Moving towards inclusive climate tech investment

With the dramatic slowdown in ESG investing in the past year, venture capital (VC) funds are increasingly important in providing solutions for tackling the climate crisis.

Climate tech projects currently dominate global VC investment, accounting for approximately 70% of total VC investment in 2023. But there is a stark lack of diversity within the climate tech investment ecosystem which is stunting progress towards an inclusive green economy and a more equitable future.

To make progress, SEC Newgate, in partnership with Dream.org, recently convened a cross-disciplinary group of investors and climate professionals at our London HQ to foster insightful dialogues and actionable strategies aimed at enhancing inclusivity and bolstering support for diverse entrepreneurs within the climate tech ecosystem. Dream.org, a non-profit that works at the intersection of racial justice and economic and environmental movements, imagines a world beyond poverty, pollution and prisons and is working to uplift minority-owned green businesses and create a better future for all.  

Ensuring Black, Brown and minority ethnic talent have a seat at the table is critical in creating a truly equitable green economy. Yet, whilst minority groups are some of the most impacted by climate change, they are the least likely to be a part of the conversation. Whilst research shows that more diverse teams are outperforming homogenous teams - with companies in the top quartile for ethnic diversity a third more likely to have industry-leading profitability - founders of colour have received less than 1% of capital invested in climate tech startups. In 2022, VC for Black entrepreneurs plummeted 45%, the largest year-on-year decrease seen over the past decade. The data highlights one thing – a lack of opportunity, not talent.

Unfortunately, the phrase ‘it’s who you know, not what you know’ rings alarmingly true for minority entrepreneurs and many find their lack of industry connections and access to mentorship to be the highest hurdle preventing them from receiving funding recommendations to VC firms. If they don’t have the platform, no one will see them, no matter how great their pitch is. So, it’s about putting the right talent in front of the right decision makers and forming connections with those who will invest in your shared values.

One of the primary strategies to enhance inclusivity is to dismantle the systemic barriers that hinder capital access for underrepresented entrepreneurs. This requires a concerted effort from policy makers, investors, and industry leaders to address implicit biases and implement equitable funding mechanisms.  One of the stepping stones toward a more equitable future is catalytic capital. This risk-tolerant, concessionary form of investment recognises the importance of social and environmental outcomes alongside financial returns. By deploying catalytic capital strategically, VC funds can play a transformative role in supporting underrepresented entrepreneurs in the climate tech space who often face limited access to traditional sources of funding due to structural inequalities.

We need to invest in different models to produce better, more equitable outcomes. But capital is only one piece of the puzzle. Human connection and the social capital that comes from mentorships and embedded networks are essential to cultivating a thriving environment for diverse entrepreneurs. The reality is investors are more likely to invest in like-minded individuals who are in their social networks.  By building supportive networks and tailored mentorship programs, we can empower underrepresented groups to become confident entrepreneurs and present them with opportunities that may otherwise not arise.

Doubling down on an inclusive recovery, leveraging our collective efforts and adopting a common-goal mindset is the only way we’ll effectively scale and deliver the necessary climate solutions to hit our global targets on time. Here are some of our key takeaways from the roundtable:

• People who are worthy of investment do not always have the most visibility or access. We must globally champion social capital to develop portfolios that will get capital to flow where it should go, but normally doesn't.  Only once the value of the diversity of our connections and quality of networks is recognised may we begin to drive meaningful progress in diversity, equity and inclusivity initiatives and mobilise the investment needed to achieve the UN Sustainable Development Goals.

• Doing good is not enough because the financial industry is focused on Return on Investment (ROI) without incorporating social goals. We need catalytic funding which values the social return of investment, to fund programs that will help us create the communities we want to be in.

• Investors need to expand their social networks to help them inform their perceived sense of risk. Doing so will help to fill in the knowledge gaps and educate investors on what is and is not considered ‘risky’ and support them in prioritising diverse climate tech founders.

By engaging in thought-provoking conversations, like one held between Dream.org and SEC Newgate UK, and diving into pressing issues surrounding global capital access, we are inspiring change and, little by little, enabling greater understanding of the intersectionality of climate change and social justice. These conversations have an immense power to inspire action and to encourage the flow of capital to Black and Brown startups whilst advocating for positive structural changes that will make climate tech an inclusive space for all.