The increased awareness about the impact of human activities on the environment has pushed new types of investors to include social and green clauses in their investment agreements. Sustainable investing has recently seen a spike all around the world, accelerated by the threats climate change poses to financial stability. This comes as no surprise, considering climate factors’ increasing importance in the social and economic spheres. Such topics have become more and more pressing to society, therefore urging a switch in paradigm. The switch has involved different parties, from single individuals to corporations, and governments, resulting in the deployment of bigger chunks of capital toward sustainable projects.
Often responsible for revolutionizing the financial space, venture capitalists have shaped the world over the past few decades. Among the different forms of financing, VC has proved to be the most suitable one when it comes to fostering sustainable investments, due to its characteristics. Firstly, VCs often share the same timings as green projects with long lock-in periods that match the need for start-ups to secure investment for an extended formation period. Secondly, VC funds provide start-ups with technical knowledge, industry relationships, and management skills. All these factors play a key role, especially in such a developing market, in enabling sustainable companies to commercialize cutting-edge science, make it more appealing to stakeholders, and achieve the innovation needed to realize their long-term solutions, advocating environmental and social benefits.
Types of Sustainable Investment
The new wave of sustainable investments focuses on recognizing Environmental, Social, and Governance (ESG) factors as economic factors, in the attempt to reshape markets and provide tangible support to the environment. CSR (corporate social responsibility) is being replaced by ESG (environmental, social, and governance) factors that include data on emissions, diversity, board independence, and supply chain information. According to a recent study by Aspire: “Venture capitals that apply these requirements base their investment decisions in start-ups not on profit, ownership, scalability, or expansion, but rather on considering environmental, societal, and governance-related (ESG) factors, all impacting the corporate footprint”. Depending on the importance of the specific factor the investor focuses on most when analyzing funding decisions, a study from Aspire has distinguished different types of green investing.
The ESG type of investing refers to a practice in which the financial outcome is still the main objective for a company, but it comes with the integration of ESG factors used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. E stands for how efficiently the company manages its resources and cares for the environment. S stands for how well it values and respects clients, workers, and lower-level employees. Finally, G pertains to the governance structure, and how well-run the company is. This first type of investing combines standard due diligence procedures with analysis aimed at assessing how and to which degree the company benefits both society and the environment.
Socially Responsible Investing
Socially Responsible Investing (SRI) is a type of investing that pushes a bit further the concepts introduced by the ESG. Specifically, one of its main characteristics is to meticulously sift through different types of investments to select them based on pre-defined ethical benchmarks. This type of investor, stresses the importance of investing in companies that focus on respecting sustainable goals as well as contributing to making society more environmentally conscious.
Impact or thematic investing is a type of investing that focuses on investments through which companies realize a positive impact on the world. This specific type of investor is a subset of the SRI spectrum. Its main difference lies in the fact that these companies look for specific intentional outcome orientation, translating into the constant attempt to provide benefits to marginalized groups and push for innovations aiming at creating sustainable solutions for a more equal society. Stepping over the simplistic distinction between positive and negative companies, Impact investing looks for companies capable of yielding returns through missions or objectives that put the planet first.
A closer look at the numbers
Sustainable investments have drawn a lot of attention in recent times. More and more startups are channeling their efforts toward more sustainable goals to attract investors that comply with the ESG type of investing. In Europe, according to a recent report from Dealroom, investment in the green sector surpassed $8bn last year, and it’s currently the continent’s fastest-growing startup vertical. Moreover, in the first three quarters of 2021 alone, sustainability VCs’ investment in climate-related startups accounted to record heights of approximately $31 billion, 30% higher than in 2020. Despite the heterogeneity of the sustainable industry, the sector that has attracted the higher amounts of money is the EV (electric vehicles), thanks to its disruptive implications for infrastructures, mobility, and industrial technologies. According to the 2020 Global Sustainable Investment Review, a biannual report published by the Global Sustainable Investment Alliance (GSIA), the total sustainable investing assets in the five major global markets (Europe, U.S., Canada, Japan, and Australasia) amounted to USD$ 35.3 trillion at the start of 2020, a considerable 55% jump from 2016.
Virtuous Examples in the Netherlands
Historical pioneer of green revolutions, the Netherlands it’s the motherland of many Venture Capitals that focus on sustainable investments. Here are a few worth mentioning, according to the 2022 Berlin Ecosummit:
One of Europe’s most important and active VCs, in both direct and fund investments. DOEN’s portfolio includes We Share Solar, Bleeve, Black Bear, Taxi Electric, and Qurrent.
Ticket Size: 225K – 550K
The most innovative utility in the Netherlands, works on the transformation to smart green utility. In July 2015, announced Eneco Innovation & Ventures, a new €100M corporate VC fund based in Rotterdam, including in their portfolio companies such as Quby, Peeeks, Lichtblick, energy analytics startup Onzo, virtual power plant operator Next Kraftwerke, heating system online retailer and installer Thermondo and EV smart charging enabler Greenflux.
Ticket Size:1M- 4.2M
An Amsterdam-based smart green VC founded in 2007 invests in technology companies that are in the early growth stage and have a sustainable impact on the future use of energy. In 2019, the VC announced the first closing of SET Fund III at €75M. and has now €100M assets under management (AUM).
Ticket Size: 1.25M- 5M
A Rotterdam-based cleantech VC entirely focuses on early-stage startups. Their portfolio includes Greenclouds and Dutch Rainmaker which converts air to water by combining wind, water, and cooling technology.
Ticket Size: 1.3M – 18M
The VC of Dutch’s oil and gas corporate Shell, is particularly active in renewable energy and corporate venturing with the ambition to transition toward a new energy business that can partner with startups wanting to go global and scale strongly.
Ticket Size: 330K – 26M
What does the future look like?
Despite the promising premises and edifying examples, most financial companies are still massively investing in the fossil fuel sector, highlighting all the difficulties that the road ahead holds.
The Business and Sustainable Development Commission, however, has estimated that market opportunities in green sectors such as food and agriculture, cities, energy, and health, amount to $12 trillion.
This projection creates massive scope for VC funds to invest in companies that aims at tackling climate change through clean and innovative technologies.
By investing in projects that are complying with the SDGs, venture capitalists can increase profitability and contribute to the planet’s sustainability, helping to end poverty, preserving the environment, and improving living conditions, globally.
Sustainable VC is a new form of investment that combines for the first time profitability with factors such as ethics, governance, gender dynamics, philanthropy, and a commitment to the restoration and improvement of the planet.
In representing a way of moving forward, it also represents a benchmark through which to look at the past. Unlike previous industrial revolutions, where ethics and balance were neglected in favor of technology and progress, sustainable investing stresses the importance of creating a conscious evolution both in means and outcomes.
A business model that asks itself hard questions before taking each new step forward, paving the way for an agreement between profit and sustainability, could represent the paradigm shift the world desperately needs at this point.