Climate tech will play a pivotal role in tackling climate change, alongside renewable energy sources. Both can directly reduce or remove greenhouse gas emissions and tackle the impacts of global warming, making them essential to achieving net zero targets.
The desire to attract climate tech companies and facilitate their financing needs has consequently become increasingly competitive across geographies. Under the UK’s Labour government, £7.3bn has been allocated in the Treasury's National Wealth Fund to drive job creation in clean energy and fund vital infrastructure and technologies using public financing. This approach is expected to encourage increased private financing to boost the UK’s energy independence.
Whilst a positive step, reinforcing the UK’s position as a hub for innovation on the world stage, economically compelling policies including the Inflation Reduction Act in the US and the European Green Deal are creating intensified competition in other jurisdictions, meaning more needs to be done by the UK to remain attractive.
Understanding UK climate tech challenges
Barclays’ Sustainable Impact Capital has a mandate to invest £500m into climate tech companies by the end of 2027 to help them scale. To date, it has mobilised £166m into over 20 innovative companies, and it is through determined efforts like this, and programmes including Unreasonable Impact that supports environmentally and socially focused companies to scale, that Barclays has an informed view of one of the biggest challenges climate tech companies are facing.
Through working with climate tech founders at the frontline of innovation, the ‘missing middle’ of financing they experience has been stressed, particularly at Series B+/ growth rounds. This is characterised by the growth stage at which climate tech companies require investment of high initial upfront costs and long timeframes to profitability, further challenged by being too large for infrastructure funds but too small for venture capitalists.
To address this ‘missing middle’ financing gap, Barclays makes four recommendations addressed to the UK government in its ‘Scaling growth stage climate tech companies’ report.
Policy recommendations
1. Provide direct public support for companies by addressing the £10-25m gap in public financing provision.
The first recommendation calls upon the British Business Bank (BBB) and the UK Infrastructure Bank (UKIB) to launch a dedicated climate tech fund or programme with a specific focus on supporting transactions with a £10-25m ticket size. This is critical to ensuring climate tech companies can scale beyond this ticket size, which is currently a challenge due to there being no public financing available at this stage of growth.
2. Expand financing mechanisms and maximise existing tools and mandates to improve the impact of public finance institutions.
There is a challenge of perceived return on investment when considering investing in new climate tech as they represent unchartered territory, including high upfront capital and long lead times for a return on investment.
Barclays’ second recommendation seeks to address this by calling on the UKIB and BBB to maximise their guarantee powers, and urges them to create a dedicated guarantee scheme targeted at supporting climate tech companies. Such an approach would help to mitigate risk and better support the private sector in mobilising lending.
In its latest investment round, Geopura, a UK-based green hydrogen pioneer saw the UK Infrastructure Bank commit £30m to their £56m investment round. This was led by a follow-on investment from Barclays’ Sustainable Impact Capital and supported by GeoPura’s existing investors, including GM Ventures, SWEN Capital Partners, and Siemens Energy Ventures. This type of collaboration provides a strong example of how public capital can help crowd in private finance, and the role the UKIB can play to bolster future investment.
3. Improve organisational connection and collaboration.
Stronger collaboration between public finance institutions is required to ensure the support on offer can be more easily accessed. Organisations currently operate independently from one another and are overseen by a range of different central government departments. This setup can hamper collaboration, creating missed opportunities for alignment and better cohesion in the delivery of programming and support. It also means that as companies scale, they are faced with navigating the complexities of multiple different institutions and processes.
4. Consider the existing infrastructure of UK public finance institutions and whether they operate within the most effective structure.
Barclays’ final recommendation is to review the infrastructure of UK public finance institutions to ensure they operate in the most collaborative and effective manner with one another. This would ensure reduced fragmentation and by combining forces, would provide a larger overall balance sheet to deploy from.
Barclays’ recommendations provide a framework for the UK to fine-tune its public finance approach and mobilise greater private capital to best support climate tech companies. In doing this, the UK can maintain and strengthen its position as a hub for innovative tech to help drive the country to net zero by 2050.
References
1. Environmental Finance. Financing the ‘missing middle’ for climate tech. 2023
2. World Fund estimate that climate finance must increase by at least 590%, to $4.35tn annually, to meet climate targets. World Fund. White Paper : Investing in Climate Tech – An Opportunity for Europe. 2023
3. Deloitte. Could technology innovations help reverse the climate change trajectory? Not without a lot more money. 2023
4. International Energy Agency. Net Zero Roadmap: A Global Pathway to Keep the 1.5°C in Reach – 2023 Update.
5. Sifted. Is the party over for ‘recession-proof’ climate tech? 2023
6. The largest direct investment scheme is Future Fund: Breakthrough, where BPC (a BBB subsidiary) “invests between £5m and £10m into funding rounds of at least £20m, as a co-investor in partnership with the private sector.” British Patient Capital. What we do – Future Fund: Breakthrough (Factsheet).
7. Note that this references the largest ticket size for financing schemes available to businesses directly. BBB has some schemes that invest in funds that provide larger commitments – notably the Life Sciences Investment Programme (LSIP) which “typically invests between £50m and £100m in each successful fund.” British Patient Capital. What we do: Life Sciences Investment Programme.
8. See references to “indicative” minimum ticket sizes for debt and equity. UK Infrastructure Bank. Strategic Plan. 2023