Going for gold: how inclusive finance for SMEs can accelerate climate solutions

Funding for climate can be similar to the funding that goes into professional sports training. Seen here, the 500 metres women's kayak final at the Tokyo 2020 Olympic Games in August 2021. AFP

Transforming date palm waste for water purification. AI-enabled carbon accounting. Natural hydrogen production using ultramafic rock. These are just three of dozens of cutting-edge climate technologies I’ve come across recently.

There’s no shortage of climate solutions in development, but the challenge is scaling them quickly – at a pace that keeps up with the growing urgency of this unfolding crisis.

Everyone loves to support bright ideas. Early-stage innovations often secure initial funding through angel investors, seed funds and the suite of sustainability-focused accelerator programmes offering grants and prizes.

But it’s a different story when they’re preparing to compete in the big leagues. As startups grow into SMEs, they need to build strong teams, invest in research and development and scale manufacturing and production. Many promising ideas falter at this stage because they can’t access the capital they need to grow fast and become fully realised, implementable technologies.

One SME founder I have worked with is raising a $40 million Series A round to file patents, acquire mineral rights and begin drilling hydrogen exploration wells. Another needs less than a quarter of a million dollars to set up a lab and develop a working prototype into fully functioning equipment that turns landfill waste into useable gas.

For institutional investors, these aren’t big asks. But without substantial green capital ready to be deployed, climate SMEs are facing a funding gap that puts their solutions in limbo.

Yes, there is a risk that an idea won’t pan out, or a company might fail, and the capital invested won’t be returned. But what of the risk of not funding these companies?

At this November’s “finance Cop”, a new climate finance target of $300 billion each year was agreed – tripling the existing target. But details of how this finance will be distributed and where the funds will be channelled to weren’t specified.

To bridge this gap, unlock progress and fast-track development, we need to ensure that sustained, risk-tolerant, inclusive financial support for SMEs during the crucial development stage is part of the solution.

Consider UK Sport’s Athlete Performance Awards. Historically, training for the Olympics was a financial struggle – meaning that mostly athletes from better-off backgrounds, with existing access to competition-level facilities, could go on to compete at the Games.

Today, the APA gives grants that fund the significant costs of training and competing at an international level to promising athletes in their first two years of high-performance competitions, when they’ve shown medal potential but aren’t yet earning money from prizes or sponsorships.

Receiving an APA affords athletes the opportunity to test their mettle and see if they have what it takes to continue on the road to greatness and a professional career. This system has significantly boosted Great Britain’s Olympics performance over the years, with 130 gold medals won in the Summer Games since Atlanta 1996.

We need a similar approach for climate finance: for companies on the verge of success, with technologies that have demonstrated their potential, who need accessible investment now to fuel their growth into the next stage.

Despite significant global commitments from governments, international organisations and institutions, funds are not being raised quickly enough, or in the right places, to get to the people and businesses who need them most. Instead, capital is being tied up in bureaucracy, or channelled towards low-risk projects that offer quick wins, but don’t tackle the hardest issues to solve. Accelerating the deployment of committed climate finance and getting it into the right hands is vital.

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  A three-year initiative will monitor gyrfalcon on the Seward Peninsula in Alaska. All photos: The Peregrine Fund

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  Gyrfalcons are the world’s largest falcon species, with females reaching 65cm long with a wingspan of 160cm

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  Researchers will also focus on the snowy owl, the rough-legged hawk, the austral pygmy owl, the rufous-tailed hawk, the rufous-legged owl, the striated caracara, the white-throated caracara and the white-throated hawk

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  The threats facing polar raptors include altered breeding behaviour and success rates

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  The project will aim to identify habitats suitable for all nine polar raptors species by 2070

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  The initiative will also focus on collecting data from all nine raptors

To do so, there must be a shift in how we evaluate the risks associated with funding SMEs, especially nascent climate technologies.

Much of the investment capital available today is controlled by financial institutions and investors, who are of course looking for businesses with proven potential to generate revenue and deliver shareholder returns – a track record that is hard for a growing SME to demonstrate.

We need to adopt a more nuanced view, with a greater weighting on the potential benefits of helping innovative solutions succeed, compared to the downside risk, and to create risk-tolerant vehicles and consortiums for green investments.

Yes, there is a risk that an idea won’t pan out, or a company might fail, and the capital invested won’t be returned. Or that even a successful climate solution doesn’t result in a path to profitability.

But what of the risk of not funding these companies? The risk that promising ideas will fall by the wayside, never to be developed into real-world solutions. The risk of not preventing the preventable, not preparing for the unpreventable, and not doing all we can to protect the planet, people and communities in the decades to come.

To overcome climate challenge, we must bridge this funding gap and bring actionable solutions out of limbo and into play for millions of people around the world. That’s why it’s crucial that the outcomes of Cop29 not only set a new collective goal for climate finance, but also directs that finance to where it’s most needed – bridging the gap between promising startups and climate solutions at scale. Through blended, pooled and inclusive finance vehicles, the world can accelerate the emission reductions and climate resilience we sorely need.

Not every athlete goes on to win the gold, but when they do, they make history. By accelerating climate capital and rethinking our understanding of risk, we can unleash the potential of solutions that find themselves in training camp today.