From INSEAD Knowledge
A new INSEAD-European Business Summit report on climate change has highlighted a surge in green activities by U.S. entrepreneurs, backed by venture capital (VC). Until 2005, the amount of VC funds invested in clean technologies such as solar and wind power had been running almost neck and neck in the U.S. and Europe. But then there was a sudden surge of VC interest in the U.S. in 2005, the report says, which resulted in U.S. firms raising $4.5 billion in VC funds to invest in "clean" technology the following year, while the EU raised $1.5 billion.
"In Europe we have a very strong regulatory push in terms of a driver to promote eco-innovations or clean tech," says Renato Orsato, co-author of the report with Benjamin Warr. (Both are senior research fellows at INSEAD.) "In America, you rely much more on market pull, so this also (has an impact) on the size of investments in venture capital. So although Europe is actually the leader in patents in clean tech, America leads the way in terms of venture capital investment."
Orsato says VC investments in clean tech "mushroomed" in 2005, due in part to the ratification of the Kyoto treaty, the impact of Hurricane Katrina in New Orleans and the environmental crusade of former U.S. Vice President Al Gore.
"So we have in America $4.5 billion in 2007 invested in clean tech, higher than the EU (at) about $1.5 (billion). It's still a small quantity when you compare with the total amount of venture capital, but it serves as a good indicator of the market belief that there are opportunities to be tapped into."
"The key issue for Europe is to understand that U.S. venture capital in clean tech is three times larger (than in Europe)," Warr adds. "This is despite the fact that Europe leads regarding patents and technologies in clean energies such as wind, solar, combined heat and power and the like."
"The worrying thing for Europe is that the U.S. can move very rapidly. Now the issue is with three times as much investment money in the clean tech energy VC segment, will the US simply buy the patents, buy the technology, buy the brains and make the most of it, as it's done in the past with other technologies?" he adds.
"The key question for Europe is to say how can we maximize ... investments in clean energy technologies and that involves the creation of a culture of investment in these types of funds. What happens in the U.S. and pretty much everywhere is that you get a virtuous cycle: Someone who invests in that domain makes a profit from that domain and then reinvests further."
"We have to generate a culture for that in Europe," Warr says. "We have to generate clusters of eco-innovation, regions and centers where people can network (and) where people with technology ideas can meet financing partners and meet businesses who are able to take products from demonstration to deployment and to full commercial maturity."
The report points out that mainstream VC firms normally try to assess environmental issues as risks in terms of their investments. However, clean-tech VCs regard these issues as potentially adding value, besides the risk reduction factor. Referring to the tipping point of clean-tech VC activity in 2005-2006, the report says the change in attitudes led to more "green pragmatism" from governments, as well as businesses.
As for the regulatory framework, the EU's is seen as "more demanding" than that in the U.S., the authors say, adding that this makes one wonder why clean-tech VC investments in the U.S. are substantially higher than in the EU. After all, the U.S. has not ratified the Kyoto protocol, and it's unclear at this stage whether the next U.S. president will seek to enforce regulations on carbon emissions.
While in terms of regulation, the EU has managed to get the buy-in of the 27 member states, environmental initiatives in the U.S. are generally dealt with by individual states rather than federal government.
"That's a considerable reality," Warr says, "in the sense that Europe has been able to identify and develop the political will to set targets for carbon constraints -- 20 percent reduction by 2020 in CO2 emissions, 20 percent of energy supplies by renewable fuels and 20 percent improvement in energy efficiency. Now some might say these are not ambitious, that from a scientific perspective we should ask for greater carbon constraints. But Europe has managed to do this whereas the U.S. has taken a different perspective."
But while Europe and the U.S. may be taking different paths, Warr says carbon constraints "will remain the major issue of the century." There may be other hot topics such as water, food and energy security, he says, but the issue of carbon constraints will shape global business over the next 100 years.
"And if you're not working one step ahead," he says, "and receiving the competitive advantage that you can achieve through investments in eco-innovations, then you're working (with) an old business model and you'll be out-competed."