Microsoft Funds Low-Carbon Tech to Green Data Centres

Microsoft continues to expand its climate tech investment strategy with over US$800m already deployed through its Climate Innovation Fund, part of its broader sustainability goals. The fund supports emerging technologies and early-stage ventures focused on cutting carbon emissions and building scalable solutions, particularly in sectors where alternatives are not yet widely available.

The fund, launched in 2020, aligns with Microsoft’s commitments to become carbon negative, water positive and zero waste by 2030. It combines financial backing with procurement agreements and technical support: a strategy the company refers to as its “market development flywheel.” This approach has already attracted US$12bn in follow-on capital for portfolio companies, according to a new report detailing the fund’s first five years.

Brad Smith, Microsoft’s Vice Chair and President, says: “Through the Microsoft Climate Innovation Fund, we invest in bold ideas and scalable technologies that drive real impact.”

Targeting complex industries with emerging solutions

A large portion of the Climate Innovation Fund’s capital goes into industries where low-carbon options are limited or still under development. These include steel production, aviation and infrastructure-scale carbon removal.

In Sweden, Microsoft has invested in Stegra’s commercial facility that uses green hydrogen in place of traditional blast furnaces. The process, known as direct reduced iron technology, aims to cut emissions by up to 95 percent. Microsoft pairs this equity investment with long-term purchase agreements for the steel, which it intends to use in data centre equipment.

In aviation, Microsoft supports projects aimed at producing and adopting sustainable aviation fuel (SAF). The fund has backed Twelve, a company using carbon transformation and LanzaJet, which is developing alcohol-to-jet technology. LanzaJet’s Freedom Pines Fuels plant in Georgia is the first commercial SAF facility of its kind to use ethanol.

Microsoft also participates in book-and-claim systems, a form of emissions accounting that allows companies to report the use of SAF without the fuel physically powering specific flights. One such deal is with Alaska Airlines.

Funding climate tech where others hesitate

The fund allocates more than US$100m to first-of-a-kind projects, technologies too large for venture capital but still too risky for conventional infrastructure investors. Microsoft estimates this financing gap ranges between US$100m and US$180m per project.

It has provided project finance for Climeworks’ Orca facility in Iceland, the world’s first commercial direct air capture (DAC) plant. Alongside the investment, Microsoft has signed a 10-year offtake agreement to remove 10,000 tons of CO₂.

In Nigeria, Microsoft funds Konexa’s renewable infrastructure that now links Heineken’s facilities to clean power. The project is already commissioned and is designed as a model for similar efforts across the country’s energy sector.

Microsoft evaluates the climate impact of these projects through a framework developed with Rhodium Group. This system measures both direct emissions reductions and the potential for broader market change—known as catalysed reductions. In technologies like low-carbon steel and DAC, catalysed benefits can surpass those achieved directly by early-stage installations.

The company acknowledges that dollar-for-dollar, these early investments currently deliver lower emissions savings than mature technologies such as solar or wind. Still, Microsoft argues they are essential to establishing future markets.

Global reach, inclusive founders and the role of AI

About 19% of the fund’s capital supports projects in the Global South, with energy access initiatives across Africa and infrastructure improvements across Asia and Latin America.

This includes investment in CrossBoundary Access, which finances mini-grids in African countries and WaterEquity, which targets clean water and sanitation projects across developing regions.

The fund also highlights diversity: 22% of the start-ups are led by women and 21% by founders from underrepresented groups.

Lillian Barnard, Microsoft’s Chief of Enterprise Partners for the Middle East and Africa, says: “Our goal isn’t just to become more sustainable but also to help every organisation in Africa and the world to do the same.”

Investments closer to Microsoft’s home in Washington State have also been part of the fund. Melanie Nakagawa, Chief Sustainability Officer, adds: “It’s inspiring to see the Climate Innovation Fund driving real impact across Washington state and beyond.”

She continues: “As a WA resident, it’s especially meaningful to see how these investments are supporting local entrepreneurs and helping scale climate solutions in our communities.”

Microsoft’s investment strategy increasingly includes the deployment of AI, which the company sees as critical to future climate progress. Described as an “innovation amplifier,” AI features in newer investments such as Vibrant Planet, which uses geospatial data to manage wildfire risks and Terradot, a start-up using AI to improve carbon removal through enhanced rock weathering.

Despite AI’s growing carbon footprint (it is currently the fastest-growing emissions source in Microsoft’s value chain), the company believes the long-term benefits will outweigh this short-term impact.

“The force creating this distance from our goals in the short term is the same one that will help us build a bigger, faster and more powerful rocket to reach them in the long term: artificial intelligence,” Melanie says. “This is not hyperbole.”

With its fund continuing to grow and attract further investment, Microsoft positions itself at the centre of climate innovation. Its strategy spans technical risk, geographic reach and the role of AI in climate technologies, all within a structure aimed at long-term transformation for data centre operations and beyond.