2025 M&A Trends in Sustainability and Climate-Tech

Climate and sustainability have been growing in focus for several VC, PE funds as well as corporates across the world. Given the change in global economies and geopolitics, M&A might be a better strategy for climate-tech startups as well as companies. 

Introduction

With the looming disruptions due to climate change, there is a growing urgency to mitigating greenhouse gases emissions. International institutions and governments are implementing favorable policies and doling out subsidies and cheaper debts. Regulations in various jurisdictions now mandate carbon footprint reporting and tracking progress towards net-zero targets.

There is a huge opportunity for businesses working in the field of climate change and sustainability. It is estimated that the global transition to net-zero could require investments of up to USD 100 trillion. This covers themes such as climate-tech, clean-tech, green-tech, etc.

• Climate-tech is focused on mitigating greenhouse gas emissions and addressing climate change crisis.

• Clean-tech emphasizes developing alternatives to existing products, services and systems to reduce the negative impacts on environment.

Investment and M&A deal trends in Climate-Tech

From 2021 onwards, climate-tech sector has received approx. USD 240 billion of equity investment, with investment into Indian companies being USD 10 billion. Further, since 2021, over USD 110 billion fresh capital has been raised by funds with some climate focus. Surveys report that over 40% of Limited Partners acknowledge significant to moderate impact of climate risks on their investment decisions. Annually, climate-tech investment as a proportion of total VC and PE investments has steadily increased to more than 10%. EV technology, renewables and grids and utility have led the tallies in terms of deal value and deal counts.

Further, the climate-tech sector has witnessed M&A deals worth USD 170 billion across 750 deals from the year 2021 till 2024. By type, buy-out deals posted a slightly higher deal value at 55% of overall climate-tech M&A activity during the period, with balance accounted by strategic M&As. Though, in terms of deal count, strategic M&A are more than double than buy-out deals. Segment-wise, renewable energy has clocked the largest deals, followed by sustainable food, grid infrastructure, clean fuels and mobility.

The exponential rise of generative-AI solutions has propelled innovations in climate resilience and mitigation. Generative-AI capabilities being utilized for this purpose span computer vision, big data analysis, deep learning, optimization and predicting modelling. These are powering smart HVAC solutions, improving utilization of renewable assets, balancing power loads in EV charging, providing real-time weather analytics, carbon offset projects monitoring, verifying forest fires, etc.

Sustainability as a cornerstone of strategy

Companies are recognizing sustainability as a strategy to not only de-risk their ongoing operations but to improve performance and spur growth. Towards this, many companies are investing in and acquiring climate-focused businesses with the following goals:

1. Achieving sustainability goals and improving the ESG profile.

2. Complying with regulatory requirements such as environmental and waste regulations, emission reduction targets, accurate reporting of carbon footprint, and meeting net zero targets

3. Future-proofing their products portfolio to avoid paying carbon taxes and benefiting from grants and tradeable credits.

4. Overall risk mitigation and performance improvement as a long-term play. Companies desire to raise their brand value by positioning themselves as sustainability leaders.

This also helps companies draw investor interest from climate-focused funds and

also generate superior shareholder returns.

To improve transparency, companies are also resorting to specialized accounting software and d-MRV systems for accurate GHG emissions tracking. Utilizing such software helps companies in ensuring compliance with assurance requirements and enhance investor & customer confidence.

The Funding Winter

In the global investment climate, there has been a marked shift due to ending of zero-interest rates in the US since 2022. Developments such as energy crisis in Europe due to Ukraine-Russia war, USA’s withdrawal from Paris Climate Agreement, US-China tariff wars, and protectionist measures across various countries are further affecting the investment landscape. Funds have recalibrated and are placing more emphasis on financial returns.

Certain technologies in the climate-tech space require longer time horizons to mature from pilot and demonstration facilities to reach full-scale commercialization. While there is approx. USD 86 billion of dry powder to be deployed, investors have become more particular in deploying capital. First-of-a-kind projects are facing challenges in getting financed, given the cautious investment climate. There still remain large funding gap for companies wanting to scale up from pilot stage to full-scale commercialization. In India, for example, there is shortage of funding between fund-raise of USD 1 million to USD 10 million (Seed to Series A stage). Venture debt investors also come to the table once a startup starts generating recurring revenue with clear visibility on profits.

Corporate partnerships and M&A in climate-tech

Investments and partnerships with corporates provide faster route towards commercialization, with deeper pockets, industry expertise, and patient capital to realize the product potential. For corporates also, strategic M&As in the climate space provide a quick headway and competitive edge. Some large corporations have also launched their corporate VC arms to invest into climate-tech opportunities that synergize with their existing businesses. The synergies that companies often aim for are:

Globally, 100+ strategic M&A deals are being announced every year from 2021 onwards. Strategic M&As in the climate-tech sector are aimed towards integrating advanced capabilities, improving organization efficiency and providing innovative solutions to customers. The observed deals trend has been that, after energy and mobility, corporate investors have prioritized investing into their own sectors. To illustrate, consumer staples companies have invested mainly into food, agriculture and land-use. 

Corporates are leveraging climate-tech acquisitions to increase potential revenue, achieve cost synergies and also transform their core businesses. In sectors, where circularity and decarbonization have larger role to play, such as materials, chemicals, energy-intensive industries, etc. companies are motivated to implement sustainability measures since it directly impacts their growth outlook and valuation. Certain companies are also divesting high-emission units and integrating technologies investing for optimizing their energy bills. To build a sustainable raw materials supply, companies are doing backward integrations and securing critical assets. For meeting waste management regulations and reducing downstream emissions, companies are also investing into waste collection, recycling facilities, etc.

Higher valuations and ESG Due-Diligence

With improved technologies, the impact of climate change on businesses can be measured reliably, making it easier to link this with financial performance as well. Sustainability is helping in enhancing operational efficiency, better employee engagement and retention and performance improvement. Due to cheaper avenues of financing, the cost of capital for these initiatives is also lower, thus generating higher ROI. All these factors are leading to buyers willing to pay higher valuations for companies that have taken active steps to be sustainable.

Adjacent to this, many investor companies have incorporated ESG considerations in their due-diligence reviews for targets / investees regardless of their sectors. This helps the investors understand the risks associated with high emissions and improper resource use, viz. unforeseen future liabilities & payouts, reputational damage, supply chain instability, tax liabilities and penalties, stranded assets, etc.

Due to specialized nature of certain climate-tech ventures, buyer corporates benefit from outsourcing ESG-specific due diligences to experts. Further, appropriate integration strategies need to be adopted for employees retention, adding the investee’s products and tech with organization’s existing set-up and synchronizing the management practices.

Conclusion

The funding from VC funds has been impacted due to various factors, especially for the climate-tech sector. With environment and sustainability becoming a strategic priority for several corporations, M&As and buyouts have been paving the way for climate ventures’ growth. Partnerships with corporates provide accelerated commercialization while also benefiting the corporates synergize for topline and cost savings. For ventures where gestation periods are longer, the patient capital and long-term horizon of corporates is better suited.

We at GM Corporate Solutions expect to see more M&As in the climate-tech space. If you’re looking to explore inorganic growth in this space, do contact us.