Niche level investment challenges for European Green Deal financing in Europe: lessons from and for the agri-food climate transition

The paper situates the European Green Deal (EGD) within the broader rise of Green New Deal approaches aimed at drastic, time-sensitive reductions in greenhouse gas emissions. Using sustainability transition theory and the Multi-level Perspective (MLP), the authors argue that radical climate innovations typically emerge in protected niches and must bridge to incumbent regimes. Financing is a critical determinant of whether niche innovations traverse valleys of death and scale. Yet, sustainable innovations are often treated differently by investors due to pro-environmental and pro-social objectives and longer development horizons. The research addresses the question: How are niche level financing dynamics likely to impact the efficacy of the European Green Deal? Adopting an innovation management perspective and focusing on the European agri-food sector (Dutch agri-tech start-ups), the study aims to illuminate niche-level factors and dynamics that could influence policy effectiveness.

The literature review draws on sustainability transitions and MLP, emphasizing niche–regime–landscape interactions and pathways such as fit-and-conform versus stretch-and-transform. Prior work underscores financing as pivotal for niche breakthroughs, with valleys of death during commercialization and scaling. Green start-ups face distinctive financing challenges: investors often lack the technical knowledge to assess novel climate innovations (raising transaction costs), venture capital typically seeks short-term returns incompatible with long-term sustainable innovation, and many green start-ups have limited financial market literacy. The mission-oriented nature of climate challenges differs from earlier missions (e.g., Apollo), requiring protracted technological and institutional change. Sector-specific insights (e.g., renewable energy) show financing constraints related to risk levels, transaction size, knowledge gaps, and missing industry networks. State Investment Banks (SIBs) can improve financing through coordination, de-risking, capital aggregation, and education. However, the specific niche-level financing dynamics under EGD-style policies remain underexplored, especially in agri-food.

The study employs a qualitative, inductive design suited to an understudied, exploratory question focused on how and why niche-level financing under EGD-like conditions might operate. Data were collected in 2016–2018 through interviews with entrepreneurs attempting to launch agri-food climate innovations and with financial experts, including unique access to 17 experts experienced in financing agri-food climate innovations in the Netherlands. Secondary sources complemented primary data. The case selection is the Dutch agri-tech start-up sector—both theoretically typical (significant transition needs, financing as a known barrier) and somewhat extreme/leading (advanced agri-food innovation context). Analysis produced first-order codes and aggregated second-order themes (project matching, poor venture supply, information flows/metrics, socio-ethical risks, agri-food innovation characteristics, agri-food sector norms), consistent with thematic coding practices that compare demand and supply-side perspectives across ideation to commercialization.

- Project matching problems: Difficulties in connecting suitable innovators and investors; mismatches between project size and investor requirements; timing misalignments across innovation and investment cycles. - Poor venture supply: Too few ventures meet combined thresholds of climate impact and financial viability; many business plans lack clients, robust value propositions, or managerial professionalism; investors often require professional management, which raises costs. - Information flows and metrics: Lack of clarity on what constitutes a green innovation; challenges in measuring and verifying environmental impact; reliance on external experts and impact committees increases transaction costs and reduces ROI. - Socio-ethical risks: Public perception, regulatory uncertainty, and ethical issues (e.g., gene editing, data privacy, animal welfare) can significantly influence adoption and commercial success; potential value/objective asymmetries emerge when investors prioritize financial ROI over climate impact. - Agri-food innovation characteristics: Long development times, capital intensity, technology acceptance risks, and system-level impacts (supply chains, markets) complicate due diligence and extend payback horizons. - Agri-food sector norms: Sectoral culture (risk aversion, collaboration patterns, European vs. Anglo-Saxon management models) shapes investor types and practices, affecting financing dynamics. Cross-cutting insight: These issues manifest as multiple asymmetries between niche innovators and financiers—classic information asymmetries and less common objective and value asymmetries—which incur remediation costs that can dampen the efficacy of EGD-style de-risking policies.

The findings explain that niche-level financing frictions—rooted in multiple asymmetries—can limit the EGD’s ability to mobilize private capital at scale. While specialist investors already adopt stretch-and-transform practices (external expert boards, assurance, narrowed investment focus), mainstream finance remains aligned with shorter-term, ROI-primacy norms. Remedies to asymmetries (expert due diligence, impact assurance, managerial professionalization) add costs, further weakening return profiles and deterring broader market participation. The study suggests coexistence of multiple financial regimes: a dominant mainstream regime and a smaller, niche-oriented specialist regime closer to climate innovators. Behavioural motives (e.g., warm glow, satisficing) partially explain existing niche financing but are unlikely to scale across mainstream investors. The EGD faces structural and epistemic challenges: epistemic insufficiency (distributed, incomplete knowledge) among both investors and innovators, and unresolved value/objective conflicts between financial and climate goals. To enhance efficacy, the discussion points to partnership-based approaches (co-investment with state investment banks, leveraging incumbents’ non-financial resources, spreading specialist practices) to narrow niche–regime gaps via coordinated learning, de-risking, and capability building.

The paper contributes a niche-level innovation management perspective to debates on the European Green Deal by identifying concrete financing frictions—project matching, weak venture supply, metric and information deficits, socio-ethical risks, sectoral norms, and agri-food-specific innovation characteristics—that are under-accounted for in macro-level policy designs. It conceptualizes these as multiple asymmetries (information, objective, value) that impose additional costs and inhibit mainstream investor participation. Recommendations include: leveraging partnership approaches that combine financial and non-financial resources of incumbents; expanding roles for state investment banks in co-investment, coordination, and education; improving venture supply quality (managerial capacity, market readiness); and developing clearer, credible impact metrics and assurance mechanisms. Future research should test these dynamics across sectors and countries, incorporate formal policy evaluation perspectives, and assess evolving technology cost curves’ implications for financing frictions.

- Disciplinary scope: The innovation management lens may omit relevant factors; formal policy evaluation approaches are needed for more specific prescriptions. - Sectoral context: Agri-food is risk-averse and slow to adopt, potentially presenting greater barriers than other sectors; however, the Dutch context represents a best-case innovation financing environment, so barriers identified may be more pronounced elsewhere. - Temporal scope: Data collected in 2016–2018; while some technology costs (e.g., renewables) have fallen, core asymmetries and information issues likely persist. - Generalizability: Findings most applicable to upstream innovation financing; dynamics may differ in sectors focused on deployment of mature technologies. - Data availability: Interview datasets are not publicly available due to confidentiality constraints.