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Only private capital can solve the climate crisis

It will take more than political will alone to reach net zero

By Michael Moore

For many, the summer of 2023 will be remembered for brilliant sporting moments: from the Lionesses reaching the final of the World Cup, to Carlos Alcaraz’s heroics at Wimbledon. But for those less fortunate, this summer will be remembered for the devastating impact of the climate crisis.

The wildfires and torrential storms that have swept the globe this year are a constant reminder of the urgent action that should have been taken yesterday.

Achieving net zero is going to take more than just political desire and government initiatives. It requires serious, long-term investment. The International Renewable Energy Agency estimates that reaching climate targets will require $110trn to be invested in the energy system by 2050.

The challenge of finding that amount of investment against a backdrop of ailing public finances is the reason why few governments will be able to tackle the climate crisis without the support of private equity and venture capital (private capital). The UK is a case in point. Inward flows of investment need to be encouraged into green infrastructure and jobs, and the right investment environment created, urgently.

After last autumn’s climate negotiations in Egypt at Cop27, experts assessed that atmospheric CO2 is 50 per cent up on pre-industrial levels. We are on course to miss the mid-century 2°C cap on global temperature increases, which was thought to be the minimum to avert disaster. Greater and more extreme weather, therefore, is sadly yet to come.

But there is cause for optimism. The UK is on the right trajectory to finding the capital it needs to generate green growth. Private capital backs the technological innovation needed to combat climate change. British Venture Capital and Private Equity Association (BVCA) members are finding and helping to grow innovative UK and worldwide private businesses that offer solutions to global climate problems.

In 2022, £27.5bn was invested by private capital into the UK economy – despite the challenging macroeconomic headwinds – many millions of which made its way to vital businesses in the sustainability sector.

Take Nova Pangaea Technologies for example, based in Redcar, which has developed a revolutionary process converting woody waste and agricultural residues into advanced biofuels used to produce sustainable aviation fuel. Or Instavolt in Basingstoke, which works with local authorities, businesses and landowners to install rapid electric car charging points, which deliver a financial return for those who house them. Both are backed by private capital, having received multiple rounds of investments over several years, helping us transition to net zero. Nonetheless, despite these success stories we know that more investment will be needed.

Recent research by the BVCA found that UK-based funds managed by our members have commitments for over £145bn of capital to deploy for investment in the next three to five years. Whoever forms the next government needs to channel that pot into UK-based green infrastructure and jobs. The opportunities for green growth are extraordinary.

As highlighted by Labour’s report “Make Britain a Clean Energy Superpower”, the global net-zero transformation could contribute £1trn to the UK economy, and create over a million jobs a year.

Also, as made clear by Labour’s report, private capital will be critical to achieving net zero. The industry has a vital role to play in global efforts to eliminate the causes and combat the effects of climate change. PE and VC firms use investment from, for example, pension funds, to exercise significant influence or control over fast-growing, unlisted small and medium-sized enterprises (SMEs). This makes BVCA members well placed to drive the transition towards net zero in areas of the economy that public markets cannot reach.

The industry also stands at the unique intersection of deploying capital, investing for the long term and helping to shape the strategy of investee companies. This allows it to play a leading role in ensuring firms adapt to the global climate realities, embedding environmental and social considerations into businesses across the UK economy.

Why are investors so willing to pour private capital into green growth and drive the green agenda in their portfolios? Sometimes businesses invest because it is a regulatory requirement, at other times because it is the right thing to do – but increasingly because there is evidence that it is a smart business decision.

The long-term approach that underpins the private equity model, for example, is not just about how the business performs today under one firm’s ownership – it must be informed by the needs of future owners, too, so perhaps looking a dozen or more years ahead. Those years will be drastically impacted by climate change, so investing in a green solution now is good for the bottom line.

To enhance this, we would like to see more incentivisation of SMEs towards positive behaviours for achieving net zero. This would include clear and proportionate guidance for reporting standards, proportionate reporting requirements, tax incentives and grants, and guarantees for green finance. It is also vital that sustainability regulation is proportionate, compatible with international standards, and appropriately tailored to encourage private capital to invest.

The BVCA would also like to see a robust UK net-zero roadmap, with clear commitments and actions on public investment. Joined-up policymaking is essential, with proportionate sequencing and timely implementation. The development of a global reporting language and common methodologies and guidance, which are cognisant of the sectors they reflect, are required to allow organisations to commit meaningfully to net zero.

The impact of Labour’s green strategy will be significant, and very clearly aligns with the private capital industry’s investment agenda. But if it wants to deliver its plan at pace, Labour needs to say more about how it will seek to encourage greater investment, welcoming private equity and venture capital as a critical partner for its green growth agenda.

[See also: On the road to Cop28]