Final Report Summary - FUNDETEC (Comparison and assessment of funding schemes for the development of new activities and investments in environmental technologies)
The project FUNDETEC examined lack of access to financing on terms that suit the needs of riskier, growth-oriented technology development enterprises. This financial constraint is often cited as a significant barrier to innovation, development and commercialisation of environmental technologies and eco- innovation. These financing difficulties are perceived to be much more salient regarding environmental technologies, which are often considered riskier than other technology investments, and as they are more subject to regulatory risk, and experience greater competitive disadvantages within current market structures.
As the impact of climate change and other environmental degradation accelerates, the need to properly finance environmental technology development and commercialisation has never been more urgent. These global-scale environmental challenges can only be met through innovation by private and public investors and policy makers alike. In pursuit of this, FUNDETEC research goes beyond the usual private-public categorisations.
While examining the effectiveness of European private sector instruments, the research identified ways that public investment or other policy actions can leverage those instruments to address market failure or urgent societal need. FUNDETEC research also draws international comparisons with environmental financing practice in North America and Asia.
Some of the key recommendations concern the importance of driving final demand by using the legislative and regulatory framework. While emphasising private finance, research generated several recommendations relating to public funding, private leverage, and burden sharing. Barriers to accessing funding are examined, and some specific measures identified, such as guarantee funds and early-stage feasibility funding. The important area of regional and national targeted policy is also addressed, and recommendations made. In addition to recommendations founded on empirical research, there are also a number of issues for further research that have been identified through various stakeholder consultations during the project.
FUNDETEC's researchers identified two types of gaps in the private sector financing of environmental technologies. There is a gap in expectations between technology developers and private sector financiers. A gap also exists in the availability of funding for early-stage developers. This report explains the obstacles and barriers that lead to the gaps in funding, but also the barriers that technology developers and investors face when trying to make deals. Approaches to overcome these issues are proposed. 178 funding instruments that support the development of environmental and sustainable energy technologies in 20 different countries were researched and assessed. Geographically these countries can be differentiated in EU Member States from Northern / Western Europe, Eastern European and Mediterranean countries. Additional interviews were held in Asia and North America.
The most common asset classes of the analysed instruments are venture capital (29 %) and private equity (28 %) followed by debt-loans (17 %) and equity-seed capital (11 %), covering all stages of technology and venture development. Private equity and venture capital funds featured the most prominently in the research pool, although less than 5 % of total financing for environmental technologies is provided by these sources. Traditional debt financing, such as loans and bond instruments feature less prominently because there are few of these products that target environmental technologies specifically, nor were there staff available with expertise on these technologies.
Researchers also identified an early- and middle-stage gap in the availability of funding due to external market conditions, such as:
- smaller project sizes resulting in higher transaction costs;
- a higher ratio of capital costs to operating costs; and
- a lack of longer-term financing at reasonable rates. Researchers explored the obstacles and barriers that lead to the gaps in funding, but also the barriers that technology developers and investors face when trying to make investment deals.
These obstacles and barriers include:
- financial structure and scale that involve higher upfront capital costs and a higher external financing requirement than otherwise;
- inaccurate perceptions of cost and long-term performance risk, compounded by a lack of timely and accurate information;
- problems in coordination and communication between the different actors involved (e.g. ministries, agencies, technology developers, banks, and fund managers);
- market distortion caused by high-carbon fuel pricing that does not reflect the environmental and social costs they impose.
This puts most sustainable energy technologies at a competitive disadvantage and makes them dependent on supportive policy and regulatory frameworks to be financially viable.
In Eastern European countries, loans are the favourite funding schemes within the interviewed institutions. In comparison, in the North-Western European countries, grant-based funding seems to be more common. Most public institutions and researched funding schemes do not focus on certain environmental technologies but finance a broad selection or even all kinds of environmental and sustainable energy technologies.
In Western European countries, technology leadership and industrial development play a crucial role as an overall goal of the funding instruments. Further goals are to create new jobs and, obviously, environmental improvement. The analysed funding instruments in the selected Eastern European countries show very diverse results. The increase of employment is very often stated to be an overall goal by funding institutions from these countries. Furthermore, the return on investment plays a more important role compared to Western European countries.
