ESG investing: it's in every media outlet and on every bank's business plan. A rush to what many call alignment of values with investment goals has led to a flourishing new industry with funds popping up like mushrooms after the rain. Green-tech startups are the new dotcoms, it seems, and the danger of a bubble seems distant—for now.
Interestingly enough, things were very different just a few years ago, as the Wall Street Journal's Scott Patterson noted in a recent article. The past decade, he wrote, saw a pullout of investors from the green energy technology field after a couple of notable demises—one of solar company Solyndra back in 2011 and one of battery maker A123 Systems a year later.
From today's standpoint, this is ancient history. Now, hardly a week goes by without a breakthrough of some sort in batteries, solar power tech, or, say, hydrogen. Most of these breakthroughs have to do with cost and efficiency, which are the two things that can guarantee a product a long life. Yet, most of these breakthroughs never make it to the consumer. They never make the leap across the so-called valley of death between the lab and the market. Especially if funding is scarce and hard to come by.
Venture capital funds are changing this, the WSJ's Patterson writes, citing data from PitchBook, a private capital market research provider. According to PitchBook, venture capital funds are seen completing $7.7 billion worth of green tech deals this year, which would be up from $1 billion ten years ago.
It's not just venture capitalists, either. JP Morgan earlier this month launched not one but three new sustainability investment funds. This was only the latest move in a rush to set up clean energy investment funds to take advantage of growing investor appetite for environmental, social, and governance, commonly known as ESG, investing.
Demand for new investment opportunities by a new generation of investors is one driver of this trend. Another, more important driver is government support for low-carbon technology. The European Union has tied its post-pandemic recovery funding program to commitments by national governments to invest a solid portion of the funds in low-carbon energy. This is effectively an open invitation to anyone doing anything in green tech. The Biden administration has also opened up the U.S. federal purse for green tech startups.
Now, the EU and the U.S. are discussing something they are calling a green technology alliance. In a joint statement, the two said, "We intend to lead by example through becoming net-zero greenhouse gases (GHG) economies no later than 2050 and implementing our respective enhanced 2030 targets."
With such solid support, investment in green tech has become a lot less risky for investors... except in the part where a technology simply has no chances of survival as happens to an awful lot of breakthroughs that sound so groundbreaking in the lab but never cross the valley of death. However, this is a risk inherent in any startup investment.
We've seen some instances of this risk materializing in the EV space recently. First, EV and hydrogen vehicle startup Nikola suffered a major share price drop when a report from a short-seller revealed that the company's CEO had overstated the company's progress on its flagship model. The revelation cost Nikola a huge deal with GM, too. Another EV maker, Lordstown, recently teetered on the brink of collapse as the company ran out of money before it started commercial production of its Endurance truck.
Many more startups, not just in the EV space but also in other green tech fields, will go under if their products don't live up to the hype. But at least now they have access to abundant funding, unlike a few years ago. Then, it was a buyers' market. Now, it's a sellers' market, and buyers are lining up, eager to take part in the energy transition. How long before the situation escalates into a bubble? That would depend on how many more Solyndras and A123 Systems there are out there.
By Irina Slav for Oilprice.com
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