Freedom to lead the change: the role of private investors in driving sustainable transition

Freedom to lead the change: the role of private investors in driving sustainable transition

Alexandre Garese, private investor who specialises in enabling environmentally and socially responsible innovation, writes about the role of individual investors in nurturing ground-breaking early-stage businesses.

Monopoly on taking risks

Leading with big statements and commitments, institutional players have played a key role in mobilising attention of public and private markets towards the impact of their investments. However, progress on sustainability that is targeted by most funds and financial institutions is inevitably incremental, since their actions are ultimately dictated by their raison d’etre: to consistently generate returns for shareholders or LPs. This is where private investors play a unique role as changemakers: their investment decisions are not restricted by structured policies in relation to return horizon, minimum check sizes and company maturity. In that way, private individuals are the only part of the investment world that can be entirely driven by conviction.

Betting on future winners

The likely drivers required to transition our economies are generally well-understood. On the other hand, when one looks at the more specific innovations that will be deployed to meet policymakers’ and business targets, there are striking parallels across each sector. Most roadmaps for sustainable transition rely on the emergence and implementation of frontier technologies, including in the areas of energy generation, storage and transportation, and carbon removal. It is far from certain which solutions will succeed and deliver the most impact. Getting there will require experimentation and risk-taking at the level of startups, with small teams of passionate visionaries pushing boundaries without a steep profitability potential.

Early-stage companies of this kind would usually fly under the radar of larger financial institutions and are unlikely to meet their investment criteria upon closer examination. They may be too nascent and untested, miss the minimum reporting standards, or be too small to consider. Without private investors that seek to do good, this gap may remain unmet and the rate at which we transition our economies may not be sufficient to avert catastrophic climate impacts.

Paving the way

Yet when it comes to the size of war chests and access to capital raising networks, private individuals are no match for institutions or leading Private Equity firms. Such comparison, I would argue, serves no purpose, because they play totally distinct and complementary roles in the investment process. The role of private investors and VCs is to provide seed or other initial rounds of funding to impact ventures, which can be used to prove the viability of business models to peers as well as bigger players. In this way, private investors become responsible for demonstrating that investment success can be aligned with a focus on ESG factors and sending a signal to funds that they want their money to do good.

A successfully incubated venture starts to achieve tangible impact once the investment case becomes evident and corporate actors take a stake, bringing not just access to capital, but also talent, synergies and routes to market to the table. I have certainly found this to be the case with my investment in ZeroAvia, which promises scalable manufacturing of hydrogen-powered airplanes for commercial use. Partnership with leading airlines, airports and manufacturers, such as British Airways, De Havilland and United Airlines, enables the piloting of green hydrogen technologies and brings the decarbonisation of a highly polluting industry closer. This is consistent with my other experiences of entering into joint ventures with bigger companies, such as TotalEnergies and Toyota. Partnerships between private and institutional investors can be quite harmonious in practice: in my case, both the big names and private investor Alexandre Garese bring their own perspectives, know-how and values that collectively serve to benefit the company and the ESG cause.

Overcoming limitations

Despite the public fascination with ESG, the reality of proof of concept for impact investments is by no means an easy process. One of my recent investments, a small German startup that measures rail wagon conditions to improve the railroad safety, has seen its work become a lot more topical overnight when a freight train incident in Ohio resulted in a leak of toxic chemicals. In the absence of a clear hockey stick path to valuation, however, its search for investors continues.

On a day-to-day basis, this is overcome by developing a network of similarly minded investors – this constitutes one of the key components of value that an investor brings to the table. Looking forward, there is ample space for new crowdfunding solutions, driven by smart blockchain contracts. This can unlock the pooling of funds from impact-oriented investors around the world who are looking to support early-stage innovations.

Attracting funding for impact ventures is made all the more challenging by the fact that ESG investing is typically heavily reliant on data. A Series A business in unlikely to be producing sustainability reports and conducting impact assessments. As a result, the common sense and intuition of an investor makes all the difference, having to make up for the gaps in information. When I invested in CloudNC, a precision manufacturing company, I saw its potential to make industrial processes more sustainable, but did not undertake formal measurement of this. The company has received backing form giants like Atomico, Lockheed Martin and Autodesk, and is now working alongside the UK Atomic Energy Authority to supply the fusion energy industry. I am proud that this will form a part of the Alexandre Garese family legacy.

To conclude, private investors play a critical role in the sustainable transition. We can support pioneering early stage businesses, getting them ready to raise funds as proof of concept is proved. Seeing my investments flourish, partnering with blue chip companies and helping meet todays’ environmental challenges is not only personally satisfying but, in the end, sees me backing successful businesses which will shape our future and deliver attractive returns.