Backing the same old solutions won’t solve the climate emergency

Impact investors must up their game to kickstart our low-carbon future

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Posted By:

Craig Burnett

Senior Communications Officer

By Harriet Lamb, Ashden CEO

Every year, our team of expert professionals and judges
trawl the world for leading businesses worthy of winning an Ashden Award for
their innovation in renewable energy. Every year, the quality is so high that
we struggle to choose between the sparky enterprises we uncover. All of them
are tackling the climate emergency with solutions that reduce emissions and
improve lives today. They’re giving us greener buildings, transport, jobs and
healthcare, as well as energy access for some of the most marginalised people.

Globally, we already have many of the solutions we need to
tackle the climate crisis. And yet we are falling far short of our carbon
reduction targets. The most recent reports show the world is still increasing
emissions and adding to global warming. So how can we take what works and scale
it up?

As ever, it’s all about the money. Too often, brilliant and
ambitious innovators are scrabbling about chasing the funding they need to
grow. We need more impact investment – investment that creates positive social change,
as well as financial return. This money plays a unique role in the sustainable
energy ecosystem.

At its best, impact investment can drive fast systemic
change by allowing businesses to test out what was previously thought
impossible. But while the wider world can do more to get the money
flowing, today’s impact investors need to raise their game too.

So, what impact could sustainable energy have, given the
right support? Two Ashden Award winners, both from India, show the potential
for change.

The country’s poor rural silk workers (mostly women) endure
long hours in a physically arduous trade, with few chances to grow their
income. Ashden winner Resham Sutra has developed a range of affordable electric
reeling machines, many powered by solar energy, that have vastly improved
working conditions and created a predictable, dramatically higher income for
more than 9,000 silk workers. But the silk industry employs 7.9 million people
in India alone so the potential for growth is huge.

In four Indian cities, rickshaw start-up SMV Green is
creating fair working conditions, with electric rickshaws and reliable
contracts, empowering drivers to buy their vehicles and earn more money, while
reducing the air pollution that kills thousands every year. Its Vahini programme
is training India’s first women rickshaw drivers, creating secure incomes for
them and improving safety and security for their female passengers.

Environmental tech analyst IQAir reports that 22 of the
world’s 30 most polluted cities are in India. Rickshaws are big business in the
country, with the market in three-wheeled vehicles worth $1.5bn. The potential
for growth, and social impact, is huge. Just like Resham Sutra, SMV Green has a
proven solution ready to take off. So, can it find the investment it needs?

Businesses seeking impact investment often work with such
new technologies and business models and serve marginalised customers without
credit history or reliable income. These factors raise the risk level for
investors, which is why companies find investment from traditional sources so
hard to come by. But backing the same old solutions won’t solve the climate
emergency.

And in a fast-changing world, their products and services
can transform markets. In just a few years, a clutch of businesses have helped
create and grow Africa’s off-grid solar market, plugging millions of people
into energy for the first time. Impact investment helped take these businesses
from small start-ups to international operators, attracting multi-million-pound
funding.

One innovator taking this revolution to the next stage is
the Ashden Award-winning Renewable Energy and Energy Efficiency Partnership
(REEEP). Its Beyond the Grid Fund for Zambia has offered companies financial
incentives that make it less risky for them to enter the country’s off-grid
energy market; in return they must offer quality products that reach customers
who might otherwise miss out, but who don’t have the funds to pay upfront for
solar.

We need a diversity of solutions, but currently investment
is concentrated in too few companies. Over the last five years, the world’s
three biggest off-grid solar businesses each received at least as much funding
as all their peers outside the top 10 combined ($120m).

In future, we need to make sure that the kind of
brilliant incentives offered by REEEP are available to a wider network of
businesses. This will build that crucial clean energy ecosystem and give impact
investors the confidence to back a wider range of companies, not just those at
the top of the pile. Or if they want a really big impact, they could invest
directly in projects such as the Beyond the Grid Fund for Zambia.

Effective impact investment is driven by passion and
optimism – individuals, trusts or institutions joining forces with innovators
to solve a particular problem, often helping people left behind by markets and
policies. Of course, there are still tough business decisions to be made.
Impact investors don’t expect the biggest returns, and they always accept a
high level of risk, but they do expect to protect their money.

In return, they must show courage and be prepared for
difficult moments. Among a host of brilliant impact investors, too many wear
the badge but don’t embrace the values. Some enterprises complain that impact
investors don’t have a clear enough focus on the social good their money could
do. They need a longer-term commitment, rather than investors who seem keen to
flee when the inevitable challenges arrive. To get renewable energy to the
so-called “last mile” customers is more difficult. Those enterprises need
impact investors to step up to their names as reliable partners for the long
haul.

Other enterprises complain about how hard it is to get
relationships started, or even a foot in the door. That’s why we run projects
and host a range of events helping motivated investors meet the brightest
sustainable energy outfits – our Ashden Award winners.

So, is the pursuit of social good through sustainable energy
compatible with the investor mindset? The two have more in common than you
might think. It all comes down to growth. Investors of every kind want to see
the companies they back doing more business, reaching new markets and
customers. And the challenge of scaling up is also at the heart of the climate
crisis: the solutions that could save us from climate disaster exist right now,
but are simply not reaching enough people, fast enough. The pursuit of growth
is where the two motivations of impact investors (financial returns and social
good) meet.

We face a crucial moment for impact investment in sustainable
energy. More people and institutions are pulling their money out of
climate-damaging businesses, partly because they realise the danger of stranded
assets as the world inches towards rejecting fossil fuels. There is a golden
opportunity for these funds to be redirected into the dynamic new companies
building our low-carbon future. We need to make sure those divesting are
investing in solutions too.

But for this to happen the financial community needs to
offer new products and services tailored to encourage investment in sustainable
energy. A company bringing solar panels to thousands of homes that can’t pay
upfront installation costs will have very different investment needs to a
business opening a single coal-fired power station.

Impact investors can lead the way for other,
larger financial institutions to follow – including governments. For too long
politicians have subsidised the fossil fuel and nuclear industries; it’s time
they followed the smartest impact investors and threw their support behind
sustainable energy. The time for excuses is over – the time for courage is
here.

This piece first appeared on Ethical Corporation

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