A report from Boston Consulting Group (BCG) suggests Canada is producing climate tech talent and startups above its weight, but a lag on private investment risks brain drain and Canadian money seeking greener pastures overseas.
The report, entitled Climate Tech: The Canadian Venture Opportunity, examined Canada’s climate tech industry and states Canada has significant potential to lead.
Boston-headquartered BCG has Canadian offices in Toronto, Montreal and Calgary.
Climate tech, which can include direct air or cement carbon capture, solid-state batteries and sustainable fuels, is critical to reducing greenhouse gas emissions in difficult-to-abate fields for Canada’s 2030 and 2050 climate goals, according to the report.
Erik Reed, a BCG partner and one of the report's authors, told SustainableBiz climate tech is a major business opportunity, but key factors are stifling its growth.
Canada has the highest global share of post-secondary graduates in science, technology, engineering and math (STEM) and is a leader in producing climate tech startups, but low private R&D funding and private investment means over 80 per cent of Canadian climate tech investors’ money does not stay in Canada.
“(A) tremendous opportunity for Canada, but it’s not going to come without some work on our part,” Reed said.
Where Canada stands on climate tech
“Investment in Canadian climate tech is up four times above pre-pandemic levels,” Reed said, noting funding for early-stage technology is driving the shift.
Canada has seen a spike in climate tech investment since 2017, standing at almost $2.4 billion in 2022 and $2.3 billion in 2021, compared to $533 million in 2020 and $580 million in 2019. Canada accounted for 2.8 per cent and 2.3 per cent of global climate tech investment in 2021 and 2022, respectively, despite producing approximately 1.5 per cent of global GDP in those two years.
Canada also has an “outsized” presence in maturing technology – the likes of sustainable fuels, electric vehicles and utility-scale storage.
Canada can lead or lag on climate tech
Across five metrics for Canada’s climate tech global competitiveness compared to its peers, it is ahead on some factors.
Canada leads the world in its percentage of the population with tertiary education, and is tied at the top for STEM graduates. It is also leading in creating climate tech ventures, producing the third-highest number of startups over the last five years (454), and has among the highest number of startups per capita.
Despite the positives, Reed said, “there are some barriers and opportunities that still exist for us to solve some problems here to really unlock growth and make sure that we can continue to be a force in driving global decarbonization.”
If not solved, Canada cannot tap into its advantages and faces so-called "valleys of death" for technology development, scale-up funding and keeping at-scale demonstration technology.
Canada is second-to-last on per capita R&D investment due to low corporate spending. It is just barely above the global average of climate tech funding events over $66 million over the past five years, meaning startups struggle to become scale-ups.
Private investment per capita in the U.S. makes up 2.8 times what goes into Canada, while Europe receives five times more and Asia-Pacific eight times more.
Around 83 per cent of private Canadian investors’ money in climate tech leaves Canada, with much more flowing to the U.S. and the U.K.
Companies BCG interviewed "cited conservatism in corporate Canada and an ambition gap between Canadian and U.S. entrepreneurs as key constraints toward building global champions." As well, promising Canadian startups were acquired by U.S. companies or moved major demonstration projects to the U.S. or the U.K.
These weak points, plus immigration employment outcomes, lower graduation rates in areas focused on the climate, and brain drain of STEM graduates could stifle climate tech development in Canada, Reed said.
How can Canada compete with the world?
The report notes the variety of green tech funding and talent initiatives taking place around the world, from the hundreds of billions in the U.S. Inflation Reduction Act to Clean Denmark and Start-Up Chile.
While Reed said Canada’s latest federal budget providing funding for the green economy helps, important changes must be made by corporations and investors, as well as the government.
“For corporates, it’s really what we call getting the table stakes right,” he said, by building a clear view of the investments needed to bridge the gap to achieve net-zero by 2050. Corporations also need to make climate tech, not just the climate, a top-of-house priority.
Investors are urged to develop a clear climate thesis, bridge the growth equity gap and focus more on Canada.
BCG recommends the government review its holistic strategy, incentivize R&D funding and attract more demonstration projects and scale-up capital.
If it is not a priority yet, Reed says companies and investors are missing the forest for the trees.
“Fundamental business model transformation is going to occur," he noted. "Thinking about the investment that you need to make in these technologies, thinking about your pathway to net-zero and also thinking about the opportunities you have in your space for investing in some of these climate technologies, the opportunities to generate new lines of business, that is what the corporates need to be thinking about.”