This text was first published in the Financial Times here
Even in the midst of this year’s coronavirus pandemic, Bernhard Stöckl still saw the potential for attracting investors to his renewable energy venture.
The chief executive of Austrian renewable energy company Photovoltaik Leitinger started crowdfunding for his “bifacial” solar panel fence, which collects sun energy from two sides and produces up to 10 per cent more energy than its conventional counterparts. “We expected renewables to gain momentum during this crisis — and our investors agreed,” he says.
The transition to clean energy is dominated by big companies and large-scale public projects aimed at delivering low-carbon power at scale. Yet many individual citizens are keen to do their part in achieving climate targets by backing and installing small-scale renewable kit.
Crowdfunding can get green energy projects off the ground and democratise the energy transition. At the same time, these platforms function differently from traditional investments and carry different types of risks for retail investors.
To finance their solar fence, Mr Stöckl and his business partner Robert Leitinger crowdfunded on the Austrian platform Green Rocket. Within two weeks they collected more than €500,000 from 462 investors. Green Rocket is part of one of Austria’s biggest crowdfunding platforms, Rockets Holding, which helps raise funds for a range of start-ups and real estate ventures. Founded in 2013, Green Rocket has since raised a total of €21m for 82 projects which have a focus on sustainability.
Users of the platform invest a modest average sum of €1,300 per project and can choose between lending or taking equity stakes in ventures. Lending investors are offered a fixed annual return of 5-6.5 per cent.
Until recently, crowdfunding was largely seen as a novel alternative to traditional bank loans or venture capital backing.
“I have given countless talks on how crowdfunding is not a replacement or competition to banks, but a complementary form of project financing,” says Wolfgang Deutschmann, Green Rocket’s chief executive. Most of the platform’s projects are based in Austria, where bank loans with low interest rates are easily available.
Photovoltaik Leitinger has also made use of a loan but opted for crowdfunding to cover the 20-30 per cent equity share commonly required as collateral. “Founders like the idea of not being dependent on professional investors who might have their own ideas,” says Mr Deutschmann. “The crowd diversifies interests and can also act as brand ambassador.”
In many parts of the world, entrepreneurs promoting environmentally-friendly ventures cannot easily secure traditional bank finance at all. A growing number of small and medium-sized green energy projects in emerging markets are backed exclusively by crowdfunding.
Bettervest in Germany has been offering “impact investing” for a total of 93 green energy projects since 2012. In the past, half of them were based in Germany, but today 80 per cent of these projects are based in emerging markets. They are selected on the basis of their CO2 savings and whether they contribute to the UN’s Sustainable Development Goals.
Investors can pick projects ranging from solar micro-grids in India to sustainable stoves in Zambia and earn up to 7 per cent in returns. “The goal is to make projects self-sufficient in the long run and to set an example for other entrepreneurs,” says Marilyn Heib, co-founder of Bettervest.
So retail investors as well as larger institutional asset managers can do their bit in saving the climate while enjoying high returns. But there is a catch — the unavoidable rate of failure among new projects.
“Risk analysis in crowdfunding projects is weak,” says Ulf Moslener, professor of sustainable energy finance at Frankfurt School of Finance. “Investors should diversify investments and check on the due diligence process of selecting projects.”
Prof Moslener argues that a crowdfunding platform’s biggest asset is its own reputation and that “it is lost after a couple of failed projects”.
Both Green Rocket and Bettervest — which typically take 10 per cent commission for revenues raised on their platforms — openly state the risk of total investment loss on their sites. Ten out of 93 Bettervest projects and up to 15 per cent of 82 Green Rocket projects have failed. The risk is exacerbated by the common practice of issuing subordinated loans in Germany and Austria, which means crowd investors are paid last in case of bankruptcy.
To counter that, both Bettervest and Green Rocket have gone through a complicated process of offering bonds rather than more risky subordinated loans. In most other European countries, this is already common practice.
A new EU crowdfunding regulation aims to help harmonise practice across platforms and open up Europe’s regionally fragmented markets to more outside competition — an ambition that could help both entrepreneurs and early-stage investors.
The reforms could provide new impetus for small-scale investment in green energy start-ups, which accounts for less than 4 per cent of total crowd investments in Germany, according to estimates from the country’s trade lobby, Bundesverband Crowdfunding.
By increasing competition among platforms and projects for investors’ attention, trust and money, this could tempt more environmentally-concerned citizens to put their money where their hearts are — and help them mitigate climate change.