Angels, ventures and environmental performance indicators: funding cleantech innovation
SMEs play a key role in transitioning to net zero. In their recent paper, Theresia Harrer and Robyn Owen explore why funding problems are so persistent for early-stage Cleantech ventures. This blog provides a summary of the findings.
Blog by THERESIA HARRER and ROBYN OWEN
Reducing emissions and switching to clean energy technologies is essential to combat climate change. For years, if not decades, academics and practitioners have argued that only if we manage to produce and use energy without polluting and poisoning the planet, we will be able to limit global warming to the recommended minimum of 1.5°C . The recent extraordinary levels of inflation, triggered to a large extent by the dependency on oil and gas from Russia, have however highlighted that the development of clean energy technology may also be critical to maintain Europe’s economic strength and the wellbeing of its citizens. Developing clean energy technologies therefore is not so much about doing-good anymore, but a necessity to survive. How can we successfully develop such technologies?
In our recently published paper in the International Journal of Entrepreneurial Behavior & Research, we argue that early-stage cleantech ventures (in short “Cleantechs”) play a central role. Cleantechs develop radically innovative new energy technology solutions that reduce emissions. In doing so, they not only help consumers change their behaviour but can also transform whole industries, shaping the economic performance of entire countries even.
For instance, the construction industry accounts for 11% of the global greenhouse gas (GHG) emissions. By employing a low-energy manufacturing process to develop insulation material from residual waste, the UK-based Cleantech Mykor, for example, not only aims to change how individual people build their homes, but also how the construction industry uses resources. A system wide implementation of that approach could reduce the carbon footprint of the construction industry as well as the dependency on oil and gas, which of course has a positive impact on the economic performance of the UK altogether.
Yet, although Cleantechs are essential to develop the direly needed clean energy technologies, they are consistently unable to attract funding and move beyond product prototyping stages. One reason for this could be their complex business model (combining commercial and environmental goals) that requires long and capital-intensive research and development (R&D) periods. Another reason we identified, however, might be that early-stage investors (e.g., business angels (BAs), venture capitalists (VCs), and government-backed funds (GFs)) simply do not consider sufficient impact criteria when they evaluate Cleantechs as potential investees. Both are valid explanations, if recent works wouldn’t show that early-stage investors are actually willing to accommodate prolonged funding periods. In fact, most of them have already adapted their investment strategies and adopted Environmental Performance Indicators (EPIs) to evaluate and track a venture’s performance with regard to environmental impact (for instance on CO2 reduction). So, what is the problem? Why seem Cleantechs and their potential investors not be able to find a common denominator?
Those questions were the motivation behind our latest paper. If Cleantechs and their potential investors all have “green” goals and EPIs to measure progress towards those goals, then why is the funding problem for Cleantechs so persistent?
Reason 1: Environmental impact goals and EPIs are two different pairs of shoes
Our analysis revealed two reasons for the persistence of the funding problem. First, we found a (misconceived) unity of environmental impact goals of Cleantechs and their potential investors. All actors claimed to put “environmental impact” first, but the definition of this impact was highly diverse. Second, Cleantechs and investors also used different EPIs to measure those goals. But to make things worse, not a single investor used EPIs that matched the goals they claimed to prioritise. For instance, while private investors such as VCs and BAs consistently claimed that environmental goals were their primary focus when they assessed Cleantechs as potential investees, our EPI analysis revealed that in fact, it is financial and economic efficiency considerations that were at the core of their assessment, not environmental sustainability. The Cleantech funding issue therefore seems to be so persistent because not a single investor seems to prioritise the thing they claim to prioritise. Clearly, environmental impact goals and EPIs are two very different pairs of shoes.
Reason 2: Actors promote different values with EPIs
To understand why Cleantechs and their potential investors use such diverse EPIs, we conducted an additional analysis of how EPIs were developed and the values that were enacted in them. This ultimately revealed three dominant approaches to use and develop EPIs and three actor groups that influence the Cleantech financing ecosystem most. We describe these in the three roles below:
Traditional Laggard: The first role refers to private investors, notably VCs and BAs. Although they emphasize that long-term environmental impact is at the core of their investment strategy, our analysis shows that they seek accurate measures of environmental impact and in doing so follow market-based values. As a result, they (aim to) develop highly sophisticated EPIs that require large amounts of data and are often used without a clear benchmark reference (e.g., energy efficiency of a product). Further, VCs and BAs also often develop their own proprietary impact measurement frameworks (e.g., specific impact scores), and so make it difficult to develop a unified impact measurement approach in the market. Therefore, as private investors currently take up the largest market share of the early-stage Cleantech investing market, we suggest that their conservative focus on EPIs and impact measurement frameworks may actually be limiting successful Cleantech investment, instead of supporting it.
Developer: The second role refers to government backed funds. Although they still have a strong focus on state-related values and on eco-efficiency indicators in relation to economic productivity, they also advocate for simpler impact measurement frameworks (e.g., by developing easy but benchmarked EPIs on a case-by-case basis) and qualitative elaborations on the pathways to behaviour change. They therefore do not require large amounts of impact data and sophisticated EPIs, but instead promote a more qualitative understanding of impact which is accustomed in the environmental logic. Moreover, government backed Cleantech funds share and develop their approaches more openly with Cleantechs and help governments to develop baseline data for such EPIs. They therefore may take on a key role in developing the Cleantech financing ecosystem. Currently, however, their approaches are not more widely promoted and remain somewhat overlooked in the private Cleantech investing market.
Boundary Spanner: This last role refers to private support agencies. Although we originally only focused on Cleantechs and their potential investors, support agencies quickly emerged as an important moderator between the two. Just like Cleantechs they promote environmental values and impact goals that focus on behaviour change. Accordingly, support agencies also advocate for qualitative explanations of the impact pathway and for simple but insightful EPIs in relation to a benchmark. Yet, they also suggest that where enough data is already available, more sophisticated EPIs may be used. Support agencies therefore position themselves as a critical actor to combine all different values in one coherent impact measurement approach. As they already actively work with private and public investors as well as Cleantechs to develop investment frameworks, they may also be critical in developing a unified Cleantech investing market. However, at the moment they are under recognised.
Our paper makes the case that the interaction with boundary spanners (i.e., private support agencies) and developers (i.e., government backed funds) is critical to developing the Cleantech investing market. They not only develop the most useful environmental performance indicators and publicly accessible data, but also bring all actors together. Most importantly, however, we show that although the use of EPIs is important to fund Cleantechs and develop clean energy technologies, an un-reflected use and development of EPIs can backfire and in fact hinder the development of a functional Cleantech investing market.