The assessment and measurement of the performances of the reported instruments is very heterogeneous. Most interviewed institutions do not use (or at least did not report) clear and measurable criteria for evaluating their investments. Sixteen percent of the interviewed institutions are either not willing or not able to specify the performance criteria they use for their funding instruments.
Detailed information was collected from 33 environmental technology developers throughout Europe, North America and Asia. The most frequently represented sectors are: biogas technologies; waste mitigation which includes recycling; wastewater, and water technologies. The most common types of technology developing organisation interviewed were SMEs and spin-outs.
The data show that the predominant source of funding for the interviewees is grants. Of the 21 European technology developers, 15 had used their own funds to finance their technology development at some stage or other. Commercial loans were the third most accessed type of funding, followed by private equity and venture capital respectively. In NW Europe roughly half the funding instruments adopted came from private sources and half from public sector sources. In CE Europe, however, over 70 % of funding was from public sector sources and about 30 % from the private sector.
The most common methods used by technology developers to measure their performance are: revenue generation and growth, and the number of commercial installations of the technology. Less than 10 % of all those interviewed measured their performance using a target expected rate of return or an internal rate of return - methods invariably used by investors when measuring performance. Several entrepreneurial barriers were identified: lack of capital; fear of loss of control; lack of management and business acumen, and the personal risk that needs to be taken. Technical barriers also arise, including difficulty protecting intellectual property (IP); difficulty getting relevant permits and grid connection; a lack of components; and skills shortages.
Two key insights among technology developers about private sector financing stand out. Technology developers with more in-depth knowledge of the complexities of the financial markets have tended to adopt a more innovative financial model for their enterprise, which improved their access to finance. Also, general market conditions have a big impact on the relative attractiveness of investments in environmental technology development. Other commonly-cited barriers include: unattractive conditions of investment; the high risk perception of projects is damaging; there is a lack of investor confidence, and developers find it difficult to provide guarantees, collateral or other risk-sharing mechanisms because of the weak nature of their balance sheets. Around 40 % of technology business leaders felt that financial professionals lack the skills and technical know-how to objectively evaluate their technology.
The medium-sized specialists were very business- focused but also technology-focused. They tend to have more advanced financial models in place than the smaller companies and their position allows them better access to funds. Their networks of companies are spreading globally and they are building strategic partnerships with large multinational corporations.
Technology developers can increase awareness of their technology using press releases, prizes, competitions, showcases, trade fairs and conferences to boost their public profile. Non-traditional business models could provide an opportunity to unlock some of the wealth of industries and other large organisations but also to take advantage of their skills, experience and networks.
In North America the public sector financing bodies are very advanced and offer many complex packages of investment, support, networks and management training, but also verification and validation of the technology, often at a state or provincial level.
Support and real help is needed, such as manuals and other aids; feedback on enquiries, opinions and advice; consultancy for preparing the essential documents and giving recommendations to improve the quality of the funding application prior to and during the application process. It is important for SMEs to recover any direct costs arising from participation in planning and consultation processes.
The EU political agenda now recognises that a low-carbon and resource-efficient economy is a priority. Ambitious environmental targets set by the European Council 2007 confirm that environmental technology and eco-innovation are set to be one of the strongest pillars of the EU's economy.
To meet these targets, public institutions will need the help of large-scale commercial funding. In support of this, Europe needs an integrated approach to financing eco-innovation. This integrated approach should link with two ETAP proposals to mobilise funding instruments in favour of eco-innovation, with all member states establishing an efficient, large-scale green funding scheme within two years, and increasing the leverage of public funding for eco-innovation, for example by turning subsidies into loan guarantees or tax rebates.
An EU-Asia financing clean technologies development partnership should be launched. It should involve EU programmes such as Asia-invest, the EIB, EU private banks and investment funds in Asia. Such a pilot could be replicated for the other regions of the world. Regions must better equip themselves to address the challenge of supporting their SMEs.
Many of the industry sectors that are key to eco-innovation are linked to regional government. Such sectors include building, transport, energy and water distribution and agriculture. For each of these sectors, sources of eco-innovation to develop include energy efficiency, water management, waste management, and public health. To be efficient, regional authorities should in particular focus their attention on developing a regional strategy for eco-innovation.
