It’s good to be green….but what’s it worth?
September 26, 2023
I’m sure you will have seen the news that last week the Prime Minister announced plans to change HM Government’s approach to Net Zero, including the ban on new petrol and diesel cars being delayed to 2035.
Environmental sustainability and investment are very closely interlinked with one another. A recent briefing paper published by the UN Environment Programme, for example, highlights a “$275trn investment opportunity” that would be presented by transitioning to net-zero by 2050 along the 1.5 ⁰C trajectory laid out in the Paris Climate Accord.
However, while significant investment is needed in order to reach net zero, difficulties in the funding market have also impacted environmentally impactful companies. CTVC, for example, report HERE that venture capital funding flowing into climate technology companies fell by around 40% in the first of 2023 compared to the same period in 2022.
CTVC’s data demonstrates that the first half of 2023 is characterised by variety across deal stages. The total value of growth funding, for example, fell by 64% with deal count down by 43%.
On the other hand, seed funding grew by 23% with deal count up by 34% in the same period. Institutional investors are also increasingly acknowledging and investing based on ESG principles.
While this news is decidedly mixed, HSBC has recently announced that it will allocate $1bn to support early stage businesses involved in innovative climate technology research and KPMG argues that “capital flows into ESG funds are accelerating and asset managers are under increasing pressure to integrate ESG considerations into their investment approaches”.
There are a range of things that we have to carefully evaluate with regards to green or environmentally conscious and sustainable businesses.
And because businesses focused on the issue of the environment and renewable energy are often at the cutting edge of new technologies, they are often IP and research focused. I discussed our balanced scorecard approach and the challenges of uncovering IP at length last week, so I won’t retread the same ground , but it does provide a solution if the company is not yet trading but pregnant with IP.
Our approach also relies on comprehensive market research and industry analysis. This allows us to identify, articulate and then prove that there is potential value that is not immediately apparent from the financial valuation. If the industry in which a company we are valuing is projected to experience notable growth this could represent a significant opportunity, which should carry additional value. Market research and industry analysis is always incorporated into all of our valuation exercises and informs whether we elect to enhance or impair the mathematical valuation of the company. When it comes to environmentally focused businesses the issue of the financial impact of emerging regulations (and dare I say it – taxes) around Net Zero always looms large.
Understanding the use case is crucial to getting valuations right, whether it is for an upcoming funding round, transfer of shares between founders or an employee share option scheme (or indeed any other purpose), the specific factors need to be considered.
