Seeds and Sparkles: Investing in solutions for the clean economy

Lauren Juliff, Head of Investor Relations and Sustainability, Clean Growth Fund

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.

 

Seeds and Sparkles: Investing in solutions for the clean economy

Lauren Juliff, Head of Investor Relations and Sustainability, Clean Growth Fund

We are at an inflection point for net-zero investment strategy – recent announcements by large asset owners, both in the UK and abroad, demonstrate a shift in focus from portfolio decarbonisation to investing in solutions. The regulatory emphasis on corporate and portfolio emissions accounting and transparency has led to an increasing industry recognition that emissions reduction trajectories are missing a vital piece of the transition pathway. As we transition away from our traditional fossil powered economy, our new clean economy requires solutions – alternatives for power, industry, transport, food, agriculture, waste and the whole value chain of petrochemical products. The transition requires productive capital flowing into innovation, growing new companies, industries and good-quality jobs.

Decarbonisation trajectories and individual company science-based targets (SBTi) still matter – they show us where value chain decarbonisation pinch points exist and where start-up technologies are needed. So, although net-zero terminology may no longer be en vogue and investors are reconsidering their emissions intensity reduction targets, the actions behind the statements are encouraging. Asset owners are now shifting their attention to how they can grow exposure to the clean economy through private markets allocations, to benefit from the clean industrial revolution and simultaneously engage in real, local, place-based impact.

The UK government has indicated that it strongly supports the growth of the clean economy and its associated co-benefits. The net zero economy is growing more than three times faster than the overall UK economy, further supporting our investment thesis at the Clean Growth Fund. The latest CBI report shows that the clean economy is bringing growth and higher productivity to all regions across the UK, generating £1.85 in economic value for every £1 invested and creating jobs with 11% higher wages than the UK average. The targets set under the UK’s climate commitments forecast a continued investment of £26 billion p.a. demonstrating that a huge investment opportunity exists to continue expanding the UK’s net zero growth engine.

The UK is a breeding ground for technological innovation, home to some of the world’s best universities and innovators. It is also Europe’s largest venture capital market and its leading unicorn engine – yet it overwhelmingly benefits overseas investors, who provide the lion’s share of early-stage capital.

The Chancellor’s Mansion House proposals aim to change this by consolidating local government pension schemes (LGPS) into pools and channeling UK capital into homegrown innovation. Our experience demonstrates that the place-based investment logic is best applied at the national level at the early, incubation stage for technological innovation. The R&D innovation location is not necessarily the location of the ongoing place-based impact as companies scale and grow to open facilities further afield.

Investing in a UK wide, diversified fund with a range of innovations helps to de-risk novel VC allocations for UK pension schemes, while also offering place-based opportunities and the potential for follow-on regionally specific co-investments. Climate solutions investments can offer opportunities for investors to engage in system level thinking; contribute to place based impact; and take part in the clean industrial revolution. There are also strong links between climate investment, social impact and nature-based outcomes.

Consolidating pension capital into super-funds theoretically broadens access to diversifying and productive investment opportunities such as VC. Writing smaller cheques into a diversified set of underlying funds can resolve the cheque-size mismatch that consolidation risks creating, allowing pools to channel capital into regional growth and net-zero innovation. Without this, UK pension capital will arrive only at Series C and later – by which point promising start-ups will have been swept up by US or European funds. The UK ranks fourth globally for unicorns, behind only the US, China and India. If UK pension capital is to benefit from those unicorns, it needs to be prepared to invest in the sparkles (apparently the term for a baby unicorn) -and accept the occasional dud.

The recent fossil fuel crisis further underscores the case for the clean transition – in terms of cost to the economy, energy and food security, and sovereignty. The net cost of achieving the government’s 2050 net-zero target is “cheaper than a single major fossil fuel price shock.”

Net zero is an economic imperative with multi-faceted co-benefits for society. Where asset owners can make the greatest difference is by directing capital into the companies of the future, stimulating growth in UK clean-tech innovation – a more powerful lever than corporate or policy engagement alone.

The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.