Jake Wombwell-Povey, Investment Director at Vala Capital, shares why the compelling combination of government resources, consumer demand, technological innovation, corporate necessity and investor appetite has led to an unprecedented investment opportunity.
In the light of COP26 United Nations Climate Summit in November 2021, one of the primary aims for governments and businesses will be to harness the power of innovative enterprises to help deliver on the ambitious goals. Thanks to their agility and high growth potential, SMEs with scalable solutions to climate change are uniquely positioned to attract significant investment. Government grants and funding are available to businesses capable of building back better for a climate-resilient economy.
But it isn’t just the responsibility, or the opportunity, of governments to invest in these businesses. Investing in the companies, products and services, which will serve us and deliver to us a better tomorrow, is both critical and potentially lucrative.
It is critical because the amount of money we need to invest in the Sustainability Transition is vast – the International Energy Agency (IEA) estimates that achieving Global Climate Goals will require around US$3 trillion in investment every year. That isn’t just in things like renewable energy generation and energy efficiency, it also includes re-engineering our economies to be more ‘circular’ rather than linear, extractive and wasteful. And if we get this wrong, the World Bank estimates this will cost investors around 10% of their portfolio value, as assets suffer devaluation from climate-related losses and risks.
On the flip side, Mark Carney, the former Governor of the Bank of England and now United Nations Special Envoy for Climate Finance, has stated that Climate Change represents the largest commercial opportunity the world has ever seen.
Good investments because of, not despite, sustainability
In previous decades, investing in businesses that had anything other than a 100% focus on profits felt like a sacrifice, where returns and profit was sacrificed for sustainability. Now the opposite is true. The size of the challenge in transitioning to Net Zero means that governments, businesses and consumers are channeling huge amounts of spending into products and services that provide more sustainable solutions than their predecessors.
Furthermore, because of the increasingly strict commitments and reporting requirements that organisations and companies are coming under, soon many won’t be able to do business with any organisation that can’t demonstrate its sustainability credentials. On both sides of the Atlantic, regulations are coming into force requiring companies to make increasingly strict ‘ESG’ disclosures as well as disclosing both their carbon footprint, and their exposure to climate related risks. These developments are revolutionising the standards businesses have to hold themselves to, and the transparency they will need to adopt. Any business with solely a focus on profit will become untenable. Large companies will be under extreme pressure to demonstrate how they are making changes and this represents a huge opportunity to early-stage sustainability ventures – both as suppliers and as acquisition targets.
Strong growth and exit potentials supported by long term structural fundamentals
Building on the strict commitments which are driving corporate buying behaviour, they are also driving investor and M&A behaviour. As investors seek to demonstrate the sustainability of their own portfolios, and corporate development teams seek out opportunities to drive sustainability as a source of competitive advantage, there is huge amounts of funding available to high growth ventures.
Investing in more resilient leaders and companies
Sustainability-linked businesses have other advantages too. Because the leaders of businesses that embrace sustainability are likely to be more empathetic, they are arguably likely to be better leaders of their teams. Their need to focus on the impact of their operations and products means they are likely to be more conscientious and, therefore, risk-prudent and resilient leaders. And this is regardless of whether we are talking about environmental sustainability, social impact or financial sustainability. Sustainability-aware leaders are likely to be more courageous and value-led resilient leaders that are, accordingly, leading more operationally resilient organisations.
Early stage ventures deliver value, innovation and job creation
According to HMT, just 34,000 high-growth small businesses – less than 1% of UK companies – account for 22% of gross value added and create 84% of all the new jobs in this country. According to the Chancellor, “if we can increase the number of scale-ups by just 1%, we’d generate an extra £38bn for our economy. There is extraordinary potential in the people and businesses of this country.”
Furthermore, when it comes to innovation, these businesses deliver 3 times the innovation as large, established companies. So when it comes to trying to Build Back Better and innovate for the future, it is clear that investing in small companies is critical to delivering the future we want and need.
Investing in Sustainability is about more than financial security – it’s our livelihoods as well
Investing in early-stage businesses is a long-term investment of at least 5 years. So, the question we should ask ourselves is what is the future that we want to see in 5+ years? Clearly it is a future that is more sustainable, more equitable, more inclusive and regenerative by design, rather than destructive by default. Investing in businesses that target sustainable operations and outcomes is critical to delivering on more than just our financial futures, but also the future that we, and our families, want to live in.
Access to unprecedented amounts of non-dilutive finance
Governments and inter-governmental bodies across the globe, are providing never-before-seen levels of funding to support sustainable companies – often in the form of non-dilutive grants and loans that support returns for founders and private investors.
One example in the UK is Innovate UK, which is providing an increasing number of grants and innovation loans, to support sustainability ventures and to fund opportunities that are of strategic and technical importance to the UK, including the recent £134m grant to help companies Build Back Better.
The level of collaborative effort among private businesses, investment groups and the government towards finding climate solutions is unprecedented. Scalable and measurable solutions are highly sought after by investors, while R&D credits can help early stage ventures to develop their ideas.
Innovators have the upper hand in this situation because there is huge demand for viable climate change solutions. Momentum is building – and history will judge whether COP26 was instrumental – to transition the economy and more importantly save the only planet that we have.
Jake is an experienced business-builder, investor and mentor to early-stage businesses. He was the founder and former CEO of Goji, a fintech asset management platform. Jake led the company through a number of VC-led investment rounds from some of Europe’s largest fintech VCs including Axa and Anthemis. Goji now provides asset management services to clients across Europe administering over £400m of assets. Jake now leads Vala Capital’s sustainability investment strategy and mentors a number of businesses within the Vala portfolio.
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This is an except from Wealth DFM Magazine’s comprehensive 2021/22 ESG report. To access the full report, please click here.