dr. Marta Ra is the co-founder of the international network Women in Sustainable Finance (WISF), an ambassador for mental health and wellness.
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As a society, we trust that innovation will solve the global environmental crisis: science and technology will find the answer, just as they often have in the past.
But according to the Global Assessment of Sustainable Investments, only a very small percentage of the $35T in ESG investments per year is allocated to accelerating high-impact, disruptive companies called “Impact Unicorns”. The ones that can transform entire industries to decarbonize or restore natural ecosystems. Instead, most investments go into expanding the application of existing technologies to public infrastructure or large corporations.
Looking back, this has been the case in many sectors over the past decades. Slow adoption of solar and wind technologies in favor of large subsidies to make oil and gas more competitive. Low penetration of electric cars in favor of increased efficiency of diesel and gasoline engines. Continuous improvement and growth of plastic packaging instead of implementing sustainable reuse models or many recycled materials such as paper. Continued focus of financial institutions on climate change adaptation and risk management, rather than repositioning finance towards mitigation, value creation and regeneration.
“Investing alone is not enough and a more supportive role must be played by providing technical, management and operational skills to accelerate and scale it. This is essential when working with climate solutions that combine technology, software and the physical world of materials, energy and waste to increase both their impact and business success,” said Ellen Bakke Mawdsley, non-exec director at BlackRock Switzerland and Impact Investing Advisor .
Code red for humanity
The world is now in a state of “code red for humanity”, as Secretary General António Guterres said in the past. IPCC 2022 report. Incremental solutions are no longer enough; we need rapid market adoption of breakthrough innovation. But with so little of the ESG investment going to disruptive companies, the tipping point to mainstream adoption is being pushed further forward.
Because of this delay, the same IPCC Report 2022 estimates that a 100x greater investment in incremental innovation would be needed to scale these breakthrough solutions and have a significant impact on the two most pressing and critical environmental problems of our time: climate change and biodiversity loss. The German Energy Agency (DENA) found that Germany alone needs $22.7 billion to have a positive climate impact by 2030, while Europe as a whole would need more than $100 billion. This is equal to the full amount of VC investments in the region.
“Venture capital should play a vital role in increasing sustainable and responsible business practices. If it is in line with the relevant ESG criteria, it can provide substantial leverage for start-ups to drive innovation and accelerate the achievement of the UN Sustainable Development Goals.” says Antonio Hautle, Executive Director at UN Global Compact Network Switzerland & Liechtenstein
The gap between the rapidly increasing demand for impact VC funding and the limited availability of large funds in this space is astonishing. According to the Financial times, there were only six venture capital funds over $100 million focused entirely on impact investing in Europe. This poses a significant barrier to start-ups looking to scale up, despite Europe’s global leadership in innovation and technology generation at the R&D level.
A promising and much-needed solution has recently disrupted the market and ecosystem. Among many other market players, the World Economic Forum called the “Innovative Fund for our Futurein 2022. How is the company evolving to fill the impact innovation gap?
A new paradigm championing impact VC
Here’s how VCs are adapting to better meet Impact’s investment needs:
• Better purchasing: Focus on turnkey companies that can transform entire industries. These are the young companies that not only have breakthrough technology ready to grow, but also understand the sustainability needs of their customers. Solution pull beats technology push.
• Better financing: Instead of investing small amounts in hundreds of small companies and hoping that a few will be successful and generate great returns (“spray and pray”), invest big in 20-30 managed companies with the potential to innovate their industry .
• Better operations: Support these young companies with operators who know first-hand how to introduce market-ready solutions to the industry. They know the infrastructure, distribution, how to assess talent and organizational requirements to scale.
• Better exits: Help founders find the best solution for continued growth and adoption of their solutions after leaving VC. Maximize the combined network of preferential connections to major corporations, top PE funds, and IPO support.
• Better results: An approach like the one above that focuses on top founders and their impact companies will have the biggest impact on climate and biodiversity in the shortest possible time – contributing to net zero by 2030. Moreover, impact investing is not philanthropy. Good returns are for those who recognize the feasible solutions to their dreams and are brave enough to lead them to the problem owners in the market.
All in all, these are critical strategic choices and equate to the same revolution that Private Equity funds saw when they realized that financial engineering was no longer enough to achieve above-average results, and thus created strong operating teams to drive economic results. .
The model is on the other side of what most venture capital funds have done in this space to date (the “squirt and pray”), which offers a significant advantage: these 5 choices work in a synergistic way to accelerate the acceleration and adoption rate of the sustainable technologies the world needs.
“We’re commercial innovators at heart, so we’re a perfect fit with founders interested in scaling quickly and having a significant financial and sustainability impact,” says Luca Zerbini, co-founder and Managing Partner of Una Terra.
Only time will tell whether this approach is truly superior, but we can only hope for our environment that we are on the right track.
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