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There has been lots of talk about net zero in recent years. Yet what is it, exactly, and how might it affect different investments? In particular, how could technology companies be affected – in particular, high-potential startups in the sector (“scale ups”)? In this article, our team at Bure Valley Group offer some reflections. We hope this content is helpful. To find out more about our EIS and other investment opportunities in our exclusive investor network, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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What is net zero?
Net zero refers to a balance between greenhouse gas emissions (e.g. from a company) and how much is removed from the atmosphere. Net zero is achieved when the latter exceeds the former. It has been upheld as a popular course for individuals, businesses and governments because it does not require them to simply cease energy usage (e.g. petrol-powered vehicles), which is likely not realistic.
It is important to distinguish between net zero and becoming carbon neutral, as the two terms are frequently misunderstood. Although both hold the idea of offsetting greenhouse emissions, the latter usually is often less prescriptive about how progress should be measured/reported and adopts a wider offsetting definition. However, net zero typically refers to all greenhouse gasses such as methane (CH4), nitrous oxide (N2O) and other hydrofluorocarbons. Net zero, however, focuses more on carbon emissions.
The UK government has increasingly concentrated on net zero in recent years, with a current target of achieving net zero greenhouse gas emissions by 2050 for the whole country. Under the strategy, all sectors are to be “decarbonised” to try and prevent global warming rising by 1.5°C above pre-industrial levels.
How net zero could impact UK tech scaleups
A scaleup is a specific type of company at a distinct phase of its lifecycle – i.e. tech businesses which has already achieved a lot of growth and funding (e.g. one or two rounds) and it now ready to take things to the “next level”. According to the OECD, a “high-growth” company is defined as having 20% or more in either employment (or turnover) year-on-year, for at least two years, with a minimum employee count of 10. This is often the stage where companies grow quickest and most significantly, and so are of particular interest to many investors. Yet this is also the point where big problems can arise if the right support, regulations and conditions are not in place. Net zero, for instance, could be a help or a hindrance to scaleups, depending on the government’s strategy and investor perceptions.
One of the biggest challenges for small companies to achieve net zero is a limited budget. Put bluntly, there are usually more pressing matters for owners to focus on in the early days – e.g. establishing profitability, building a strong team and generating returns for shareholders. Tech companies also comprise a relatively small proportion of global emissions (about 4%) due to their focus on software (less intensive than, say, oil extraction). However, societal pressure is building for tech companies to join the world in the move to net zero. In 2019, just 16% of the global economy had a net zero commitment yet by 2021, the figure had risen to almost 70%. Tech scaleups in the UK and elsewhere cannot ignore the matter even if they wanted to.
The challenge for these businesses is that 80% – 100% of their emissions typically fall outside of their direct control, lying largely within the supply chain (e.g. mining of parts for mobile phones). Carbon removal guidance can also be unclear. The good news, however, is that the UK’s ongoing commitment to net zero is likely, in time, to help make the necessary steps clearer for tech scaleups. Indeed, the drive towards a “greener” future is even creating opportunities for UK scaleups to innovate and thrive. In 2021, for instance, Tech Nation – the UK’s leading growth platform for tech scaleups – revealed that 34 UK scaleups had been accepted in the “Net Zero 3.0” government-backed programme. In further good news for the UK’s goal to “level up” across regions, around 51% of these companies were located outside of London – with many based in Wales, Northern Ireland, Scotland, the North and the East of England.
The UK also held first place amongst countries in Europe for climate tech companies and investment. In total, over 4,400 climate tech startups and scaleups are thought to exist in the UK – with more created every month. 249 climate tech rounds raised $2.6bn in total in 2021 (a 63% increase on the previous year) and most appear to be working in the energy sector. With the UK currently facing a spike in energy prices and cost of living crisis, the government is likely to want these companies to thrive to help generate more energy independence – along with moving the nation towards its net zero commitments.
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