Demands from younger family members and experiencing a pandemic have galvanised the investment community to go greener, according to leading figures in UK climate innovation.
While the economic case for investing in green businesses has never been stronger, it has taken the emotional impact of these twin motivators to accelerate a revolution.
We spoke to two experts who advise businesses in the Better Futures project to get insight into this upward trend and how to take the opportunities it affords…
“After a decade in the wilderness, we can finally say that green is the new black, to use a fashion analogy,” says Andrew Wordsworth, Managing Director at Sustainable Ventures.
“The pandemic has focused people’s minds. We also meet investors who tell us they are getting a hard time over Sunday lunch from their teenage kids about why they aren’t using their prowess and capabilities to invest in green businesses.”
When COVID first hit the UK in March 2020, those working in climate innovation were already beginning to see a surge of interest from investors.
However, Professor Richard Templer, Director of Innovation at the Grantham Institute, Imperial College London, said the pandemic didn’t halt progress but sped it up.
“We’d been ploughing a lonely furrow, but then people started knocking on my door in 2019, and they’ve not stopped,” explains Professor Templar. “I’ve had enquiries from investors all over the world, and I’ve been to talk to several senior CEOs of big multinational organisations who are deploying capital for projects in ways I hadn’t seen before.
“I’ve been told by many of them that they have kids who are teenagers or at uni who are saying, ‘You are playing with my future’. It’s a very human thing - it’s a story of emotions and gut, not economics. Also, the pandemic has reminded us that Mother Nature doesn’t care about ideology, politics or economics. Climate change only obeys the laws of Physics, Chemistry and Biology.”
For entrepreneurs trying to launch green businesses, this is encouraging news as real change opens up new possibilities.
While the Government might have targets and goals in climate change, both Professor Templer and Andrew Wordsworth say the most significant impact can be made by private money.
“The real change is happening in the business sector,” asserts Professor Templer. “We’ve heard from many people in private banking that there was around $4 trillion in family offices of high net worth that’s moving from the older generations to younger generations.
“One of them said, “The kids are getting pretty bloody angry, and they are forcing their parents to let them take control. They want this planet to be survivable, and they have long term visions for the money’.”
Similarly, in Andrew’s experience, the landscape of green investment has changed significantly in the past three years.
“You don’t have to be a Nobel prize winner in finance to work out that if you sell something to a growing market, you will make more money than if you sell it to a shrinking market. Suddenly these well-paid finance people are starting to get that and now understand that they stop selling shares in Shell and start buying shares in a renewable company because that’s where the future is.
“Take the Green Angel Syndicate, for example, which started at the same time as Sustainable Ventures,” offers Andrew. “Their membership started to explode between 2019-2021. They had around 60 people beforehand, and now it’s more like 300-400.
“Also crowdfunding sites like Seedrs or Crowd Cube, you will now see around a third of the businesses raising funds are green.”
The typical lifespan for investment is five to seven years, at which point traditional investors will look to cash out.
However, green innovation is different and requires much more patience. So, what kind of businesses are attractive to this new crop of eco investors and are they willing to wait for a return?
“For high-risk early investment, investors like businesses with intellectual property - patented ideas,” says Professor Templer. “If the business goes bust, they can still sell off the patent and make some money back.
“Another thing they like is tech and digital stuff because the investment isn’t too large. But digital is simply an enabler, and if you are an impact investor, you know jolly well that isn’t going to solve the problem. You need hardware to solve problems in the real world, and a lot of it will take ten years to make an impact. It’s a rich and varied journey, but the return period is much longer.
“There are now investment vehicles emerging who are specifically talking about longer time scales. Shaun Kingsbury has founded ‘Just Climate’, a flexible pot of money that’s evergreen. I expect others will look at what he’s doing and start recognising we need to do things like this.”
Andrew agrees that investors need to get comfortable with eco-innovation investment returns taking longer.
“This is climate change, and it involves physical things – it can’t be solved by software alone,” he reasons. “It’s part of the answer, but not the whole picture. We are doing market testing with our fund, and there’s a mix between software and hardware now. It seems to be encouraging, and there are people who are prepared to be more patient, but it’s early days.”
For entrepreneurs, the message is clear – green investment is there for the taking. However, Andrew says that their messaging and strategy need to be honed to win funding.
“Businesses need to be investment ready and know their investment pathways,” says Andrew. “You need to be realistic, know what your business model is and who to talk to.
“If you have a hardware or Internet of Things (IoT) business, you need to get to the point where you can show investors what it looks like, the value it’s created and the scalability of your business.
“At the start, it’s about building that investor relationship and being realistic about what people can get away with in their investor committees. Believe me, it’s a lot easier for people to take a million-pound punt just to learn how these businesses work than jumping straight in with £10 million.”
Professor Templer says that good start-ups tend to have more than one parent, which means they may receive support and advice from places like Better Futures, Sustainable Ventures and the accelerator at Imperial.
He also says that there are fundamental principles for all businesses seeking investment, not just ones driven by climate innovation.
“My hypothesis is that if you prepare a business really well with a great team and it’s a good proposition, why wouldn’t people put money in it?” he argues. “After nine years, the 80 or so companies that graduated from our accelerator have raised half a billion dollars. Even when things are tough, good companies are a good prospect.
“Part of the work we do at Better Futures is making sure that the businesses we support will take our advice and use it well. They will make themselves into better companies and flourish.”
Both experts are keen to stress that investors who are new to green innovation will need extra support.
As they navigate new terrain, it’s up to the companies seeking investment to educate as well as pitch.
“Entrepreneurs need to be prepared that it’s going to take longer to move that wall of capital from general investors,” says Andrew. “Companies have to educate the investment team, and the investment team has to educate investment committees.”
Carbon literacy is one part of the education process, but Professor Templer says that they also need to demonstrate they’ve considered their impact across their value chain.
“Companies must understand what the impact of their innovation will be on their value chain – so that’s lifecycle analysis, systems impacts and Sustainable Development Goals (SDGs),” he explains. “These are things that people doing ordinary innovation don’t need to know anything about. So, in other words, you need to be able to state that you’ve done this properly and you are not going to sell them snake oil for climate change.”