Despite headlines of downturn and funding fatigue, the latest data from Net Zero Insights tells a more nuanced story about climate tech investment in 2025. In an interview with Climate Solutions News, Sofia Esteves, Head of Market Insights at the climate data firm, called the current moment “a shift in trends” rather than a crash.
“We see a stagnation in funding and a decline in the count of jobs,” she said. “But if we delve deeper, it’s more of a reset. There’s a rise in non-dilutive capital and a pivot toward emerging technologies.”
That reset is particularly evident in the Q1 2025 edition of the State of Climate Tech report, published by Net Zero Insights. While traditional venture capital (VC) may be slowing, other forms of support are stepping up, especially debt financing and public sector involvement.
Debt and the US Government’s Role
One of the most striking findings in the Q1 report is the uptick in debt-based funding, much of it led by public bodies. “Debt funding is playing a very big role,” said Esteves. “We’re seeing public organisations, especially from the US, stepping in.”
This includes the Department of Energy and the USDA, which jointly backed $1.7 billion of debt financing in the first quarter alone. “That support might attract more private investors,” she explained, suggesting that public sector involvement could help unlock new private capital.
Whether that trend holds will depend on future rounds from these federal programmes – many of which began in late 2024 – but Esteves is optimistic about the short-term outlook. “We expect to have some other rounds coming soon.”
Is US Dominance Waning? Not Yet
With looming election-year policy shifts, the US market is being closely watched. Yet, according to Esteves, the anticipated downturn hasn’t materialised. “We might have a lag in how policy shifts affect the funding landscape,” she said, “but for now we continue to see the US very well positioned.”
Even grant funding, which has declined slightly, hasn’t dragged down overall momentum. “Market demand might be overshadowing policy uncertainty,” Esteves suggested, pointing again to the resilience of the US market, particularly for early-stage equity in emerging tech sectors.
Where the Money’s Flowing
So where exactly is investor interest growing? According to Net Zero Insights, it’s a tale of two markets.
On one side are mature technologies like electric vehicles and batteries, which still draw large rounds, especially in Europe and increasingly in the US. But the more dynamic story is the rise of less-proven but highly promising sectors.
“Sustainable aviation fuels, small modular reactors, data centres, and direct air capture are seeing the highest growth,” said Esteves. “Of course, the funding is still relatively small compared to mature solutions, but the direction of travel is clear.”
Interestingly, the US appears to be taking more risks in backing these emerging categories. “They seem more willing to invest in early-stage, high-potential solutions compared to other global markets.”
AI: A Bridge to Generalist Investors?
Another developing theme is the role of artificial intelligence. Net Zero Insights plans to focus its next report on AI-related climate tech, and not without reason.
“Generalist investors are very interested in AI-based solutions or any climate tech that uses AI as an enabling technology,” said Esteves. That could prove to be a way to bring some of them back into the climate fold.
Esteves acknowledged a broader retreat by generalist investors since the peak of 2021–22. “That funding gap can’t be filled entirely by specialist investors. We need generalists to return, and AI might help.”
Corporates Step In
As generalist VCs pull back, another group is stepping up: corporates.
“This is a trend we’ve been seeing since 2023,” Esteves noted. “Corporations are not only more active in M&A, but also in direct venture funding.”
And it’s not just equity. Net Zero Insights now tracks commercial agreements, including offtake deals, which Esteves said are vital to venture backers. “Especially in energy, we’re seeing more partnerships that help validate market readiness and improve investor confidence.”
She added that corporate partnerships, even when they don’t involve direct investment, can be pivotal. “They’re a strong signal for other investors looking at a startup.”
Tougher, But Not Impossible
Is it now harder for startups to raise? Absolutely. But that’s not the whole story.
“It is much more competitive than in 2021 or 2022,” Esteves said. “Founders need to demonstrate market readiness, scalability, and customer demand. Those that can show those metrics still have a path to funding.”
She argued that this shift might even be healthy for the sector. “It’s tough, but maybe that’s what founders need, to really focus on what matters for success.”
What Comes Next
As for the next two quarters? Don’t expect major surprises, but do expect more corporate engagement.
“Founders should focus on building strategic partnerships with corporates,” Esteves advised. “Even if the company doesn’t invest directly, it can help integrate technologies into real markets and prove value to other investors.”
Her final takeaway: this moment isn’t a downturn so much as a reshaping of the investment landscape. There’s a shift in who’s investing, how they’re doing it, and what they’re looking for, but the opportunity is still there.
“Visit stateofclimatetech.com,” Esteves added, “for all our reports and ongoing updates on the global funding landscape.”
