Catalytic Capital for Climate Innovation in a Brave New World
Written by Constance de Wavrin, Founder & CEO of In|Flow
The role and mobilisation of catalytic capital for climate innovation has captured sustainability professionals’ imagination. In the space of a month, more events have focused on how to accelerate the flow of catalytic capital into small, innovative enterprises by indexing investor risk return appetite, liquidity profile and values.
Understanding the nature of capital required by MSMEs and the need to mobilise funds that display adequate investment risk profile combined with suitable time horizons has become highly topical. The reason why this is pertinent now can be attributed to the shrinking of international aid. The role that concessionary funding used to play in internationally blended finance structures must now increasingly be supplemented - if not altogether filled - by private investors.
Catalytic capital with a spine – whether funnelled through philanthropic foundations or HNWs – understands the upfront-risk-high-stakes characteristics of entrepreneurial ventures primarily in technological innovation. Ensuring this ballsy-yet-patient capital ignites true innovation where most needed assumes this capital is “collaborative”. A step-by-step approach must faithfully embrace every stage of development from seeding an idea through to execution and scale-up.
This infusion of private capital also makes up for the fact that SME climate tech entrepreneurs often outshine the pace of government-led policy development. The vulnerability of government policy to political cycles provides another reason for private capital to step up. We certainly should feel inspired by the fact that the pace of innovation and collaboration hasn’t let up despite the recent hostile political backdrop.
An EY x Acumen event at NYCW recognised that we need more philanthropic impact investors driving capital solving poverty and inequality. We asked what’s keeping investors from making those investments. We acknowledged that we must offer clarity around what returns can be expected and what impact can be achieved as a starting point. Yet it is truly a paradigm shift that is required. How do we rewire the economy and society to deliver on the triple bottom objective? By re-wiring corporate culture to include social purpose and adopting a platform risk approach, we can deliver market return, green and social impact as well as economic empowerment.
Unlocking US Donor-Advised- Funds (DAFs) and non-US equivalents access to catalytic capital was hotly debated at multiple #NYCW events: the WEF Schwab Foundation, the Regen Foundation and The Table Foundation all chose to focus on shifting donor mindset for climate innovation by tapping into the potentiality of DAFs. These Funds are presented as turnkey investment vehicles that allow grant-making and impact investing, creating opportunities for pooled, high-impact portfolios. They have emerged to allow multiple financing modalities from blended structures, co investing, de risking, funding credit guarantees, co raising, and financing carbon credit offsets (through pre-purchase)
Endowments and corporate balance sheet money typically move to the most impactful projects, for example, mainstreaming indigenous community-led nature-based solutions, for e.g. reforesting the Andes (women grow the seedlings) and water security projects. This leaves ample space for bespoke vehicles that drive catalytic capital – including in the form of recoverable grants – out into the system. Climate and regenerative tech entrepreneurs can then tap for capital access, fund and accelerate their innovations towards climate-positive solutions across in agriculture and regenerative farming, nature, energy, circularity, new materials, and first-of-a-kind (FOAK) technologies. The Table.vc noted that “DAFs represent a $260B+ pool of capital: unlocking even a fraction for climate could be transformative”.
Back in London, at the London Impact Investor Network event, private investors shared their take on the potentiality of private capital as a key driver of a just transition. It was emphasised that impact requires a long investment timeframe while embracing a complex set of variables: over 120 social and environmental indicators are referenced in the UNDP and that, for this reason, creating systematic change cannot solely stand on government subsidies. Better Society Capital exemplifies how fulfilling the role of asset manager and asset owner at once by investing in its own capital empowers their social impact funds to encompass a broad range of outcomes, influencing public policy, advocacy, and scaling socially impactful investments. Schroder’s Blue Orchard published a promising research piece - using data since 2010 to date - evidencing not only that alpha delivered by impact investee companies is less correlated to listed equities in recessionary markets but also substantiates the idea that impact materiality is a driver of alpha per se.
This week, a GIIN London x TONIIC x Impact Europe collaboration also chose to frame catalytic capital as a transformative tool for impact, emphasising the importance of collaboration in catalytic capital deployment and co-investment structures wherein investors come together to build collaborative investment structures that amplify catalytic capital’s impact. As complex social and environmental challenges require collective action, co-investment alliances are emerging as critical vehicles to coinvest, share risk, align values, and unlock funding for bold, impact-first solutions. Rethinking how capital can be pooled and deployed to drive systems change where urgently needed and actively being deployed.
Repeatedly, and on both sides of the Atlantic, the importance of shifting the capital raise narrative came up in conversations: The need to curate narratives that connect wealth to impact outcomes as well as the relevance of behavioural psychology on giving and making investments. From landing “easy wins” through epic narratives that connect donors to measurable outcomes through to showcasing incremental change to mobilise capital at scale, there is consensus around a gap for effective storytelling:
How do we tap into storytelling to ignite the drive to find opportunities to collaborate? The sustainable finance industry has clearly been inspired by the upsurge of systems thinking. Showcasing low income BIPOC, indigenous owned projects for inspiration in innovation can help create an ecosystem where funders and donors are willing to share and are inspired to give more systematically. There is also an opportunity to demystify the do-good character of impact and demonstrate that doing good does not systematically hamper returns.
Despite all concerted efforts, the asset class is nascent and vulnerable. Impact x return remains scatter-plotted all over. Costs of borrowing remain tightly linked to inflation and high interest rates can be problematic in this space. We therefore need to manage private capital’s expectation around returns, volume and impact. To impact investment professionals, we issue these 3 recommendations:
1. Place greater emphasis on connecting philanthropy and private wealth to where their money goes through bespoke dialogue and curated storytelling.
2. Enable issuer/enterprise-investor engagement and stewardship throughout the SME journey and tailor funding modalities at every stage of development.
3. Ensure impact funds that are well-packaged and adequately sold to foster trust in positive impact outcomes and protect the credibility of the asset class.
Understanding how to operationalise principles into effective financial instruments to uplift local communities and advance a just transition has been a cornerstone of the Impact Investment Exchange’s pioneering impact work. As one of the most place-based and locally minded of global movements, the Orange Movement provides a platform to shepherd Orange SEAL Certified enterprises, curate a deal pipeline through its Impact Partners platform and offer an IIX Values transparency blueprint to systemise the connection of local businesses to global capital markets.