Climate fintech is exciting investors right now. Here’s why it’s primed to be the next red-hot sector.

• Startups operating at the intersection of climate tech and fintech are hot right now.
• Climate fintech includes everything from energy software to financing for carbon removal projects.
• The buzzy category will be a “major new wave,” according to CommerzVentures.

Startups at the intersection of climate technology and fintech are currently attracting a lot of investor attention.

While venture capital funding has declined overall this year, some sectors, such as generative AI, have sent dealmakers scrambling to secure a spot in the hottest rounds.

According to investors, the so-called “climate fintech” sector is another such area that has seen investment increase against the backdrop of the broader malaise that has hampered the startup ecosystem.

Climate fintech is defined as companies that help manage and adapt to climate risks by the fintech venture firm CommerzVentures. The firm has identified over 600 such startups based in the United States and Europe that are suitable for venture capital investment.

Fintechs that facilitate the price, procurement, and structure of energy agreements; assist in the management of clean energy portfolios; simplify billing; unlock finance for climate projects; and embed payments within other climate-focused tools are all covered by this broad brush.

According to CommerzVentures managing partner Paul Morgenthaler, investors have always believed that fintech could have an impact “far beyond just the financial sector.”

“Given how the climate crisis demands a transformation of our entire economy, we felt that fintech can be an important catalyst,” he said in an interview with Insider.

“Starting in 2020 we could see more and more companies getting built in the space, and we built the conviction that this will be a major new wave, given the enormity and urgency of the climate crisis.”

There has been a lot of activity recently. Cloover, which allows solar companies to sell their technology through subscriptions, recently closed a round with 2 million euros (approximately $2.1 million) in equity and 5 million euros (approximately $5.3 million) in debt. Climate Aligned recently raised £1.5 million (approximately $1.8 million) for its AI-powered data platform that details the sustainability credentials of bonds and issuers. Opna, a platform that helps carbon removal projects get funded, raised $6.5 million last month.

“One of the reasons why climate fintech is the next obvious thing to be interested in is that it cross-cuts across a lot of the economy,” said Aleksi Tukiainen, CEO and cofounder of Climate Aligned.

“If we assume that carbon accounting, climate credentials, and so on must be embedded in the ecosystem, a lot of things will have to fundamentally shift.” The corporate system is represented by the financial system.”

Climate fintech is also a software play, so it can scale quickly and efficiently, which is a sweet spot for most VC investors, according to Morgenthaler.

It helps that both climate and generalist VCs have dry powder waiting to be deployed, and the need to address the climate crisis “isn’t going away regardless of whether we’re in a bull or bear market,” according to Jeremy Brown, an investment principal at Anthemis.

Morgenthaler added that new regulation requiring the financial sector to disclose climate impacts, risks, and mitigation strengthens its business case.

“The biggest challenge is that budgets for climate have been limited and there was no clear climate roadmap within banks and corporations,” he told reporters.

“However, this is changing fast and we see the market maturing, which benefits climate fintechs.”

Venture capitalists are particularly enthusiastic about energy fintech. According to Morningstar’s Europe Equity Market report, which was released last week, energy and fintech deals are priced higher than other sectors. Energy valuations increased 11.1% in the last quarter, with energy software enjoying its own spotlight. Meanwhile, fintech was up 9.4% after two “solid” quarters, according to the report.

It’s not just niche players who are jumping on board.

“The fundamental issue is that many existing tools for financing and developing energy projects have been built for large, predictable assets like coal plants and oil rigs — not dynamic and variable assets like solar plants and wind farms,” wrote US fund Bessemer in its recently released climate tech investment roadmap.

The fund is interested in the entire financing lifecycle, from the financial assessment of renewable energy projects to the facilitation of power purchase agreements, which may have an impact on consumers.

“Clear and simplified renewable energy contracts, energy invoices, and tariffs in turn allow consumers to access the cheapest energy from multiple renewable sources,” said Aia Sarycheva, an investor in Bessemer