thing.”
