Is there anybody out there – the void in ESG funding

A lack of risk-willing, capital heavy growth investors is a key hurdle in Europe’s push for a green transition, Danish industrial cleantech scaling fund Nordic Alpha Partners’ (NAP) co-founder and growth partner Laurits Bach Sørensen said.

“ESG and Impact Investing matters very little when the single biggest obstacle for the EU to achieve a successful green transition is the lack of funds and investors in the bracket between early stage and buyout funds,” Bach Sørensen told Mergermarket. “Those with sufficient capital are too risk averse [and] those with risk appetite do not have the capital.”

Unlike in the early stage when the capital required to build some test facility to proof a concept is limited and risks thus smaller, growth funds which finance more mature businesses are faced with the much larger capital expenditure to scale the business properly, and therefore with larger risks, Bach Sørensen explained.

Cleantech and greentech businesses are particularly risky because their technologies and markets are often subject to new and changing regulation. Few European funds, therefore, invest in that segment between the early stage and the buyout stage, so sector companies struggle to fund continued growth, Bach Sørensen said. “It’s a valley of death for the green transformation,” he argued.

The green transition is only possible through technological innovation, Bach Sørensen said. But despite a vast financial ecosystem at work – including early-stage climate funds, ESG-conscious institutional investors and subsidising governments – the gap between early-stage investments and buyout capital remains a hurdle, he said.

In 2021, McKinsey estimated that Europe would require EUR 28trn of investment across transitory sectors and clean technologies over the next 30 years in order to reach net zero.

“There is a responsibility upon the alternative investment community to support the world’s green transition, and currently there is a gaping void in which promising green and cleantech companies die, because no investors are able to take them to the next level once they pass this early growth stage,” Bach Sørensen said.

When listing is the only option

As an example illustrating the lack of mid-stage funding, Bach Sørensen pointed to NAP’s portfolio company Re-Match [CPH:RMATCH], a specialist in the recycling of decommissioned sports turf which listed last year.

Artificial turf is becoming more popular, with more than 42,000 football fields being installed globally last year, as it allows sports to be played regardless of climate and maintenance. But after the lifespan of around 10 years, the turf has until recently had to be disposed of via incineration or landlls, harming the environment. In Re-Match’s factories, much of the material can instead be reused, signicantly reducing CO2 emissions, Bach Sørensen said.