The COVID-19 crisis threatens all of our lives. Understandably, it is currently the central focus of government policy globally. Yet history tells us that post-crisis economic reconstruction is most successful where investment is greatest in new emerging sectors. It is crucial, therefore, that investment in the UK is directed towards globally leading innovations for environmentally sustainable development, rather than simply to become more efficient at producing and selling more of the same.
Prior to the COVID crisis, progression to Net Zero carbon neutral emissions was rising to the top of the policy agenda in many countries. There was a widespread declaration of the climate crisis and climate war and a proliferation of Green New Deals – overarching policies for an integrated government-led approaches to delivering reduction in carbon use and emissions.
We have argued that an essential element of climate change policies is a recognition that investing in early stage SME Cleantech innovators is crucial. These are companies developing technologies that lower carbon use and which are key to reaching the ambitious goals of an at least 40% reduction in greenhouse gas emissions set by the UNFCCC Paris Agreement of 2015. However, the costs and risks of investments in the cleantech sectors such as renewable energy, transport, building and communications infrastructure are high. Government interventions have been necessary to attract a greater quantum of private investment more rapidly into the sector through inducements such as co-investments, niche loans, grants, tax incentives and green tariff payments.
However, a great deal of this government intervention has been directed at headline large infrastructural schemes such as UK Green Investment Bank investments into Wind Farms and Global Climate Partnership Fund renewable energy projects. An examination of the UK Green Finance Strategy (2019) underpins this work with commitments to spending billions on further, very necessary, infrastructural works to create low carbon environmental efficiency.
It is a concern, however, that relatively little attention has been given to creating an effective financing system to support the role of the innovative Cleantech SMEs. In fact, it is barely mentioned in the UK Green Finance Strategy. This is worrying, since these companies are acknowledged as one of the key leaders in delivering the global low carbon solutions that can win the war on climate change.
A caveat here is the aforementioned high cost and risk of investments in the Cleantech sector which is most acute in terms of the poor risk reward balance during the so-called ‘valley of death’ period of R&D and early commercialisation, where funding so frequently runs out. The notorious 2016 MIT study of US cleantech failure during the Global Financial Crisis period suggested that venture capital (VC) alone is not the solution, whilst more recent studies suggest an improving Cleantech investment market, prior to COVID. Here it is important to recognise that Cleantech investment is not just about quick win returns from digital technologies (such as smart metres and software Apps), but the willingness to finance sufficiently for the long horizon engineering and bio-science, more capital intensive Cleantech innovations.
The familiar danger signs of another post economic crisis collapse of VC investment are here. This could put back the fight to tackle climate change, since we are now very aware that economic recessions reduce investment liquidity and increase the timelines on successful innovation investment exits by several years.
Now, at this time of deep crisis, we must not lose focus on the fundamental need for a better funded systematic government-led Green Deal approach to early stage Cleantech funding. Such an approach requires government financial intervention policy and targeted programmes to support and encourage environmental impact investing and to ensure that the right types of Cleantechs are properly assisted and fully funded for success, rather than the current disjointed and under-funded efforts which in the UK have led to a culture of funding for failure and sub-optimal trade sale exits – often to foreign investors.
So, even in this crisis period, it is vital for the UK government not to lose sight of the bigger, longer term picture, and the need to improve early stage Cleantech SME innovation finance and support to tackle climate change.
A current study for the ESRC funded UK Productivity Insights Network (PIN) by Middlesex University, Centre for Understanding Sustainable Prosperity (CUSP) researchers, alongside partners from SQW, St John’s Innovation Centre and the UK Green Angel Syndicate is exploring the relationship between early stage Cleantech investing in the UK and its potential environmental sustainability impacts. The aim is to radically disrupt current thinking about the role of innovation in economic productivity measures and demonstrate the crucial importance of early stage impact investing into Cleantech innovation. Early findings demonstrate a paucity of useful data, due to the lack of standard industrial classification sector matching for Cleantech activities. They further demonstrate that, despite years of advice, the development of an effective, efficient UK Cleantech investment funding escalator -which progresses early innovation Cleantechs through for example grants for early proof of concept to significant Series A+ VC rounds and to successful commercialisation – is far from in place.
We welcome feedback and collaboration with our research team from Cleantech investors, SMEs, support services and policymakers. Together we can improve the system and put the UK at the forefront of the globally important Cleantech sector, which can be a key driver for future economic and environmental well-being.
For further information on the Middlesex University PIN project please contact Dr Robyn Owen, or Theresia Harrer at the Centre for Enterprise and Economic Development Research (CEEDR) and Centre for Understanding Sustainable Prosperity (CUSP).