Green Tech in Investor’s Interest

It makes financial sense for investors to invest in green entrepreneurship. There is a need to boost demand for green tech and for the public to start understanding how its money is used. Investment in green entrepreneurship, transition to a sustainable economy and the Government Cleantech Strategy was discussed at a breakfast seminar arranged by Centre of Excellence for Science and Innovation Studies (CECIS) at KTH, Swedish Entrepreneurship Forum and Fores.

Representing both Swedish Entrepreneurship Forum and CECIS, the moderator Johanna Palmberg, PhD and Research Manager, welcomed the audience to the seminar and introduced Mark Sanders, PhD Institute for New Economic Thinking, University of Utrecht.

Johanna Palmberg and Mark Sanders

Johanna Palmberg and Mark Sanders

Mark Sanders was invited to speak on the topic Mobilizing Private Funds for the Transition to a Sustainable Economy. The presentation was drawing upon a research project with the working title Green Funding that he is conducting in collaboration with Maria Adenfelt, Research Director at Swedish Entrepreneurship Forum and Ulrika Stavlöt, Research Director at Fores.

Mark Sanders pointed out that there are a number of policy challenges in directing investment towards the green sector and the green entrepreneurs. First, it is clear that we are not going to be able to sustain consumption of the world’s natural resources at our current speed. Second, the World Economic Forum (WEF) has made it clear that we need to invest 700 billion Euro until 2020 in energy transition in order to meet climate goals:

–        The governments are falling short in committing the necessary resources and we need to leverage private funds 4.5 times of that. How do we do that, Mark Sanders asked.

However gloomy that sounds, Mark Sanders was optimistic about the prospect since enough funds can be found in the market.  But green tech is risky business for investors and any savings require return that compensates for risk and opportunity costs.

–        Green tech needs a business proposition that can compete and compensate for market failures, information problems, associated lock-ins and the uncertainty inherent in the market.

Mark Sanders

Mark Sanders

Basically, the study hypothesize that the green entrepreneurs are (mainly) technically oriented engineers and driven by “doing the right thing”. They are more creative than commercially talented.  In theory this means that there are possibilities for VC and investors to provide complementarity resources. The investors have business know-how and the money but lack in creativity. Thus, there are positive synergy effects if the green entrepreneur matches up with the right investor. Unfortunately, this opportunity is little used still and matching seems difficult.

Why do finance and green entrepreneurs have difficulty to match up? According to Mark Sanders it can be explained by the fact that green tech currently is underrepresented in VC and investments and the preliminary interviews suggest lack of social ties, information and cultural gaps between the sectors.

On top of these obstacles, green technology is a policy driven market which creates uncertainty for the investor since the market is not “natural”. This built in uncertainty creates a gap between the sectors and since fundamental uncertainty cannot be priced, controlled or managed, investors are hesitant.

–        The financial sector must realize it’s in their interest to invest in green tech, Mars Sanders said.

Magnus Emfel, head of Climate Innovations at WWF, largely agreed with Mark Sanders and stressed the urgency in finding a way to attract private capital to green tech.

Magnus Emfel

Magnus Emfel

WWF is working on promotion of green business through their Climate Solver program. We need better solutions in the green tech market to enable the necessary transition, Magnus Emfel said. There is also a need to redefine and reduce risk related to investing in green solutions.

–        Why do WWF work with this? Because there is no uncertainty about where we are. The climate matters are urgent.

One challenge is that fossil fuel is still a very profitable market. However, according to Magnus Emfel, the market is overvalued given the scarcity of resources, and might result in stranded assets and wasted capital. Since investors fail to see the urgency, we are still not on the pathway to redirecting our economy.

–        There is still too much money to be made on the wrong thing.

How does Sweden want to position itself in the global clean tech market? Magnus Emfel asked. Sweden is a small player with no possibility to compete with production giants such as China and India but it is a very innovative country. Magnus Emfel pointed out that Sweden has a lot of potential to be a role model for the bigger economies but right now we are not making use of that potential.

–        Collaboration in the global market is a way forward, but Sweden needs to figure out its role. It’s a pity Sweden is not making use of the knowledge and the good ideas of Swedish entrepreneurs.

To circumvent the high uncertainty associated with investing in green solutions Magnus Emfel suggested that there is a need for a longtime framework and making more use of climate bonds, an instrument that is not currently used enough to leverage funds.

In 2011, the Swedish Government launched a Cleantech Strategy with the aim to improve the conditions for development of the Swedish cleantech sector. Johan Harvard is the Project Manager for the evaluation of the Strategy at government agency Growth Analysis.

Johan Harvard

Johan Harvard

Johan Harvard informed about the objectives of the Strategy and its wide range of programs. Exports to key markets, promotion of testbeds for cleantech ideas and improving incubator services for green entrepreneurs and promoting FDI of green solutions are some of the initiatives that the government is working with.

Johan Harvard had a few reflections from the work with the Strategy this far. First off he thought the financing was too small-scale. The Strategy is not backed up with sufficient funds. There is money to make a difference for the individual company but not enough to make big changes for the whole cleantech market. Moreover, there are over 30 agencies working with this but there is simply not enough coordination between them to get the desired synergy effects.

–        It’s essentially a too “soft” strategy, mainly focused on providing information with too little emphasis on the economic “hard” instruments.

–        The Strategy fails to promote demand. There is nothing extra in it for incentives; not enough to preach about cleantech.

Johan Harvard pointed out that this policy composition results in an imbalance of the strategy with too much focus on the supply side. We need to change the outlook of the policy, John Harvard concluded.

Magnus Emfel och Johan Harvard