Moray Wright, CEO, discusses how institutional investors have a great opportunity to support their ESG initiatives by investing in the univeristy spin-out asset class. The orginial article appeared in Investment Week.

As Davos wraps up for another year, the buzzword has undeniably been “environment”.

Numerous companies signed up to a new framework, enabling them to report their corporate metrics on topics such as the environment in line with the UN’s sustainability goals.

Prior to Davos, BlackRock’s Larry Fink published his open letter highlighting an “inextricable link” between purpose and profit, and how this would impact BlackRock’s investment strategy in the future, moving environmental, social and governance (ESG) investing firmly into the mainstream. 

However, ensuring investments have a true impact on the global challenges facing the world today can be a significant challenge for institutional investors.

Investment ‘greenwashing’ is a real issue, with fund managers struggling to separate a company’s true ESG standing from marketing strategies designed to make it appear more aligned with ESG objectives.

The ‘greenwashing’ risk is far more prevalent with larger, more established businesses, especially given the lack of a standard reporting framework.

Therefore, for institutional investors who genuinely want to generate a step change in the required impact returns, as well as potentially the financial returns, must be willing to take on a higher degree of risk by looking at earlier stage businesses. 

Spinning into spin-outs

For instance, one asset class that consistently produces world-changing technologies is university spin-outs. This is also a neglected asset class in terms of later stage funding, which means institutional investors can take advantage of relatively low valuations as well as accessing a broad range of sectors with global impact.

For example, the UK is a global leader in quantum research, with national centres of excellence and quantum hubs in Oxford, Glasgow, York, and Birmingham targeting developments in communications, sensors, security, and chemistry.

Over the past year, there have been several breakthroughs from teams around the world, with quantum now genuinely on the cusp of becoming a commercial reality.

This leap in computing power would fundamentally change the way that we process data, supercharging the likes of drug research and development and designing clean energy solutions.

An example of the potential for quantum computing to solve significant environmental challenges concerns the Haber-Bosch process, which is used to make fertiliser and uses roughly 2%-3% of the world’s total energy output.

Tiny anaerobic bacteria in the roots of plants performs this same process every day at very low energy cost, using a specific molecule called nitrogenase, and it is widely believed that a quantum computer could work out the process that bacteria use at an atomic level.

This could then be translated into a new chemical process to replace Haber-Bosch, saving the world at least 1.5% of its total energy use.

This was once merely a fanciful theory. In the early 2000s, Microsoft calculated it would take contemporary quantum computers a theoretical period of 24 billion years to calculate the energy levels of ferredoxin, which plants use in photosynthesis.

Quantum computing has evolved rapidly to the point where this could be a reality within a decade, the same algorithm now needing to run for just an hour on a quantum machine of “a few hundred qubits”.

Drug development

Another example of quantum potential is in drug development. Today, drug development is done through expensive, relatively low-yield trial-and-error which can take more than 10 years.

Quantum computing is expected to reduce the time it takes to explore unique chemical compositions and molecular simulations, with the potential for dramatic progress in drug research.

There is a plethora of research emerging from university spin-outs, producing financial and meaningful impact returns. The University of Cambridge has spun out 15 companies that are today valued at more than $1bn.

Bramble Energy, a spin-out from University College London, has developed a low-cost hydrogen fuel cell architecture which can be used in multiple applications and scale to gigawatt production.

Oxford PV, a spinout from Oxford University, has developed a perovskite-based solar cell that has achieved an independently certified world record efficiency of 28%. 

While the steps made at Davos are positive, there is still a long way to go and no universal way in which to integrate ESG into investment strategies.

UBS revealed in its latest report on climate change that the $600bn currently invested in “climate finance” is less than a fifth of the sum needed to decarbonise the world’s energy supply.

To quicken the pace of change required to address the challenges we are facing, more investment needs to be channelled into the cutting-edge technologies being commercialised by the university spin-out asset class.

Institutional investors have a great opportunity to support their ESG initiatives by investing in these technologies, becoming part of the next leap rather than the next small step in technology advancement, while also taking advantage of the lack of scale up capital to seize and value opportunity.