Finance has a crucial role to play in helping solve the world’s most pressing challenges, with universities perfectly placed to lead the way in developing new ways of doing business
The world faces an ever more complex set of challenges, starting with the recovery from the COVID-19 pandemic, but also climate change, economic development, as well as growing inequality, among others. Solving these challenges will require a massive number of innovative projects, but the world’s markets are not equipped to finance all of this work on their own.
Climate change is a good example. Agreements made at the 2021 United Nations Climate Change Conference have set firm targets to phase down coal usage, cut methane emissions and end deforestation, but there is no single solution the world can pursue. While the US, alongside the world’s wealthiest nations, is trying to balance cuts to emissions with removing CO2 from the atmosphere, poorer nations are still struggling to slow their emissions in line with net-zero commitments. Achieving net zero will require completely different approaches in Europe and Africa.
Some of the solutions will be highly profitable and have no shortage of financial support. Other projects, particularly those most beneficial to poorer countries, may not be as attractive to investors due to lengthy research or limited profitability. How do we make sure finance is accessible to both? This question is at the heart of several major projects being undertaken at Imperial College Business School.
Impact-driven venture capital
The “valley of death” between scientific results and a viable product is well known, as noted by my colleague Professor Ramana Nanda. Scientific breakthroughs in the lab need to be turned into technology that works in the real world, which can then be commercialised and expanded to a broader customer base.
Venture capitalists like to focus on mature technology with proven markets, but investment is also needed during the delicate, early stages of research. This is a barrier deep tech startups, meaning businesses that explore the fundamental sciences to develop new solutions to problems, often encounter. These technologies are typically far from the level of readiness that can entice typical venture investors, who see them as too risky or immature.
With their role in supporting early-stage research, universities can help overcome this barrier by mobilising and working alongside philanthropic venture capital. This approach requires creating a framework for investors to take a chance on early research projects with the expectation that, even if they don’t achieve a financial return, they will have supported work of value to the broader scientific community, and improved our understanding of, and opportunities in, one area.
Research into areas that are critical to achieving COP26’s goals, such as energy storage, carbon sequestration and alternative fuels, is within this scope. Helping this work get off the ground is a key goal of the Institute for Deep Tech Entrepreneurship at Imperial College Business School.
Pushing future finance
But the role of universities in accelerating the transition towards a more sustainable future needs to go beyond mobilising philanthropic capital to support deep tech. Universities can drive living labs to find new ways to develop and leverage financial tools that are critical for development and sustainability. Moreover, business schools can be at the driving edge of such experimentation.
Bringing affordable and accessible financial products to those who don’t have access to them can play a key role in eliminating poverty. But, by their nature, these products are often not lucrative, and it can be difficult for major lenders to prioritise their development.
Research from my Business School colleagues Dr Enrico Biffis and Dr Erik Chavez and the Centre for Environmental Policy combining climate data, machine learning and product development led to the creation of a parametric insurance product for farmers in Tanzania. Instead of paying out on calculated losses, parametric insurance pays customers when specific conditions are met, such as an earthquake higher than a particular threshold on the Richter scale. These policies can be easy for customers to understand and easy for insurers to assess but developing one that is financially sustainable has prevented the idea from being successful.
The novel approach developed at Imperial bridged the gap between research and business to create a product that is viable in the market. The climate-based parameters, combined with a loan, was implemented by a major reinsurer and subsequently extended credit to many farmers who had never had access to finance. Combining the work of researchers and business can help get these projects past their early hurdles.
This kind of thinking is not just limited to insurance. My colleague Professor Tarun Ramadorai has written about how technology can reduce the cost of basic financial services to make small-scale investing and borrowing affordable to more people. As people were forced to come to grips with technology during the COVID-19 pandemic, we’re now in a window in which newfound trust and familiarity in digital systems can encourage people to engage with new, more affordable financial products.
The solutions to all the world’s problems are out there, but to make sure the answers are not lost in the churn we need to make sure people have access to the finance they need to get their work underway. Universities have a critical role to place in both helping research find the funding it needs and developing tools for greater financial inclusion.
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