Sophie Flak
Member of the Executive Board
Managing Partner - ESG and Digital Director
Zoé Fabian
Sustainable tech is a hot sector in Europe thanks to the momentum created by the continent's entrepreneurs, consumers, and regulators rallying to meet ESG requirements. Sophie Flak and Zoe Fabian suggest that investors should continue to respect rigorous investment criteria as they scan the market for opportunities.
Look before you leap
Thanks to a confluence of disparate factors, European entrepreneurs are currently leading the way in sustainable technology. In fact, the sector is currently attracting such high valuations that it justifies a word of caution to any less experienced investors looking to jump into a hot market.
Sustainable tech is a young but broad investment category, covering all sorts of digital solutions designed to address the many aspects of ESG high on the corporate and political agenda, ranging from climate change and environmental protection to increasingly responsible corporate and consumer behavior.
Europe has emerged as the cradle of this exciting new sector for three main reasons. First, there is a new generation of motivated and experienced entrepreneurs with a sharp eye on the opportunities. Second, there is a groundswell of demand from both consumers and also regulators. And third, the current “polycrisis” of pandemic, war, and climate change is acting as a strident wake-up call, almost as if the planet itself were trying to force us, in spite of ourselves, to become more sustainable in our behavior patterns.
The vibrant state of the European market is well illustrated by the fact that the region boasts two of the world’s top five locations of sustainable tech finance: Berlin and London. However, despite the buzz around the sector, the rush of early-stage funds into the sector has been pushing valuations for young and often untested companies very high. There’s an obvious danger here that savvy investors need to be aware of, and which should prompt them to establish and respect rigorous criteria before jumping into the fray. In such an immature and still fragmented market, there is still a lot of healthy competition between different companies offering competing solutions to address a similar problem, as in the case of carbon accounting software, example.
As a result, what ranks at the top of any investor’s list is the need to truly understand the sector, ideally even as users. Experience is key here. Newcomers to sustainability investing may not have acquired the knowledge over time to identify which trends are likely to last, nor have the scientific and technical background needed to identify genuine sustainability solutions from “greenwashing” gimmickry, or short-term exploitation of regulatory loopholes.
With sustainable technology still such a young investment category, it’s essential for any investor to do their homework. Nothing can replace the deep sector work required to get to know the entrepreneurs early, build a relationship, and really understand their business model, effectively future-proofing the investment as far as possible. It’s a similar constraint for any technology investor. Anyone can be fortunate enough to invest once early in a complex industry, but without a strong, hands-on grasp of what the business really entails, they will not be a useful companion on the entrepreneur’s longer journey, failing to understand what the next strategic step is and why it’s important.
Sustainable technology is still in its infancy, and for many of the larger tech funds, the target companies are still too small to commit to without infringing their own investment criteria. However, such constraints need not rule out taking an active interest in these smaller companies by acting as a client. Any investment fund with a sizeable collection of portfolio companies should be investigating how the emerging sustainable tech pioneers can actually be serving its own needs, thereby gaining first-hand knowledge of what is out there and even helping to influence the roadmap of those young companies.
They may still be nascent, but ultimately, the best of this new wave of European sustainability tech entrepreneurs will emerge as global leaders in a sector that will itself prove of crucial importance to the future of the planet.
Picking those winners could be the most significant investment decision each of us will ever make.