There is also a need to differentiate between member states' different legal frameworks (Anglo-Saxon versus Roman right), public administration cultures, skills, constraints, and the type of public sectors involved.
As the impact of climate change and other environmental degradation accelerates, the need to properly finance environmental technology development and commercialisation has never been more urgent. These global-scale environmental challenges can only be met through innovation by private and public investors and policy makers alike. In pursuit of this, FUNDETEC research goes beyond the usual private-public categorisations.
While examining the effectiveness of European private sector instruments, the research identified ways that public investment or other policy actions can leverage those instruments to address market failure or urgent societal need. FUNDETEC research also draws international comparisons with environmental financing practice in North America and Asia.
Some of the key recommendations concern the importance of driving final demand by using the legislative and regulatory framework. While emphasising private finance, research generated several recommendations relating to public funding, private leverage, and burden sharing. Barriers to accessing funding are examined, and some specific measures identified, such as guarantee funds and early-stage feasibility funding. The important area of regional and national targeted policy is also addressed, and recommendations made. In addition to recommendations founded on empirical research, there are also a number of issues for further research that have been identified through various stakeholder consultations during the project.
FUNDETEC's researchers identified two types of gaps in the private sector financing of environmental technologies. There is a gap in expectations between technology developers and private sector financiers. A gap also exists in the availability of funding for early-stage developers. This report explains the obstacles and barriers that lead to the gaps in funding, but also the barriers that technology developers and investors face when trying to make deals. Approaches to overcome these issues are proposed. 178 funding instruments that support the development of environmental and sustainable energy technologies in 20 different countries were researched and assessed. Geographically these countries can be differentiated in EU Member States from Northern / Western Europe, Eastern European and Mediterranean countries. Additional interviews were held in Asia and North America.
The most common asset classes of the analysed instruments are venture capital (29 %) and private equity (28 %) followed by debt-loans (17 %) and equity-seed capital (11 %), covering all stages of technology and venture development. Private equity and venture capital funds featured the most prominently in the research pool, although less than 5 % of total financing for environmental technologies is provided by these sources. Traditional debt financing, such as loans and bond instruments feature less prominently because there are few of these products that target environmental technologies specifically, nor were there staff available with expertise on these technologies.
Researchers also identified an early- and middle-stage gap in the availability of funding due to external market conditions, such as:
- smaller project sizes resulting in higher transaction costs;
- a higher ratio of capital costs to operating costs; and
- a lack of longer-term financing at reasonable rates. Researchers explored the obstacles and barriers that lead to the gaps in funding, but also the barriers that technology developers and investors face when trying to make investment deals.
These obstacles and barriers include:
- financial structure and scale that involve higher upfront capital costs and a higher external financing requirement than otherwise;
- inaccurate perceptions of cost and long-term performance risk, compounded by a lack of timely and accurate information;
- problems in coordination and communication between the different actors involved (e.g. ministries, agencies, technology developers, banks, and fund managers);
- market distortion caused by high-carbon fuel pricing that does not reflect the environmental and social costs they impose.
This puts most sustainable energy technologies at a competitive disadvantage and makes them dependent on supportive policy and regulatory frameworks to be financially viable.
In Eastern European countries, loans are the favourite funding schemes within the interviewed institutions. In comparison, in the North-Western European countries, grant-based funding seems to be more common. Most public institutions and researched funding schemes do not focus on certain environmental technologies but finance a broad selection or even all kinds of environmental and sustainable energy technologies.
In Western European countries, technology leadership and industrial development play a crucial role as an overall goal of the funding instruments. Further goals are to create new jobs and, obviously, environmental improvement. The analysed funding instruments in the selected Eastern European countries show very diverse results. The increase of employment is very often stated to be an overall goal by funding institutions from these countries. Furthermore, the return on investment plays a more important role compared to Western European countries.
The assessment and measurement of the performances of the reported instruments is very heterogeneous. Most interviewed institutions do not use (or at least did not report) clear and measurable criteria for evaluating their investments. Sixteen percent of the interviewed institutions are either not willing or not able to specify the performance criteria they use for their funding instruments.
