Why private markets are better for investing in climate tech

The climate emergency

The UN IPCC report delivered a damning indictment of humankind, demanding urgent action by investors to rectify the damage inflicted during Anthropocene.

After a false start in the “cleantech” era of 2006-2011 when VCs lost over half of the $25bn invested in green tech, the advent of mature climate technologies has attracted record flows in both public and private markets. 

ESG

You needn’t be a clairvoyant to see the material risks of asset degradation over the next few decades, never mind food insecurity and biodiversity collapse.

As a result, ESG has been touted as a panacea, with Bloomberg estimating total ESG assets will hit $53 trillion by 2025; a third of global assets under management.

Indeed, 90% of capital inflows in public markets went into ESG funds in July, according to Calstone. In that sense, it is public markets that have been chosen as the vehicle to recalibrate planet earth.

'G' for greenwashing

Yet as many have highlighted, ESG reporting standards are often heavily weighted to governance factors.

This represents a shift from Friedman’s “maximising shareholder value” model in terms of corporate governance, but in the absence of uniform reporting standards, ETFs tracking broad ESG indices are susceptible to greenwashing. 

Of the world’s 20 biggest ESG funds, 6 have invested in ExxonMobil; two have invested in Saudi Aramco, according to The Economist.

MSCI gave fast-fashion titan Boohoo a 7.6/10 ESG score, further displaying the lack of unanimity shrouding the rating system.



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At the moment, the UN Principles for Responsible Investment (PRI) has been delayed until 2023. The OECD Taskforce for Climate Development (TFCD) on financial disclosures will only be introduced in the UK in 2025, despite having 7000 corporate signatories. 

That means scoring is left to the whims of credit rating agencies such as Moodys, S&P, and Fitch for debt, and specialist ESG rating consultancies such as Sustainalytics and MSCI.

On both corporate and government ‘green bonds, there remains no regulation in any jurisdiction despite making up between 1-2% of the global bond market.

Zooming in on individual firms, the drive to attain coveted B-Corp status is emblematic of the state of play.



"More guns to combat gun crime"

The former head of ESG at Blackrock, Tariq Fancy, even claimed that the fallacy of “more market (green products) to combat market failure” is analogous to the NRA’s answer of “more guns to combat gun crime.”

So In short, regulators' inertia on multilateral ESG reporting standards reflects the subjectivity of stakeholder concerns exploited by clever fund marketing. That matters if you seek impact, but what about performance?

Harvard Business School’s Mark Kramer, George Serapheim, and Michael Porter argue there is no conclusive evidence that ESG improves performance, claiming it should be supplanted by a “shared value” model.



Risk and reward

ESG funds provide a veneer of virtue for the investor, when in fact, they are often making little difference to decarbonisation. They are popular because they are cheap and instantly accessible to retail investors and institutions alike.

But dynamic private markets foster radical innovation and risk-taking, unshackled from the need to deliver short-term shareholder profits.

Investors in venture understand the risk of failure and have the patience to allow for product iteration - which is crucial for climate moonshots. 


The public paradox

Conversely, ‘green’ public companies’ CEOs can be compelled to make apocryphal statements to boost the share price. EV truck company Nikola and its founder Trevor Milton is a case-in-point.

While institutions may not have the risk mandate to invest in climate tech startups, what is stopping an environmentally-conscious young professional from doing so?

The answer is the inaccessibility and exclusivity of alternative assets.


The alternative

Total investment into private climate tech startups for 2021 stands at $14.2bn as of June, which is well on course to surpass the 2018 peak of $17.9bn, according to Pitchbook.

And there’s plenty of competition in the shape of hedge funds, corporate VCs, private equity, ‘big mining’, and even governments, for deals.

In addition, climate tech startups are believed to have raised at the highest valuations of the startups in the latest Y-Combinator cohort.



City of angels

But this doesn’t mean there won’t be opportunities missed by the big money.

There is a chasm waiting to be filled by buccaneering angels and family offices to invest in solar geoengineering, green hydrogen, cement-production carbon capture, and geothermal energy startups - to name a few. 

In terms of impact, investing in startups has a far more tangible impact than tracking arbitrary metrics in ETFs and funding green debt.

From an IRR and exit perspective, there are myriad future opportunities for acquisition by obsolescent oil majors, and SPACs scrambling for targets.



How can I make an impact?

There are some excellent VC funds based in the UK investing heavily in climate tech. 


  1. Counteract
  2. Eka VC (new fund)
  3. Future Positive Capital

The buy-ins to these funds, however, might be too high for the average angel. You can invest in an angel syndicate, such as the Xoogler EXFI syndicate, to get access to the best deal flow.

Another option is to launch an SPV with your friends and earn carried interest on the best deals you source, should there be an exit event.