What has happened to green tech investments?

Trends published at the end of last week by the Cleantech Group, a global research firm, show a serious drop off in green tech investments in the third quarter of this year. The decline is a surprising deviation from the signals sent by the first half of 2010, which exceeded even 2008 investments, a booming year for clean tech.

The report analyzed clean technology venture investments in North America, Europe, China and India. Globally, venture capital investment fell 30 percent, while in California, the belly button of technological innovation, it plummeted by 61 percent.

Could it be that investors have been burnt by slow returns?  “As we’ve said before, the length of time of commercialization and maturation of some of these cleantech companies is far longer than an investor is used to,” Katie Ferehnbacher points out in a recent post on GigaOm.

Kochan & Co., another research and consulting firm, found that less than 10 percent of global investment in clean tech was directed at start-ups. Europe and the U.S. are especially lagging. Kachan elaborates:

“For several quarters now, there have been roughly four times as many cleantech IPOs each quarter in China than either North America or Europe. And much higher returns are being made. It’s time for investors and entrepreneurs in North America, Europe and elsewhere to recognize this. The huge cleantech returns in China are getting too little attention.”

In other words, China is whooping the West in funding a shift to clean energy.

Amidst the ugly numbers, there are still some promising considerations and important lessons for the future of clean tech:

  1. Maybe it’s not so bad. While third quarter investments suffered extremely, the year overall is still due to come out well ahead of 2009, and will likely finish in second place for highest annual volume of clean tech investment ever. Clean technology fared much better than other types of investment throughout the recession.

  2. The Smart Grid is still getting some love. Smart grid investments totaled $163 million this quarter, ranked third on a list of leading sector investments, behind transportation and biofuels. Cool IT Leaderboard company, Intel, backed a big deal during the third quarter for software and smart grid consulting services through its investment arm, Intel Capital.

  3. California needs to defeat Proposition 23. While it’s unclear if Prop 23, which threatens to suspend California’s global warming law (AB32), has been a deterrent to risk-averse investors, you can bet that the law’s passing will exacerbate negative trends.  Where clean tech investments soared after AB32‘s passing in 2006, the opposite is bound to occur if investors do not see regulatory conditions that favor and enforce a clean energy transformation.

  4. Clean tech needs bolder global policy support. Investors will not commit to clean tech without global policy frameworks and incentives that signal protective and friendly long-term conditions for renewable energy and solution technologies. For as long as fossil fuel subsidies are able to seduce would-be investors and fickle policy-makers debate global warming regulations rather than implement them, we will see equally non-committal attitudes from the investment sector.

News of a crash in clean tech investments should be a call to action for powerful IT companies to get vocal in the policy arena. Our next ranking of IT climate leadership, coming soon, will evaluate the efforts of IT companies to advocate for political priorities that boost clean tech. Bold political advocacy is a win-win for the sector and the economy as companies get the R&D money they need to open new business pathways, which will thereby form the basis of a strong new industry for the global economy.

Only then will we ensure that green tech is here to stay.