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Why Early Stage Cleantech Financing is Critical to Building Back Better a Sustainable Productive Economy and How This Can be Achieved

A new report by CUSP researchers as Middlesex University takes a holistic view of the UK cleantech finance ecosystem, drawing on the experiences of contemporary young cleantechs, investors, government policymakers and support agencies. In this blog Theresia Harrer and Robyn Owen outline their findings.

Blog by THERESIA HARRER and ROBYN OWEN
CC.0 :: Colin D / unsplash.com

In the midst of the perfect storm of economic destruction delivered by Brexit and COVID-19, the UK government faces the dilemma of balancing the two key policy priorities pertaining to economic efficiency and the drive for productivity and global competitiveness (HM Government Industrial Strategy, 2017) and the requirements of a sustainable low carbon net zero economy (HM Government, Green Finance Strategy 2019). These are presented in the recent UK government’s designated Grand Challenge for ‘Clean Growth’ and promise of £2.5bn investment into low carbon innovation. Yet, much of this challenge necessarily focuses on large infrastructural projects to address renewable energy generation projects such as windfarms, electric vehicle (EV) transport infrastructure and construction.

A new Productivity Insights Network Report  by CUSP researchers at Middlesex University draws attention to the need to focus on the green shoots of cleantech innovation and to nurture and commercialise today’s ideas that can become tomorrow’s globally transformative low carbon technologies. The report takes a disruptive perspective to traditional labour productivity, suggesting that there is a need to go beyond Romer’s total factor productivity in order to properly calculate sustainable productivity for a low carbon economy. Such an approach requires long term and Circular Economy thinking that transcends existing carbon input-output models and considers recycling, longevity and repurposing of products and services.

Cleantech offers new business models and technological advances that can lead to more efficient use of energy as well as greener renewable energy solutions such as natural wind, wave and thermal sources. Taking a broad definition, cleantech can also reduce uses of rare earth minerals, reduce waste, improve recycling and through smart software deliver far more efficient production, process and service uses.

However, the new report finds that UK early stage cleantechs struggle to raise funding rounds for their seed R&D and Series A early commercialisation. The result is that very few cleantech start-ups achieve full commercialisation and those that do often take long periods of five to 10 plus years to do so. Yet those that do so can make global low carbon impacts, such as Petainer packaging solutions and Anesco renewable energy solutions—both UK originated companies backed by UK Government co-financed venture capital.

The perpetual under-funding of cleantech is not a new phenomenon. A UK Department for Business, Energy and Industrial Strategy research paper published in 2017 demonstrated the patient capital funding gap facing long horizon cleantech innovation and the inability of UK government policies to address market failure funding gaps for early innovators. The problem arises from information asymmetries which occur between cleantech venture founders and their potential investors such as business angels and seed venture capital funds. Past government policy efforts to bridge the gap through grants, private investor incentives such as tax breaks and public-private co-funding of venture capital have only partially closed the gap. More needs to be done.

The new report takes a holistic view of the UK cleantech finance ecosystem, drawing on the experiences of contemporary young cleantechs, investors, government policymakers and support agencies. It finds that at the intersection of the cleantech funding ecosystem nexus, all actors struggle to agree on the value proposition of the venture. From the cleantech perspective the founders struggle to present their case in terms of environmental and commercial impact, partly due to the lack of reliable industry benchmarks. From the investors’ perspective, they need to see how environmental impact will support the commercial argument for investing. Early investing is very risky and where new ventures lack track records and are presenting unproven disruptive technologies, there is a need to demonstrate how the cleantech will add value to the existing market. From the government policy perspective there are the joint and potentially competing objectives of achieving enhanced efficiencies and competitiveness as drivers of economic growth, as well as low carbon impacts to address climate change. These different actor perspectives and often competing logics and objectives, are holding back the market.

The report suggests that the solution requires greater understanding and harmonisation of environmental indicators. Drawing on existing use of environmental indicators, the report demonstrates considerable convergence across all actors in the use of environmental efficiency and reduction measures relating to renewables uptake and lower carbon emissions. However, more complex compound measures relating to circular economy and the material input, output and outcomes across the wide range of cleantech activities remain inconsistent and unevenly applied. These however are crucial requirements of a holistic appreciation of the environmental impact of a cleantech, which should ultimately offer an improvement on existing industry low carbon benchmarks, to support financial return forecasts to potential investors. This is a potent combination which policymakers should also look to support through early stage cleantech financing schemes in order to ensure that efficiencies also lead to overall reduction in emissions, as argued in prior research.

Our work concludes by offering a blueprint approach for all actors, which enables cleantechs to present their value proposition in terms of an environmental impact and commercial case which public and private investors can assess and evaluate. It is also noted that support agencies such as Future-Fit Business and Cranetool are already working to deliver environmental benchmarking solutions that can assist all parties to work together better. What is now required, as outlined in the recommendation, is harmonised UK policy support for early stage cleantech financing, as outlined below:

  • Development of Standard UK environmental impact metrics (EIMs) through integrated cross-departmental use for business finance policies, adopting consistent greenhouse gas (GHG) metrics alongside CE measures for carbon and rare earth mineral inputs and outputs and consideration for greening supply chains.
  • Ensure that public-private co-financing and tax incentive policies for business investment use environmental indicators to encourage environmentally sustainable development.
  • Collect national environmental audit data annually to assist SMEs to undertake environmental benchmarking to enable progression to a greener economy. These data can assist impact investors, offering baselines to assess cleantech environmental impact.
  • Offer environmental sustainability support programmes alongside SME support and finance programmes, integrating these with leading private market support providers.

For further information about this project, please contact Dr Robyn Owen Dr Robyn Owen or Theresia Harrer at Middlesex University Centre for Enterprise, Environment and Development Research (CEEDR).

Further Reading

Productivity growth means getting more output from fewer inputs. It is a key goal of conventional economic policy. But ‘productivity growth’ is a vague concept and there are large gaps in our understanding of it. This ESRC funded project explores links between the different types of productivity and two major gaps: the relationship between energy and productivity, and wellbeing and productivity. The aim is to map the existing evidence base and guide future ESRC productivity research.
Productivity growth means getting more output from fewer inputs. It is a key goal of conventional economic policy. But ‘productivity growth’ is a vague concept and there are large gaps in our understanding of it. This ESRC funded project explores links between the different types of productivity and two major gaps: the relationship between energy and productivity, and wellbeing and productivity. The aim is to map the existing evidence base and guide future ESRC productivity research.
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Falling productivity growth, climate change and changes in energy supply. We face serious challenges now and in the coming years. A recent paper by CUSP researchers Shimaa Elkomy, Simon Mair and Tim Jackson reviews connections between these three challenges and look for paths forwards. Here, Simon Mair is summarising the findings. 
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