The sustainable investment and innovation gap

Last week, I attended the European Sustainable Investment Forum in Paris, which brought together institutional investors, bankers and policy makers from the UK and EU, as well as from organizations such as the UN, Principles for Responsible Investment (PRI) and Intergovernmental Panel on Climate Change (IPCC) to discuss growing decarbonization and sustainable finance. At gatherings like this, I am always struck by both the mobilization around climate capital, and the lack of discussions about innovation, technology and venture capital as a part of the puzzle.  It often feels like there are silos between the government and institutional players focused on decarbonization - and the startups, scale-ups and venture capital investors behind the innovations that can rapidly accelerate net zero.

According to the IEA and Allianz, more than 75% of emissions reductions need to come from new technologies that are currently in the prototype or early adoption phase.  By definition this means that entrepreneurs and venture capital funds that identify, fund and help to scale decarbonization technology innovations, have a critical role to play in achieving our global emissions reduction targets.  So, you can imagine why I am perplexed that conferences headlined by governments, intergovernmental organizations and institutional investors such as pension funds and asset managers, don’t spend the vast majority of these events talking about things like creating more climate startups and scale-ups, increasing early and growth-stage climate capital and accelerating legislation to make these two things happen.

So what do we need instead?  We need to bring together capital, innovation and legislation to accelerate technology-based solutions for decarbonization. This requires legislation that unlocks more institutional capital at scale for entrepreneurs creating solutions, and early and scale-up investors who know how to back these entrepreneurs. This is a critically pressing problem in Europe, in particular.  As an example, European pension funds contribute only 0.01% of total pension fund assets to venture capital compared to US pension funds who invest nearly 2% of assets into venture capital. In other words, US pension funds invest 200x more into early and growth stage innovation than European pension funds. Given the scale of these investors, that's a massive difference in capital invested in innovation. .

As a part of this, we need a more connected and regular dialogue between decarbonization entrepreneurs, venture capital investors, large asset managers and policy makers to address legislation that can unlock decarbonization R&D and bolster IP rights.  At the scale-up stage, where European technologies often fail to realize their potential scale and impact, we need much more capital and expertise among investors. In the US 60% of top tier funds have Partners with operating experience. In Europe, just 8% of funds have Partners with operating experience. In Switzerland, where I live, that number is 3%.

A critical part of helping European climate tech companies scale is reducing and unifying regulation, growing and deepening capital markets and creating greater financial incentives for capital and expertise to flow to climate solutions. Another critical part of this is encouraging much greater rates of entrepreneurship and risk taking across Europe, including at all levels of education, and helping European societies welcome risk, and in many cases failure, as a part of the startup and scale-up journey.

At the Sustainable Finance Summit, there was one speaker who addressed Europe’s decarbonization scale-up capital and expertise gap head on.  Unsurprisingly, she represented the European Investment Bank, who, along with their counterpart the European Investment Fund, plays a pivotal role in growing scale-up and sustainability capital across the European ecosystem.

“In Europe, we are very good at supporting innovation in patents and R&D, but we are not very good at helping innovations to scale-up,” said Elina Roine, Department Director for the European Investment Bank.  “We need to grow patient risk capital to bridge this valley of death.”

We founded SSV to help accelerate net zero and fill Europe’s scale-up capital gap. We look forward to growing engagement across the ecosystem with investors, government and entrepreneurs to make this happen together.