Changing the Record – HMT reflections on COP26

What the World Needs now…

“…is love, sweet love” as the Burt Bacharach classic goes and this should be a given, but clearly a higher priority some 50+ years after its release is “Climate Action…….and now!”.

Week One at COP26 saw a flurry of announcements of climate commitments and pledges which each morning have assaulted the front pages and news websites with barely a pause for breath or analysis before the next pronouncement has arrived. The juggernaut that is COP26 keeps rumbling on.

World leaders (with some notable exceptions) came to Glasgow and then left (by plane or slow train) leaving in their wake an army of negotiators and administrators whose unenviable job it is to translate the bold mission statements into measurable targets and actionable tasks.

The draft COP report has been issued, re-affirming an ambition to restrict global warming to 1.5^oC by 2050. But despite the headline initiatives, the consensus points to a realistically achievable target of ~2^oC or more increase in global temperatures, which will see billions more affected by life threatening heatwaves, floods, drought, famine and extreme weather patterns.

We have seen pledges that:

• Address deforestation
• Limit Coal production and use
• Target methane emissions
• Increased emphasis on the provision of finance to green companies & business reporting initiatives to achieve net-zero portfolios in the financial sector
• Support the transition to greener transportation

For the sake of us getting to the point, we will spare you the detail, since the pledges have been widely reported and can easily be searched.

How those global targets and ambitions trickle down into definitive legislation and corporate action will only become apparent over time, but we are already seeing the theme of ‘energy transition’ filtering through into, and driving increased activity, in the fundraising, debt and M&A markets.

Venture Capital Markets

Through our fundraising work with Cleantech/Climate tech companies, we see increasing numbers of new funds emerge, the latest being World Fund, a €350M fund backed by search engine company and Google challenger Ecosia, with the goal of “solving” climate change.

This is testament to the fact that climate tech is (well), a hot sector (sorry!) with some $32bn already invested in climate tech companies in 2021, more than four times the spend back in 2016.

Far from being a blip, we see this trend accelerating, with heightened interest in those companies with strong green credentials, not just in historically well-backed software sectors, but increasingly in more ‘difficult’ hardware and hybrid solutions covering energy efficiency and EV infrastructure and through to deeptech solutions for novel materials and carbon capture.

What’s more, is that Europe is the fastest-growing region in the world for tech companies addressing climate change and London the epicentre, attracting scouting teams from some of the biggest US funds in the market.

Corporate Venture teams are also very active on the ground, looking to back companies that help the mother ship to meet their current and increasing ESG obligations.

Private Equity

Private equity moves as a pack and is driven exclusively by financial returns. For all there will doubtless be an increased interest in the potential for investing in Clean, and Climate-tech companies, the investment thesis for private equity will nonetheless need to stack up on a conventional basis. As the ongoing wave of venture investments mature and market demand for their solutions grows in response to legislation and consumer sentiment, then doubtless we will see a Climate-tech “bubble” at some point in the next few years and we can be sure that analysts will be actively tracking those sub-sectors of the market that are capable of delivering investor returns the fastest.

In the meantime, with an inevitable increase in regulation and government spending in this area, Private Equity will be looking for those already established businesses whose opportunity for growth will be bolstered and enhanced by the outcomes of COP26, whether they be consultancies, software solutions, reg-tech, green energy, transport solutions, energy management or (cynically) just businesses that offer PE a green-washing effect. By the same token I would expect appetite for anything oil and gas-related or which relies on carbon-guzzling to be a difficult sell to investment committees.

Over time we may see an increase in the number of funds with a specific ESG focus, (Impact Funds) and one might hope that the government would see the advantages of tax breaks to encourage investment into and by such funds. In the meantime, private equity remains a competitive environment and I very much doubt that any investment will pass muster unless it delivers a conventional rate of return. Private Equity will follow where Government and the consumer markets lead, but they won’t sacrifice returns in order to take a climate-friendly stand.

M&A

And where Silicon Valley starts, UK Private Equity will eventually follow.

It is only a matter of time before Climate Technology is a mature market and the current climate imperative will surely accelerate that point.

Heightened focus on a company’s green credentials not just for reporting, but because of customer demand and consumer activism, is already proving a boon for cross-border M&A. We are working with climate-related companies receiving unsolicited offers from around the globe which is reflected in very attractive multiples – “What’s your number?” is increasingly being heard.

Last month, Blackrock CEO Larry Fink said that he expects the next 1,000 billion-dollar start-ups to be in climate tech, while Bill Gates expects there to be 8-10 Teslas created in the space. Think of that, 10 more Elon Musks!

If you are wondering what this all means for you, wherever you are on your company’s climate-change journey then we would be happy to chat through your options and discuss a strategy to take advantage of this surge in both investor and corporate activity. Get in touch with our team on 01491579740.

Talk is cheap, climate action is imperative.

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