Developing Innovative Blended Finance Models to Accelerate Climate Tech Investment

Client

Innovate UK (IUK)

Challenge

The UK faces a critical challenge in scaling private finance and accelerating capital flow into climate tech businesses. Despite a large pool of global capital actively seeking opportunities in competitive return-generating green investments, funding has slowed due to a complex interplay of uncertainty around investment returns, real and perceived risk, and information asymmetry.

Carbon Limiting Technologies (CLT) was engaged to develop innovative blended finance models that could rebalance risk and significantly accelerate capital flow to cleantech ventures. The research needed to identify funding gaps across climate tech and deep tech verticals, particularly in hardware scale-up and first-of-a-kind (FOAK) demonstrations, and design targeted blended finance products to address these gaps.

Solution

CLT, in partnership with Project X and Herbert Smith Freehills, implemented a comprehensive four-phase research methodology.

In Phase 0, the team established alignment with IUK’s objectives through workshops, identifying data sources and analytical approaches through a Rapid Evidence Assessment framework. They developed an initial stakeholder engagement plan, leveraging CLT’s extensive networks across government, cleantech, and finance sectors.

Phase 1 involved detailed analysis of funding requirements and flows across 27 verticals (20 climate tech and 7 deep tech). The team mapped UK funding flows by vertical, supply chain position, and funding stage, identifying specific market failures and finance gaps. Through stakeholder engagement, including expert interviews and working groups, they assessed the UK’s strategic advantages and global opportunities. This resulted in the prioritisation of five verticals for deeper analysis based on criteria including emissions reduction potential, market size, strategic advantage, and vertical maturity.

Currently in Phase 2, CLT is conducting more detailed analysis of scale-up funding gaps across the five prioritised verticals. The team has enhanced their stakeholder database for design and validation purposes and established expert working groups for each prioritised vertical. They are documenting a comprehensive database of blended finance mechanisms relevant to the UK market, with 8-10 deep-dive case studies of mechanisms likely to be of interest to IUK.

The research involves analysing investment risk and market failures through detailed data analysis, stakeholder interviews, and vertical working group discussions. Reference innovators at different stages are being mapped to identify typical funding needs at each development stage, mapping different risk perceptions for each identified funding need. The team is developing a capital risk framework covering the ‘model startup’ lifecycle to understand the impact of introducing finance mechanisms at critical growth stages.

This groundwork will enable the generation of a long list of potential blended finance solutions, matching priority funding gaps with appropriate mechanisms. The design of these solutions considers factors such as market failure mitigation, risk de-risking strategies, leverage potential, cost minimisation, incentive structures, and sustainability.

Outcome

While the project is still ongoing, Phase 1 has already delivered significant outcomes:

• A comprehensive mapping of funding flows, needs, and gaps across 27 climate and deep tech verticals
• Identification and profiling of specific market failures and finance gaps
• Selection of five priority funding challenges based on rigorous assessment criteria
• Formation of expert working groups to inform and validate findings

As Phase 2 progresses, CLT is developing a prioritised shortlist of 4-8 blended finance options with outline design specifications. These will be refined in Phase 3 through testing with the investor community and enhanced with detailed product designs. The final phase will deliver implementation plans, inputs for strategic and economic cases for spending proposals, and dissemination of findings through webinars and dedicated workshops.

The ultimate goal is to develop innovative blended finance products that will catalyse private investment in climate tech, addressing key funding gaps while providing attractive risk-adjusted returns for commercial investors, thereby accelerating the UK’s progress toward its Net Zero goals.