A higher level of investment into climate-tech from institutional investors (and major companies, especially in the energy sector) is challenged on a number of fronts.

Within the investment world, the first is around ‘traditional mindsets’ where institutional investors allocate capital in a similar pattern to previous years – to global, listed assets, without giving full consideration to alternatives. Better communication and up-skilling could address this; can allocations made closer to home deliver comparable returns whilst benefiting local economies?

Second, there is the fear of conflicts of interest, where institutional investors are wary of being accused of undermining their fiduciary responsibility of loyalty and care. However, if investment risk is climate risk and the changing climate is already affecting a business’ ability to create value, then fund managers need to invest for our future.

In discussing funding of climate-tech, there is often talk about a ‘gap’ and often confusion whether that’s at seed, Series B, first-of-a-kind demonstrators, or at the scale-up stage. The UK needs a joined-up funding escalator from origination to a multi-billion industry that includes all the necessary financial products to nurture, build and sustain the sector.

A funding escalator would ensure a joined-up funding path so that founders and CEOs could focus on delivering their business plans instead of chasing investment. The time spent looking for funding adds significantly to the commercialisation of net zero technologies, which is time that society doesn’t have.

Ideally, this would include government grants that run on a five-year spending review cycle. Currently, there is a gap of some 12–18 months between the end of one cycle and the beginning of the next as business cases are presented to the Treasury and funds are allocated. A London Economics report showed that the UK creates around 150 new climate-tech startups per annum, but there is a marked decline during the spending review gap. Chris Skidmore’s Net Zero Review also called for long-term funding certainty for major net zero priorities, in particular to allow capitally-intensive projects to be built and run over a period of time to demonstrate their viability.

Additional capital organised in a joined-up funding escalator would encourage more entrepreneurs to develop net zero solutions.

The time spent looking for funding adds significantly to the commercialisation of net zero technologies, which is time that society doesn’t have.

None of this is worth doing unless we put in place support systems, including experienced incubators and accelerators, to support management teams on the journey. Also, good banking practices. Oddly, venture-backed businesses struggle to open high street bank accounts because banks are not comfortable with the layered structure of venture capital (VC) fund managers. Many companies also struggle to access debt mechanisms because of their lack of track record.

Funding actions
Despite these challenges, some progress has been made in this field. The UK Chancellor of the Exchequer’s Mansion House Compact, announced last year with the support of Aviva, Nest, M&G and other institutions, plans to unlock more capital for investment from institutional investors. Aviva and the other signatories (all UK pension providers) have committed to allocate 5% of their default funds in unlisted equities by 2030 – a move set to unlock £50bn of capital. This is a significant move, but how do we ensure that this is invested in climate-tech funds?

Global Impact Investing Network reports a 32% increase from pension and insurance funds into impact fund managers globally, but there is still more to do. We need to encourage more pension money to invest in the UK’s net zero future. Place-based Investing from the Good Economy shows that UK local authority pension funds represent one of the largest pools of investment capital, at £326bn, but it’s allocated to listed, global funds. If only 5% of these funds were allocated to invest in UK climate-tech, this would deliver £16bn of investment.  

Cleantech for UK, of which Clean Growth Fund is a founder member, has said that to spend the GDP equivalent of the US’ Inflation Reduction Act, the UK would need to spend £33bn over the next 10 years. So, £16bn from local government pension funds would go a long way to covering this.

Our first VC fund (at £101mn) has local authority pension funds – Merseyside, South Yorkshire and Strathclyde – among our investors, and we are planning to raise a second, larger fund over the next 12–18 months. So far, we have invested in 16 of the UK’s most promising early-stage climate tech companies; those that are pioneering carbon emission reductions in power and energy, buildings, industry, transport, agriculture and waste.

Historically, the UK has been a leader in the net zero transition and our landmark ‘firsts’ are well documented; but, if we wish to capitalise on the biggest economic opportunity of the 21st century and achieve net zero by 2050, we need to go further, faster.

The views and opinions expressed in this article are strictly those of the author only and are not necessarily given or endorsed by or on behalf of the Energy Institute.