Barclays is calling on the UK government to address a £1.5bn financing gap for growth-stage climate technology companies, which it says is critical if businesses are to scale at pace and the UK is to meet its net zero ambitions.
While welcoming the Labour government’s recently announced plans for a £7.3bn National Wealth Fund to “unlock investment” in new and emerging industries, in a report on scaling net zero technologies, Barclays has called on the UK Infrastructure Bank and the British Business Bank to launch a dedicated climate tech fund, with a specific focus on supporting debt and equity transactions with a £10mn to £25mn ticket size.
It is also urging the government to rethink the organisational structure of UK public finance institutions, which it claims are not operating optimally.
“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,” Barclays global head of sustainable finance Daniel Hanna said in a statement.
Barclays’ report highlights a notable gap in Series B+/growth-stage financing for UK climate tech companies that build physical and digital technologies for reducing or removing greenhouse gas emissions and adapting to the physical impacts of climate change.
Venture-backed series B+/growth-stage financing for European climate tech companies fell 48 per cent year on year in the first half of 2023, show figures published in the report. Data from the UK’s Cleantech Group suggests that from 2018 to 2022, a £1.5bn climate tech financing gap has emerged at Series B.
Series B+ climate tech companies are typically characterised by high capital expenditure and long paths to profitability, and seek financing for “high-potential but not yet commercially deployed” technologies, which could help reduce greenhouse gas emissions by 35 per cent by 2050, International Energy Agency estimates reveal.
However, the risk-return profile of these companies makes them less attractive to traditional investors and lenders, including banks.
“While traditional bank debt instruments usually provide the capital to support a large increase in technology deployment, they will usually require clear track records and evidence of steady cash flow, and banks typically have a lower risk tolerance for failure in their portfolios,” Barclays writes in its report. “These features are often missing from climate tech companies at this stage, especially given those delivering first-of-a-kind technologies, which in many cases will not yet be profitable.”
Hanna said the NWF is an opportunity for the UK to “fine tune” its public finance approach and help mobilise greater private capital by setting up a dedicated climate tech fund.
Barclays is also calling on the BBB and the UKIB, which will distribute funds under the government’s NWF, to explore the creation of a guarantee scheme specifically targeted at supporting climate tech companies, and to “maximise” their guarantee powers to help mobilise private capital and transfer risk.
Both institutions should be properly resourced, to ensure they have the right talent and expertise to understand the unique requirements of innovative climate tech companies, says the report.
Responding to the Labour government’s plans to set up a NWF, UKIB chief executive John Flint said in a statement earlier this month that it had a “strong track record of deploying capital where it’s needed to unlock private investment in critical infrastructure along the path to net zero”. In the past three years, the bank has invested more than £3bn in projects in “all four corners of the UK”, which has helped to mobilise almost £11bn in private capital, he said.
However, Barclays says the current set-up of organisations, including the UKIB, BBB, UK Export Finance and Innovate UK, creates “missed opportunities” for collaboration, alignment and better cohesion in delivery of programming and support, and calls on the government to review the benefits and practicalities of consolidating the existing infrastructure of UK public finance institutions.
This article originally appeared in The Banker
