Venture capital can offer a direct avenue for capital to help accelerate environmental change
writes Dr Lisa Smith.
The 26th UN Climate Change Conference of the Parties (COP26) held in Glasgow at the end of 2021 received mixed reviews. Some of the positive developments at COP26 included:
- An agreement to phase down unabated coal and other fossil fuel subsidies
- Pledges to reduce methane emissions and end deforestation
- Guidelines for a global carbon market finally being approved, having been in discussion since the COP21 conference in Paris
- Commitments by states to regularly update their targets and strategies for reducing emissions, which may help to keep up the pressure for further improvements
However, while these are positive developments, they lack specific ways for carbon emissions to be reduced.
The current shift towards using renewable energy sources and the trend towards manufacturing electric or hydrogen vehicles are already entrenched and will clearly continue, even if disappointingly, there was no firm commitment at COP26 to accelerate these trends.
There were some reasons to be alarmed, however. Global temperature rises are estimated to be as much as 2.7C, even with the agreements made at the conference, rather than the “well below” 2C requirement widely thought necessary in order to stave off disastrous, unstoppable climate breakdown.
Furthermore, India and China watered down the wording on phasing out coal and subsidies for fossil fuels to “phasing down unabated coal power and phasing out inefficient fossil fuel subsidies”. This is significant because both countries are crucial in the fight against climate change because of their population sizes and use of fossil fuels to generate their energy requirements.
Overall, there was disappointment at the paucity of political leadership and the lack of explicit binding government mandates on carbon reduction. Interestingly recent political events and global actions, may have done more to accelerate this agenda.
There is enormous interest from asset owners, particularly in Europe, to invest their capital into areas of the investment markets that are, at a minimum, away from fossil fuel companies, and aspirationally towards ventures that are working towards carbon neutrality.
The EU’s Sustainable Finance Disclosure Regulation (SFDR) is helping to classify those investment products with its designation of Article 8 (light green) and Article 9 (dark green) versus Article 6 (non-environmental) funds.
The response by capital owners has been overwhelming, with investments flowing into the environmentally focused sectors – net flows into ESG mutual funds and ETFs were at $577 billion in the nine months from January 2021 to the end of September, and total assets could reach as much as $30 trillion by the end of this decade.
These vast sums show that there is capital looking for a sustainable home, and the traditional investment industry is offering good avenues for this money. However, these investments are going into generally established, medium to large companies that have a stock market listing and so are effectively already well funded. Venture capital however offers access to earlier-stage outfits that are working in more innovative sectors and can offer more creative solutions – if only they receive adequate funding to scale up their technologies to a self-sustaining level.
As part of a broad portfolio, venture capital can be both a source of attractive returns in the long term, as well as offering potential solutions to climate breakdown. Recent events have shown just how situations can change overnight, and how global leaders need to be prepared for catastrophic events. We’ve seen energy prices sky-rocket and counties around the world are starting to look again at their dependency on gas and fossil fuels. As energy prices continue to rise, the push to move towards renewable energy has never been so important. Asset owners looking to deploy capital towards an environmental aim can do their part for the world’s future generations by taking a chance on ventures that could offer real long-term solutions to today’s problems.
Written by Dr Lisa Smith, Managing Director