Addressing climate change requires investment in a wide range of solutions, from scaling existing renewable energy technology to identifying and supporting early stage innovation for the next wave of technological breakthroughs. However, the current state of climate finance does not reflect this broad-based need, leaving critical gaps in the fight against climate change. To explore these gaps, the Climate Solutions Collaborative hosted a webinar discussion on Monday, February 12th featuring Scott Burger, of PRIME Coalition and Liqian Ma, Managing Director at Cambridge Associates, authors of the recently published Stanford Social Innovation Review article "The Investment Gap that Threatens the Planet." Alicia Sieger, Managing Director, Precourt Institute Clean Energy Finance Initiative, Stanford University set the stage for the discussion and served as moderator.
In setting the context, Alicia highlighted how the funding gap to meet the goals set out in the Paris Accord demands a tripling of current spending in clean energy, as outlined by the Clean Trillion Campaign from Ceres, and the International Energy Agency 450 Scenario. Further, reaching the carbon reduction goals will require the deployment of clean energy equivalent of 70 times all of the wind power ever installed. Traditional funding mechanisms have not been well positioned to scale these solutions, but PRIME Coalition and others are beginning to develop approaches that address this need.
Scott Burger began by outlining why innovation is important for solving climate change, and highlighted the fitness of traditional venture capital for climate solutions. While some believe that barriers to scaling clean energy are merely social and political, Scott quickly pointed to a more sober reading of the landscape wherein technology must continue to evolve to meet the IPCC goal of limiting warming to 2 degrees. Indeed, technological advancement is crucial for driving down the price of solar panels and other technologies to achieve widespread deployment. Perhaps more importantly, innovation is needed to scale the negative emissions technologies that are critical to addressing climate change. Many of these technologies are still in their infancy, with only one operating negative emissions plant on the planet today. New investment models, like PRIME Coalition, are finding ways to address the venture capital funding gaps in these sectors to scale solutions that are needed, but neglected, in the current financial market.
The C|A clean tech benchmark, representing 1,473 investments made between 2000-2015 totaling about $32B, provides a good look into how capital is being deployed in this space. Liqian Ma discussed how the vast majority of the capital in the fund is in later-staged deals in developed markets, and for good reason, as late stage has historically outperformed early stage investments. However, there are some signs that this trend may be reversing, and dispersion within the sector affords some differentiation. New approaches are required to realize the opportunity in this space, including flexibility around supporting new managers, and tolerance for mixed track records.
Overall, the discussion clarified the promising role that philanthropic and family office investors can play in scaling nascent climate solutions. By taking advantage of new funding models like PRIME, mission aligned investors with access to a wide range of capital are in a unique position to identify critical gaps and fund the next wave of climate solutions. Some key takeaways include:
- Be flexible with your investment criteria – It is important to fight biases against first time funds or teams with less than stellar track records in this space. Scaling new technologies will require supporting first time managers who have followed the space closely, not just seasoned teams with long track records. Additionally, any teams that have been in the space for more than 10 years will most likely have a mixed track record. It is important to consider how their experience and knowledge will help grow the next venture instead of automatically screening them out of consideration.
- Investment in early stage technology is critical and complementary to investing in later stage solutions – While often viewed as an either/or proposition for investors, scaling climate solutions requires a focus on both ends of the innovation spectrum. Philanthropists are in a great position to help scale nascent solutions by allocating resources to venture capital and fostering innovation where other investors are reluctant to get involved.