Financing climate solutions: Do it the easy way or the impactful way?

Funding for climate innovation is surging. However, to enable a truly global and equitable transition, both investors and the philanthropy sector need to include diverse grassroots innovators working on adaptation and mitigation.

Between 2015 and 2020, venture capital for climate tech leaped from $3.7 billion to $17 billion — and then skyrocketed to $53 billion in 2021. This positive development fills one portion of an annual funding gap of over $4 trillion needed to limit global warming to 1.5°C. Moreover, venture capital remains concentrated in specific markets and sectors, with 81% within the U.S., Europe, and East Asia, with a heavy focus on transportation and electricity.

The current funding shortfalls result in missed opportunities for climate action where it’s needed most.

In philanthropy, climate action is a priority for a few funders, but the sector as a whole has been hesitant about where and how to engage. Globally, climate mitigation funding constitutes less than 2% of philanthropic giving — roughly $10 billion in 2021, with only a third of foundations considering funding climate efforts.

Philanthropy plays a key role in nurturing impact-focused innovators to overcome the common “valley of death” between launching an idea and demonstrating a viable business model. Philanthropic funds may also be deployed to grow valid novel climate solutions that go missed by traditional VC entities.

The current funding shortfalls result in missed opportunities for climate action where it’s needed most. Those who contribute the least to the climate crisis both within and across countries — least developed nations, Indigenous people, and more — bear the brunt of the repercussions of historical emissions.

To achieve equitable outcomes for climate action, we must invest heavily in underestimated communities, grassroots organizations, and historically underfunded communities. Supporting local innovators will not only help us close the gap between climate goals and reality, but it also will lead to more sustainable, culturally responsible, and anti-colonial solutions.

There are communities developing and piloting practical ideas, born from their direct lived experiences and needs, that provide better livelihoods and higher quality of life and that help communities adapt to more extreme weather, all while avoiding the high-carbon consequences of fossil fuel–based industrialization taken by the Global North.

Such solutions typically struggle to fit into traditional funding models for multiple reasons. First, most climate solutions require hardware development, which is more capital-intensive. An equitable zero-carbon world will require significant physical changes — such as building good new homes for a billion people and replacing and retrofitting most existing homes in the Global North. This necessitates additional capital to prototype, pilot, and validate those solutions, often over a longer timeframe.

For equity, those tests need to adjust to local context. Some of the most crucial work — such as protecting Indigenous land rights — may never yield market-rate returns and will rely on concessionary capital or government support. Philanthropic funding is well-suited as risk capital in this field.

There are additional real, but surmountable, barriers to expanding support from venture and philanthropic funding to global grassroots solutions. Identifying and validating feasible grassroots climate solutions in emerging markets takes time, and investing in them may be perceived as riskier. Smaller organizations often struggle to meet the reporting needs of traditional philanthropic funders or the production requirements of potential corporate buyers.

Additionally, historical injustices such as colonization, can create barriers in understanding, trust, and collaboration. Using intermediaries to connect funders to a global pipeline of vetted promising ideas allows resources to be channeled more efficiently to grassroots innovators and facilitates knowledge exchange on both sides.

The innovators who will shape and anchor the equitable, thriving, and climate-stable future are already at work in their communities. For philanthropists exploring climate strategies, grassroots climate innovators offer a direct path to impact that can catalyze access to critical investment capital.

As interest in funding climate solutions snowballs, both the philanthropy sector and investors need to look toward innovations from emerging economies and underestimated communities. Over time, funders will find investing in diverse innovators as a pragmatic solution to address the climate crisis.