Clean development financing: Creating an investment pipeline for decarbonisation

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Published: 7/8/19

As the priority of climate change rises and rises for investors, an increasing volume of capital is being marshalled to support climate change mitigation. Hundreds of billions of dollars of capital have been pledged by public institutions and there is growing private sector support to align trillions in private wealth to science-based climate targets in various ways.

Large, relatively low-risk investment vehicles capable of supporting decarbonisation are generally the focus of these investment efforts. There are plenty of potentially profitable early-stage and high-risk opportunities, but most institutional investors have difficulty investing in such asset classes. Unfortunately, the supply of suitably large low-carbon investments does not meet demand.

To build sufficient decarbonisation investment opportunities, it is necessary to support early-stage low-carbon innovations. Without support for research, development, deployment and demonstration at scale, the late-stage opportunities decarbonisation focused investors are looking for won't emerge.
Cleantech startups are a subset of this pipeline and tell us a lot about the present issues with early-stage financing. Most earlystage investment and support organisations were built for software startups, and cleantech startups have fundamentally different qualities in three key areas:
- Capital intensity due to the need to develop and deploy physical products and increased initial overheads.
- Geographic constraints due to the tyranny of distance for large, physical products and varying local laws and regulations.
- Revenue delay as value streams develop, and due to customers and distribution partners with long decision-making timelines.

We propose a three-part framework which we think might address some initial issues in these early stages.
- Push: Provide startups close to taking off with non-equity financing without match-funding requirements and in-kind R&D assistance to overcome initial obstacles.
- Pull: Leverage existing investment infrastructure by implementing profitable cleantech-specific strategies, such as leading earlier-stage investments in overlooked startups.
- Match: Help capital flow to cleantech startups through aggregation, leveraging emerging financing models, and funds that seek different returns profiles.

Although we discuss cleantech startups in-depth here, we think these issues challenge the early-stage clean development investment universe broadly. Startups in this area are not alone in facing these challenges and we're not arguing they inherently deserve special treatment. However, if global finance is to play its full role in decarbonising the economy, the early stages of the investment pipeline are likely to need increased support.
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