November 1, 2021
How Funders Can Help Close the Climate Finance Gap

Perspectives from The Lemelson Foundation

In September 2021, The Lemelson Foundation and ANDE partnered to produce a new report called Climate Entrepreneurship in Developing Economies: Funder Perspectives on Approaches, Challenges, and Opportunities. In an exclusive interview following this publication,  Executive Director Rob Schneider, Program Officer Maggie Flanagan, and Communications Officer Pam Kahl share more insights and calls to action for other funders. As the world gathers for COP26, this is particularly important. 

We’ve seen a mismatch between climate funders and climate entrepreneurs, both in the scope of the work as well as the scale. What do you think contributes to that mismatch?

Maggie Flanagan (MF): I think that the biggest bias in climate financing is this top-down funding focus, specifically in the energy sector. I think larger companies and infrastructure projects ignore how dynamic the needs are, particularly in low- and middle-income countries, how energy is actually being used, how their economies are developing, and the need for sustainable technologies and services that enable a reduced future potential for emissions. And I think that there’s a great opportunity among local businesses to be more dynamic, but it’s also a very fragmented approach and one that might not necessarily be able to deliver at scale right away. And that presents challenges for the funders. So it’s essential that we look for models and find ways to support more demand-driven approaches where marginalized populations are dictating the need for different products, services, etc.

Rob Schneider (RS): One of the things I see is the rigidity of organizations when they develop their theory of change. You have some funders saying, “We fund X and Y, but we don’t fund A and B.” And even if companies or funds are solving for X and Y, maybe they developed their pitch based on where the money was five years ago, which was around A and B.

Related to that, particularly on the investor side, but also on the grantor and donor side, I find organizations, because of their thesis-driven approach, forget about the larger impact they are trying to achieve. While the impact was part of what created their theory of change, now that they’ve got that theory, they focus more on the short term outputs or outcomes, but not on the overall impact. And that includes impact investors. They know they want to have impact, but they don’t really think about what’s beyond just supporting the companies – whether it’s developing the ecosystem that will create more companies or whether it’s helping develop talent or partnering with others.

What’s been helpful for us as Lemelson is that we provide grants and investments. So we use both tools, and it forces us to keep our eyes open. So I would encourage investors to think about what’s the impact they’re really trying to achieve and whether there are alternative ways to reach that impact.

Pam Kahl (PK): Investors and funders are also still trying to figure out how they can have a real impact. There isn’t necessarily a clear roadmap when it comes to climate, so in that sense, it is still kind of a moving target.

How can funders address what feels like a moving target as they seek to establish a clear roadmap?

RS: At Lemelson, we fund organizations, not projects. Some organizations and investors don’t have that flexibility. We do have that flexibility, so one of the ways in which we do that is creating long term partnerships with the organizations we fund because we recognize that if you’re trying to solve any development problem, climate change included, it doesn’t happen in five years, it may not happen in 10 or 15. You’ve got to keep working at it. Now, that’s not to say you get to avoid creating intermediate milestones. We need to know we’re going down a path, but I think that’s one way that we think about it as funding organizations, not projects.

MF: This is particularly relevant in climate change because there is an immense sense of urgency to do something. And we feel that urgency, but we also are committed to invention, which is not a fast thing. And what we’ve learned about technology invention, international development, and sustainable development says that the quick wins usually aren’t really wins.

But as Rob said, different funders are best suited for different timeframes and I think as we’re highlighting the disconnect between funders and climate entrepreneurs, it’s really important to highlight that there’s a lot of work just for funders to do to understand where they sit on that spectrum, and understand each other better so that we can be better at complementing one another.

RS: We need all the pieces along the chain. You need somebody who’s going to put in the super risky capital. Some people are going to put in seed-stage and some people are developing the talent and understanding. And as Maggie was saying, allow organizations with flexibility to see where the gaps are and to be able to fill those gaps.

What kinds of stories and data and other evidence would be helpful in showing funders where they’re most needed?

RS: I think we need lots of stories –certainly success stories, and the various things companies needed to succeed and thrive. I also think there need to be some stories about failure.

I think it was in the early Obama administration when there was a ton of money put into clean energy, and then it all evaporated. A lot of investors got burned, so a lot of mainstream investors are not planning on investing in that space anymore. Now we see a resurgence in cleantech investing, but I think it bears looking back 10 years ago to see what went wrong so that we don’t do that again. I think there ought to be a decent postmortem on what went wrong in the clean energy space 10-15 years ago.

