Accelerating climate change is forcing humanity to reimagine how it uses and sources energy, feeds itself, heats homes, uses land and so on.
It’s also prompting a rethink of how investors and bankers finance companies developing critical green tech.
The industries that should be thriving at this stage of the energy transition — batteries, green hydrogen, “clean” steel— are square pegs that don’t fit in the round hole of capital markets. The latter are well-suited to asset-light companies but inhospitable to capital-intensive, asset-heavy energy businesses. As a result, many promising green-tech innovators aren’t getting enough money — and dying on the vine.
“The evolution from science project to commercial outfit can be one of the hardest to pull off, especially in an economy where our capital stack was built for digital innovation rather than hardware advances,” said Chuka Umunna, JPMorgan Chase & Co.’s head of ESG and green economy investment banking for Europe and the Middle East. “Helping innovative companies clear the commercial valley of death will require us to think differently about capital.”
That “valley of death” is the final resting place for firms too advanced to interest venture capitalists who make small, speculative bets on nascent tech, but too small and unproven to attract infrastructure investors that write the really big checks.
Bankers familiar with financing energy-transition startups say one hallmark of companies stuck in the valley is they don’t have any sales yet. Another indicator is the size of a company’s funding need, with those seeking capital in the $20 million to $100 million range being prime candidates.
Barclays Plc calls this gap the missing middle. “We need to find ways to invest in technologies to the scaling point,” Barclays Chief Executive Officer CS Venkatakrishnan said last week at the Bloomberg Sustainable Finance Forum in London.
S2G Ventures, a $2.5 billion investment firm focused on venture and growth-stage businesses, said in a 2023 paper that what’s needed is “capital focused on supporting companies that have matured out of the venture stage, but have not yet scaled and de-risked adequately to access infrastructure-type capital.” That funding is “vital to the successful gestation” of such companies, the firm wrote.
Of the $270 billion of energy transition-focused private capital raised between 2017 and 2022, venture capital accounted for $120 billion, or 43%, while private equity and infrastructure-focused funds raised $100 billion, or 37%, according to S2G. That means late-stage venture and growth-focused funds accounted for the remaining 20%.
“Today’s lack of adequate, fit-for-purpose growth equity is a fundamental barrier to realizing the energy transition,” S2G said. “The siloed nature of today’s capital markets creates a range of barriers to effective progress on the energy transition.”
Just as with all aspects of the energy transition, traversing the so-called valley of death will require determination and ingenuity on the part of financiers.
Celine Herweijer, chief sustainability officer at HSBC Holdings Plc, said achieving economy-wide decarbonization by mid-century is a daunting challenge — but it’s an imperative.
“The clock is ticking,” Herweijer said at a London Climate Action Week event last week. “We have to lean in and put capital to work in areas that are more risky, technologies that are more nascent, or markets where, even with mature technologies like renewables, the cost of capital is higher.”
Sustainable finance in brief
More financial firms are bowing to right-wing attacks on sustainable investing. AllianceBernstein Holdings LP left the group Climate Action 100+, following in the retreating footsteps of JPMorgan and Pacific Investment Management Co. by exiting the world’s largest alliance through which investors can fight global warming. The departure is the latest in a broader pullback by US-based financial firms fearful of further criticism by Republicans seeking to protect the fossil fuel industry. Still, CA100+ said the group counts “well over” 600 members representing more than $50 trillion of assets under management, even after the latest departures.
- There’s a growing list of institutional investors in Europe who are stripping oil and gas stocks out of their portfolios.
- Companies accused of misrepresenting their progress on tackling climate change are increasingly finding themselves the target of litigants.
- The market for carbon credits is facing a renewed wave of opposition as climate activists deliver a fresh warning to companies and governments not to use such financial instruments to offset their emissions.