Early Stage Investing in Green SMEs: The Case of the UK

Journal Paper by Robyn Owen, Ottmar Lehner, Fergus Lyon and Geraldine Brennan
ACRN Journal of Finance & Risk Perspectives, 8 (1) | January 2020

Huge investment is needed to tackle the climate emergency but the focus has tended to have been on larger companies and big infrastructure. There is a big gap in finance for small innovative businesses that are developing products and services that are vital for sustainability. A recently published paper in the Journal of Finance & Risk Perspectives, by Robyn Owen, Othmar Lehner, Geraldine Brennan and Fergus Lyon explains why a more focused policy is required to address early stage longer horizon financing of Cleantechs.

In the UK context, with the recent establishment of a Green Finance Institute to develop policy, the focus has remained  on large-scale infrastructure projects and corporate business. In our paper, we argue that insufficient focus has been applied to early stage investing into the types of innovative small and medium-sized enterprise (SME) that could lower CO2 emissions across a range of sectors, including renewable energy, recycling, advanced manufacturing, transport and bio-science.

Whilst such businesses may offer the keys to unlocking the globally transforming solutions required to achieve carbon neutrality by 2050, or sooner, they are also difficult to fund. This is because Cleantech, such as renewable energy solutions, often requires long horizon R&D investment and substantial patient capital investment. From a private investor’s perspective the risks and costs are often perceived as prohibitively high and the returns do not reflect the full environmental benefits. Therefore, to encourage more early stage environmental impact investing, government intervention policies are required.

Drawing on longitudinal case studies of early stage Cleantech SME innovators in the UK, where the government’s UK Innovation Investment Fund co-financing programme has leveraged increased amounts of early stage private investment since 2009, the paper demonstrates a remarkable form of triple bottom line benefits for investors (both government and private sector), Cleantechs and the environment.

Key benefits revealed by the study include:

• The environment benefits from earlier deployment of more efficient lower carbon technologies.
• SMEs benefit from earlier, larger investments which progress R&D and commercialisation.
• Investment returns are enhanced by the non-financial skills and networking of venture capital financiers, leading to improving marketing, international sales and more rapid business scale-up.
• Venture Capitalist private investors benefit from lager scale funds, operable across international borders. This allows increased sharing of risks amongst investors and governments. Larger scale funds have a greater ability to select successful businesses and provide follow-on funding to full commercialisation – resulting in greater environmental benefits and better investment returns for private investors.
• Government benefits from co-financing with expert private investors, experienced in the Cleantech market and earlier stage investing. Such arrangements improve the likelihood for investment returns to the Treasury and also provide wider economic benefits from employment generation, sales and exports and further innovation spin-outs.

Whilst the case studies demonstrate success, more evidence is still required to encourage government policy and investment. Crucially, the paper indicates that all government co-funding should support sustainability rather than pure profit motives. This requires better metrics which take into account the broader value of the business activities to better inform such investment decisions. This suggests an important avenue for future research will be to incorporate sustainable, circular economy, metrics into government investment policy evaluation and impact investor screening.  In this way, government policy Green Deals can address the early stage Cleantech and wider investment markets and achieve the low carbon transitions required to tackle climate change.