PK: Another point is that climate change is cross-cutting, so in thinking about the rigidity of certain funders, I think we also need stories, data, and evidence, that deliberately connect the dots between climate change and sanitation, or climate change and women’s health. That’s the opportunity to educate others on those connections.

Small businesses and entrepreneurs often get left out of some of these climate conversations. One thing that came up in the report was skepticism about whether for-profit models can truly create equitable change, that is not extractive, but regenerative. Where do you think small businesses can play a role in creating this type of equitable, regenerative change?

MF: I think entities led by founders that have lived experience in their issue area or have spent a lot of time at the consumer level are particularly effective at aligning user needs and revenue generation models. I think that the regenerative change can come with the support of policies and other enabling environment interventions that are even better at helping to align some of the consumer needs and the longer time frames for business operations. I think that there’s a role for both to be going on at the same time.

RS: I agree with that. I saw a webinar the other day that I thought was really good and they said, “Look, we need technology, we need policy, we need finance. And not everybody’s going to do every one of those things, but all three of them are critical.” So when you think about that, the policy is clearly a governmental angle, but another angle can be a civil society. They can push the government to do things. But if you look at the development of technology and finance, those are squarely in the realm of the private sector. The government has some role there; they have some finance and they’ve got the ability to spur technology development. So, I think that’s where government and private sector together are the ones that are going to solve this. Philanthropy is not going to solve climate change. In fact, investing is not going to solve this. These sectors can start solving it, but you need to engage the large players that have the ability to generate technology and finance it to scale.

PK: And if you think about for-profits having a multiplier effect in terms of job creation and local sustainability, those also matter in the whole equation.

What roles do invention and enabling ecosystems play in solving the climate crisis?

MF: The solution for climate change is not just one global solution. There are countless ways that this issue is manifesting in regional contexts, and we don’t just need inventions that are going to help populations around the world adapt today. We don’t just need interventions that are going to help the economies in these various places develop using more sustainable technologies that make their economies more sustainable and resilient in the future. We also need systems that enable the invention and commercialization of the resulting innovations across these regions, so they can reap all of the benefits from developing those solutions, whether they’re related to climate change or not.

How can funders better support climate entrepreneurship?

MF: The approaches to supporting small and growing businesses that have been documented in reports like Beyond the Pioneer are still highly relevant. Early-stage grants for companies are still relevant, but consider whether you can get local match funds, or technical assistance, or link to local follow-on investment, contributing to some of the market-building that also needs to take place. For us, it’s been very relevant to support locally-based organizations that support entrepreneurs through training, networks, and advocacy. ANDE’s report on Climate Entrepreneurship in Developing Economies highlights just how few of the world’s entrepreneur support organizations have the expertise and focused support that is relevant to climate change. We need more funding for these organizations and funding to integrate climate change expertise into existing organizations. These organizations become appropriate channels for making grant capital available to enterprises to take big risks when technology and markets still haven’t been proven. This funding, at an appropriate scale, is extremely hard to come by in low- and middle-income countries. To the extent possible, make investment capital available through local fund managers that are going to become integral to that ecosystem and incentivize collaboration amongst entities that could reduce some of the frictions that entrepreneurs experience trying to launch and scale.

RS: I agree. I also think funders need to be reminded that there is capital and talent in low- and middle-income countries. I think there’s skepticism that someone in India, or Kenya, or Uganda can actually invent something that is world class. There is technology and there is capital and the ability to deploy that capital in those countries. And, as Maggie has said, we need to cultivate those ecosystems. That’s what we need to cultivate or else we’re just going to be in this problem again in five years and 10 years and 50 years.

What positive trends are you seeing in the sector?

RS: I think the way we are addressing the pandemic has some signs of hope. Pulling the politics out of it, if you look at the creation of the vaccines, it built on 20 years of previous work, so that when it was needed, they deployed it pretty quickly. I think there is that hope that people recognize the importance of funding the ecosystem, of putting things in place before we need them so that can be solutions.

MF: I echo Rob, that increasingly I see the whole emphasis on local ecosystem development being relevant and we have to figure out how to partner with local organizations.

Another positive trend is this urgency around climate change. I do think that mitigation, adaptation and resilience are becoming mainstream nomenclature and there are increasing efforts to come up with common definitions and frameworks for analyzing what fits where.

I also feel like there is this lens in climate change of linking poverty alleviation with climate change and recognizing that the key to that is we have to be inclusive of marginalized populations. We can’t just do cleantech infrastructure projects. Climate change is way more complicated than that. And we’re at risk of hurting some of our other development goals if we don’t integrate, if we aren’t we’re breaking down the silos and making climate change part of our plans for health, and vice versa.