This article was contributed by Dimitar Histrov of FCC partner KISMC
Financing climate innovation is one of the topics of the “Innovating for Climate Change & Sustainability Toolkit” which is being developed under the Erasmus+ Project “Collective Innovation to Fight Climate Change“.
The projected market value losses could rise by more than 200% if warming reaches 5°C as compared to 1.5°C. The socioeconomic impacts from climate change and extreme weather will be felt differently across different sectors. Research suggests that every dollar invested in climate adaptation could result in 2 to 10 USD of net economic benefit. So, investing in a sustainable environment and innovative climate solutions is financially and strategically one of the best decisions for the companies including SMEs but the reality is slightly different.
Despite its rising importance, the shortfall in funds to help reduce such weather-related disasters – the “adaptation finance gap” – is growing.
There are, however, some large investors, like the World Bank and Bill Gates’ energy venture fund, committed to funding adaptation measures, such as desalination technologies and dynamic mooring systems. Effective adaptation strategies may combine structural measures (e.g., flood protection), nature-based solutions and risk-transfer schemes (e.g., insurance products). Risk transfer can be a powerful mechanism for companies to buffer against economic impacts of extreme weather and may even incentivize companies to invest in further climate adaptation through discounted premiums.
Two types of investors in climate innovation are a focus in this article – private and governments. The authors of the article “The Next Generation of Climate Innovation” (2021) give some encouraging facts, information and examples about investing in climate change innovation by private investors and governments.
The financial community needs to focus on how investors can contribute to financing the transition to new technologies and models. Venture capital funds and private equity firms describe themselves as a purpose driven investment organisation that has decided to align all investment decisions in support of achieving SDGs. Still, the climate solution perspective focuses first on opportunity – how companies can produce goods and services that contribute to the society we want to build. Venture capital investment in climate technology is growing five times faster than the average rate of investment across all industries. Climate investment soared from $418 million in 2013 to $16.3 billion in 2019.
There are identified more than 75 funds that are already taking a variety of approaches to climate investment, including focusing on general climate technology, high-impact technology, vertical technology, and deep tech. But all this money is still a fraction of the $1.4 trillion in private equity and venture capital that was available for investment in 2019.
Flagship Pioneering is an example of how a venture capital fund can adopt a kind of problem-focused approach taken by climate innovation ventures. It applies an innovation process based on existing new technologies in order to design products or reimagine value chains, helping in this way a start or nurture more than 100 scientific ventures, that finally resulted in more than 34 billion USD aggregated value of investments in climate.
Deep-tech investors also can adapt their expectations without accepting lower returns. To de-risk R&D and launch the resulting products they also can extend the fund lifetime. For example, Breakthrough Energy Ventures, which has raised more than $2 billion, has a 20-year time horizon and is backed by Bill Gates and other notable limited partners, including Jeff Bezos, Michael Bloomberg, Richard Branson, Vinod Khosla, Jack Ma, Xavier Niel, and Masayoshi Son. About 90% of the company’s portfolio consists of deep-tech ventures geared toward climate change or sustainability goals, and about 50% of its staff have earned doctorates. More funds are combining investment with active support and assistance. In 2020, Amazon unveiled its Climate Pledge Fund, a venture capital program directed at sustainable technologies. The company plans to become carbon neutral by 2040.
Microsoft has created the $1 billion Climate Innovation Fund and announced that the company will be carbon negative by 2030. SOSV Investments, which invests in about 150 new startups a year, has an accelerator program that includes a network of 1,000 global mentors and an alumni community of more than 2,000 founders around the globe with deep market and technical expertise. The program provides access to an extensive infrastructure of laboratory and maker spaces, and SOSV introduces startups to sector-specific corporate partnerships and later-stage venture firms focused on the same verticals.
Private equity firms can also emphasise the impact of climate tech ventures on the SDGs to their investors and the companies that they invest in. Sweden’s EQT Partners, for example, describes itself as “a purpose-driven global investment organisation” that has “decided to align all investment decisions in support of achieving the SDGs as well as ownership actions to drive the development of the portfolio companies in this direction.” They can also fill gaps in skills and increase understanding of technology by building in-house expertise and networks. Larry Fink, the CEO of BlackRock, the largest fund manager in the US, wrote in 2021 that “Climate change has become a defining factor in companies’ long-term prospects.”
Governments are active in supporting innovation in climate solutions, albeit to varying degrees and with different approaches. Policies are being developed to put pressure on carbon-intensive products, technologies and practices, and to enable (stimulate and expand) the scale of innovation that has the potential to completely bypass system lock-in. Opportunities are created and climate innovation is stimulated by moving towards value chains and models compatible with the SDGs.
A good example is China. The government supports science parks for innovation and technology and the creation of research and development centres focused on sustainable development technologies. In 2017, Nanopolis Suzhou, for example, hosted over 200 private investment firms, including numerous major international venture capital investors, and more than 300 nanotechnology companies.
In Europe, both the EU and national governments are funding R&D for innovative solutions to combat climate change. Under the Horizon Europe Programme, EUR 26 billion is planned for basic research, EUR 53 billion for applied research and EUR 14 billion for supporting innovation and start-ups from 2021 to 2027. The goal of the Joint European Disruptive Initiative (JEDI) is “to bring Europe to a leadership position in revolutionary technologies”.
An example from Germany. A national hydrogen strategy has been developed to build industrial production capacities with a capacity of 5 gigawatts by 2030 and will invest €7 billion in strengthening hydrogen technologies and €2 billion in the creation of hydrogen production plants in other European countries.
The new administration in the USА is also signalling to provide greater financial support for climate change initiatives.