Investment in Canada’s cleantech sector dwindled by over $1 billion from 2022 to 2025, as the market cooled and scale-up financing remained in short supply, a new report from the Institute for Sustainable Finance finds.

Prateek Sood and Yingzhi Tang, researchers from the Queen’s University-based organization, analyzed the sector’s activities from 2016 to 2025 in The State of Canadian Cleantech Venture Capital Markets. Funding peaked in 2022 when deal value hit approximately $1.65 billion, before plunging to $795 million in 2023, rising to $1 billion a year later, then sliding to $590 million in 2025.

There was a bonanza of enthusiasm for clean energy and the energy transition following COP26 in 2021 and the passing of the Inflation Reduction Act in the U.S. a year later. However, many inexperienced investors and projects flooded the market, Yrjö Koskinen, director of research at the institute, said in an interview with Sustainable Biz Canada.

There was “perhaps a little bit of too much enthusiasm,” he added. Then the conversation shifted from energy transition to energy security after Russia invaded Ukraine in 2022. “I would say that the bubble burst,” Koskinen said.

Canada’s cleantech sector is still a high-growth industry that brings billions of dollars to the country, the report states, particularly in electricity and grids, industry and mining, and buildings and city infrastructure. But it could struggle to grow if the consistent lack of scale-up financing in the country remains an issue.

Public funding a major force in Canadian cleantech

The report’s authors uncovered a cleantech funding environment that has been prone to major changes.

For the first half of the decade covered by the report, funding was lower-volume and lumpy, with capital concentrated in a handful of large, later-stage deals. From 2021 onward, early-stage investments were the focus.

The slowdown of interest in 2025 slammed early-stage companies the hardest, with a 71 per cent year-over-year decrease in deal counts. However, seed deals remained “relatively resilient.”

The Canadian venture capital market stands out globally because of the strong presence of public sector institutions, Koskinen said, such as the Business Development Bank of Canada. Approximately one-third of cleantech deals in Canada involved a Canadian public investment institution, which accounted for 57 per cent of total deal value.

Cleantech revolves around “speculative” technologies, with uncertain commercialization pathways, malleability to regulatory and policy shifts and being capital intensive, according to the report. Thus, public investors willing to absorb early-stage risk can help validate technologies in tandem with private capital.

The scale-up funding shortage

A problem facing the Canadian cleantech sector is the shortfall of scale-up funding compared to the U.S., the report found. The scale-up stage provides the funding for a young company to grow and reach commercialization.

From 2021 and beyond, later-stage and growth deals did not develop into a steady pipeline, the report’s authors found. While capable of supporting seed- and early-stage companies, later-stage financing in Canada remains “inconsistent,” the report says.

Canadian venture investors tend to be risk-averse, Koskinen said, which is a problem not specific to cleantech. Nor is it a new obstacle. When Koskinen moved to Canada 10 years ago, he heard the same observation.

Organizations such as Boston Consulting Group and MaRS Discovery District, and Canadian cleantech investors like Tom Rand have sounded the alarm about the scale-up funding deficit in Canadian cleantech and climate tech.

If not addressed, early-stage Canadian cleantech companies may have to look abroad for funding or expansion, particularly the U.S. and its ample pools of capital, Koskinen said. “We create innovations and U.S. investors reap the profits,” he warned.

Patient capital, buyer coalitions

As cleantech is a hardware-based industry with long commercialization timelines and high capital requirements, venture capitalists familiar with asset-light business models such as software may need to rethink their expectations, Koskinen said.

Investors could adopt patient funding models. Cleantech startups can look to private evergreen funds sponsored by family offices, foundations and endowments, or reach out to venture capitalists that are taking a longer view on their investments.

To create early demand for cleantech, Canadian industry associations, public institutions, large corporate buyers and corporate venture capital investors could collaborate on creating “buyer coalitions” for emerging cleantech solutions, the report suggests. This could provide clearer demand signals and improve the commercial case for private investment.

“Our existing private corporations have to become more and more involved as first customers,” Koskinen said.

Koskinen recommends that Canada’s internal trade barriers be lowered in order to support the cleantech sector. The Canadian private sector could take more measured risks and pour more resources into research and development, he added, lest it fall further behind its peers.

The Institute for Sustainable Finance aims to publish an annual report on Canada’s cleantech sector, Koskinen said.