Detailed information was collected from 33 environmental technology developers throughout Europe, North America and Asia. The most frequently represented sectors are: biogas technologies; waste mitigation which includes recycling; wastewater, and water technologies. The most common types of technology developing organisation interviewed were SMEs and spin-outs.
The data show that the predominant source of funding for the interviewees is grants. Of the 21 European technology developers, 15 had used their own funds to finance their technology development at some stage or other. Commercial loans were the third most accessed type of funding, followed by private equity and venture capital respectively. In NW Europe roughly half the funding instruments adopted came from private sources and half from public sector sources. In CE Europe, however, over 70 % of funding was from public sector sources and about 30 % from the private sector.
The most common methods used by technology developers to measure their performance are: revenue generation and growth, and the number of commercial installations of the technology. Less than 10 % of all those interviewed measured their performance using a target expected rate of return or an internal rate of return - methods invariably used by investors when measuring performance. Several entrepreneurial barriers were identified: lack of capital; fear of loss of control; lack of management and business acumen, and the personal risk that needs to be taken. Technical barriers also arise, including difficulty protecting intellectual property (IP); difficulty getting relevant permits and grid connection; a lack of components; and skills shortages.
Two key insights among technology developers about private sector financing stand out. Technology developers with more in-depth knowledge of the complexities of the financial markets have tended to adopt a more innovative financial model for their enterprise, which improved their access to finance. Also, general market conditions have a big impact on the relative attractiveness of investments in environmental technology development. Other commonly-cited barriers include: unattractive conditions of investment; the high risk perception of projects is damaging; there is a lack of investor confidence, and developers find it difficult to provide guarantees, collateral or other risk-sharing mechanisms because of the weak nature of their balance sheets. Around 40 % of technology business leaders felt that financial professionals lack the skills and technical know-how to objectively evaluate their technology.
The medium-sized specialists were very business- focused but also technology-focused. They tend to have more advanced financial models in place than the smaller companies and their position allows them better access to funds. Their networks of companies are spreading globally and they are building strategic partnerships with large multinational corporations.
Technology developers can increase awareness of their technology using press releases, prizes, competitions, showcases, trade fairs and conferences to boost their public profile. Non-traditional business models could provide an opportunity to unlock some of the wealth of industries and other large organisations but also to take advantage of their skills, experience and networks.
In North America the public sector financing bodies are very advanced and offer many complex packages of investment, support, networks and management training, but also verification and validation of the technology, often at a state or provincial level.
Support and real help is needed, such as manuals and other aids; feedback on enquiries, opinions and advice; consultancy for preparing the essential documents and giving recommendations to improve the quality of the funding application prior to and during the application process. It is important for SMEs to recover any direct costs arising from participation in planning and consultation processes.
The EU political agenda now recognises that a low-carbon and resource-efficient economy is a priority. Ambitious environmental targets set by the European Council 2007 confirm that environmental technology and eco-innovation are set to be one of the strongest pillars of the EU's economy.
To meet these targets, public institutions will need the help of large-scale commercial funding. In support of this, Europe needs an integrated approach to financing eco-innovation. This integrated approach should link with two ETAP proposals to mobilise funding instruments in favour of eco-innovation, with all member states establishing an efficient, large-scale green funding scheme within two years, and increasing the leverage of public funding for eco-innovation, for example by turning subsidies into loan guarantees or tax rebates.
An EU-Asia financing clean technologies development partnership should be launched. It should involve EU programmes such as Asia-invest, the EIB, EU private banks and investment funds in Asia. Such a pilot could be replicated for the other regions of the world. Regions must better equip themselves to address the challenge of supporting their SMEs.
Many of the industry sectors that are key to eco-innovation are linked to regional government. Such sectors include building, transport, energy and water distribution and agriculture. For each of these sectors, sources of eco-innovation to develop include energy efficiency, water management, waste management, and public health. To be efficient, regional authorities should in particular focus their attention on developing a regional strategy for eco-innovation.
There is also a need to differentiate between member states' different legal frameworks (Anglo-Saxon versus Roman right), public administration cultures, skills, constraints, and the type of public sectors involved.