Equity Finance Supports Eco-Innovation

The UK’s commitment to realise net zero by 2050 is one of the most important challenges for the country, and a way of achieving this aim seems to be to call upon smaller businesses as eco-innovators and as users of emission-reducing practices in the growing clean tech sector.

In order for the UK to arrive at net zero as efficiently as possible, it is vital that no piece of technology stands undeveloped as a result of lack of finance.

While grants have the ability to provide support for the very early stages of innovation, as these eco-innovations progress closer to the market, equity finance is essential to aid companies to commercialise and achieve scale.

Innovation into emission-reducing technology and eco-initiatives have the potential to be expensive, risky and time-consuming.

With these risks in mind, equity investors, who broadly work with a clear focal point of long-term value, and whose investments are not in need of regular payments, constitute an ideal fit for funding eco-innovation.

However, eco-innovators are confronted with challenges when they look to raise equity finance.

Commonly, costs of due diligence do not comparatively stay in line with the size of investments, meaning that due diligence processes create more difficulties for smaller deals that are required to take the initial steps of developing a piece of eco-innovation, hampering activity at the lower end of the market.

Investors lacking knowledge about the pieces of technology, fundamental to eco-innovation, is another common challenge for small businesses looking to raise funds for a piece of new technology.

These challenges can mean that the actual level of free-market demand is untried, amplifying the risky proposal of investing in any innovative eco-technology.

Despite these obstacles, UK SMEs have secured significant investment to develop eco-innovations over the last 10 years, as the years between 2011 and the third quarter of 2021 saw 1005 publicly announced equity deals in clean tech SMEs, accounting for £3.3 billion of investment.

While the past decade has seen important growth in equity investment for eco-innovators, the path for deal volumes and funding levels fluctuated, as the period between 2006 and 2011 saw a boom in investment, equity investment levels in clean tech decreased, prior to returning to more growth in the last few years.

This recovery is a reflection of growing recognition of the urgency of tackling the climate crisis, and has brought about buoyant investment in 2021 to date.

This is evident from huge investment activity in the first three quarters of 2021, which produced 147 clean tech deals amounting to £572 million reported.

The appearance of mega-deals for UK SMEs is another indication of the clean tech sector’s growth, as both Flexion Energy and Zenobe secured mega-deals in the 12-month period prior to the UN COP-26 conference in November 2021, each raising £150 million from private sector investments to finance infrastructure expansion.

Increasing equity investment in clean tech and the advent of the first mega-deals in the sector are certainly steps in the right direction for the UK’s goal to achieve net zero and promote the sustainable use of resources across the country.

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