The UK has an opportunity to “leapfrog international markets” and become a destination of choice for innovative climate technologies, according to a paper published by Barclays.
To do this, however, the UK government must address public and private sector funding challenges that are currently hindering the ability of growth-stage climate tech firms to scale at pace. The paper – which asks how existing UK public finance support for growth-stage climate tech can be optimised to bridge the ‘missing middle’ financial gap – outlines the main obstacles around financing and government support, detailing four key recommendations to address them.
Growth-stage climate technology companies, particularly those at the Series B+ investment stage, often have high initial upfront costs and long timeframes to profitability. According to the paper, faced with an investor market more acclimatised to software start-ups, climate tech firms can find it challenging to convey their revenue drivers and scale potential, creating a perceived risk/return profile that can prove difficult to overcome, meaning these companies fail to secure the funding needed for their next level of growth.
The International Energy Agency estimates that 35% of greenhouse gas emission reductions required by 2050 will come from technologies not yet on the market.
“The UK is renowned for its innovation but there is a missing middle of capital holding back successfully scaling viable real economy ideas that can support the transition to net zero emerging from our institutions, entrepreneurs and universities,” said Daniel Hanna, global head of sustainable finance at Barclays.
“The National Wealth Fund presents an opportunity for the UK to fine-tune the UK’s public finance approach and help mobilise greater private capital. Our policy paper – Scaling growth-stage climate tech companies –suggests four practical steps for the National Wealth Fund and UK public institutions to unlock financing critical to scaling next-generation climate tech companies and support the UK becoming a global centre for climate tech.”
Recommendations
Barclays’ first recommendation is to provide direct public support for companies by address the £10 – £25m gap in public financing provision. They suggested the British Business Bank (BBB) or the UK Infrastructure Bank (UKIB) could launch a specific fund or work programme focused on climate tech transactions, requiring debt and/or equity investment at this ticket size.
Secondly, financing mechanisms should be expanded by maximising existing tools and mandating to improve the impact of public finance institutions. This should include the UKIB and BBB maximising guarantee powers and mandating to help mobilise private capital and transfer risk; the BBB exploring the creation of a guarantee scheme specifically targeted at supporting climate technology companies; and the appropriate resourcing of both institutions to ensure they have the right talent and expertise to understand the unique requirements of innovative climate tech companies.
Thirdly, the recently announced National Wealth Fund “presents an opportunity to facilitate better collaboration and unlock greater financing”, with the current set-up of organisations creating missed opportunities to improve organisational connection and collaboration.
Finally, Barclays suggested that consideration should be given to the existing infrastructure of UK public finance institutions and whether they operate within the most effective structure. For example, the government could review the ecosystem of support and consider the benefits and practicalities of consolidating the existing infrastructure of UK public finance institutions.
