The Role of Environmental Policies in Promoting Venture Capital Investments in Cleantech Companies

This paper provides insights on the role of environmental policies in promoting venture capital investments in companies involved in the development of clean technologies. Based on a supervised machine learning algorithm, we develop a fully replicable methodology to identify cleantech firms among a comprehensive database of invested companies by venture capital funds. We then analyse the relationship between the stringency level of environmental policies and venture capital investments in cleantech companies operating in 21 OECD countries. We explore whether policies have a differential effect in fostering institutional venture capital (IVC) and governmental venture capital (GVC) investments. Our findings indicate that IVC investments in cleantech are mainly driven by the level of environmental taxes and market pull mechanisms as feed-in tariffs and R&D subsidies, whereas GVC investment decisions are driven by a country’s commitment to reach environmental targets. Moreover, our results suggest that GVC funds are developed as an alternative incentive mechanism: when direct incentives applied by governments are less developed, the relevance of GVC investments increases, which suggests a substitution effect between the two forms of intervention.