It is undeniable that 2020 witnessed a significant surge in the popularity of special purpose acquisition companies.

Throughout the year, a total of 219 SPACs successfully raised $73 billion, as indicated by widely circulated market research from Goldman Sachs. This represents a substantial 462% increase compared to the figures from 2019, and exceeds the capital raised through traditional initial public offerings by approximately $6 billion. Estimates suggest that around one-fourth of the SPACs announced are focused on businesses related to climate change.

To date, over one-third of the 78 transactions completed or announced since 2018 have centered on climate-related ventures, according to data compiled by Climate Tech VC. Notably, these SPACs have demonstrated stronger performance than the broader technology market, with the 10 climate tech companies that have finalized mergers achieving an average return on investment of 131%, contrasted with the 50% return observed across the entire SPAC market (based on an average offering price of $10 per share).

This year has clearly been exceptionally favorable for organizations addressing the climate crisis across various industries, but the question remains: can this momentum be sustained?

Several factors suggest that it can, primarily driven by the demand for these types of public offerings from institutional investors, encompassing pension funds, mutual funds, and asset managers responsible for managing trillions of dollars in investments.

In a direct message, Rob Day, a veteran clean technology investor, explained, “[The] present trend [of SPACs] stems from the fact that over the last 24 months, the institutional investor community has fully embraced the belief that climate solutions will be a major area of growth in the 2020s and beyond. However, they were lacking investment options.”

He continued, “The existing publicly traded ‘green’ companies were largely already acquired, and private equity alternatives were also insufficient – either too small in the case of venture capital, or offering low returns for large-scale projects. Coupled with a market of retail investors, like those on Robinhood, showing considerable enthusiasm for electric vehicles and similar technologies, the conditions are ripe for this trend to continue.”

Leading money managers concur with Day’s evaluation.

Richard Manley, Managing Director and Head of Sustainable Investing at CPP Investments, stated, “Industry-wide commitments to mitigate climate change risk are providing investors with the confidence that decision-makers are actively driving change. There is a growing recognition within public markets that the innovative transition solutions found within core operating subsidiaries or investments in the venture capital arms of corporations haven’t provided public equity investors with the targeted opportunities they desire.”

CPP Investments, with approximately $355.4 billion in total assets under management, is not the only major financial institution prioritizing climate investments as a core strategy. In January, BlackRock pledged to integrate climate change mitigation into its investment calculations for the $9 trillion in assets it manages.

“We are observing a clear increase in the number of investors committed to aligning their portfolios with the mitigation of global warming,” Manley noted.

The necessity to deploy these funds rapidly contributes to the remarkable growth of companies like Tesla and its inclusion in the S&P 500.

It also explains how a company such as AppHarvest could become publicly traded despite only recently finishing construction on its initial tomato farm (the company, among numerous indoor agriculture startups, cultivates tomatoes in advanced greenhouses that utilize fewer resources and enhance crop production efficiency).

CPPIB is an investor in at least one SPAC focused on climate mitigation. The Canadian pension fund is supporting the SPAC acquiring ChargePoint, a developer and operator of electric vehicle charging technology.

This September agreement concerning ChargePoint was followed in November by a SPAC deal for Nuvve, a company pioneering vehicle-to-grid energy management software and services.

Investors anticipate that the rate of SPAC formation, particularly those targeting climate tech, will remain consistent and potentially accelerate throughout 2021.

“There is considerable consideration being given to sustainability SPACs even at this moment,” said one investor specializing in sustainable food companies. “While attention often focuses on energy and alternative energy, food is frequently overlooked. Since Beyond Meat’s IPO, every bank has provided coverage of this market, generating significant demand for innovative capital deployment strategies in this area… We can expect to see more SPACs in the sustainable food sector.”

Opportunities extend beyond the sustainable food industry. Electric vehicle manufacturers have been readily targeted by SPACs, particularly following the initial success of the Nikola acquisition and subsequent offerings in other climate-focused SPACs.

However, Nikola’s challenges also underscore the need for caution when considering these types of public offerings.

Investors were compelled to watch as agreements with GM and Republic Services dissolved after the company’s leadership made exaggerated claims regarding its capabilities and accomplishments. While the stock remains above its initial offering price, it has declined substantially from the peak it reached during the summer of 2020.
“I am cautious about the overall performance of many of these SPACs, but some will utilize that available capital to become significant, innovative companies in these sectors,” Day wrote. “And, of course, many patient venture capitalists are now realizing substantial gains on their investments, which will assist them in raising their next, larger funds.”