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Sustainable venture finance examined

Attendees of a workshop focused on venture capital investing in environmental and social sustainability-orientated projects have agreed to establish a networking portal and a common research agenda. The workshop, held in Fontainebleau, France, addressed the question of whether and when it is profitable to invest in venture capital funds and entrepreneurial ventures focused on sustainability.

The French business school INSEAD and the United Nations Environment Programme Finance Initiatives hosted the event, which was attended by 100 representatives including LPs, VCs, entrepreneurs, policy makers and academics.

Jacob Malthouse, of UNEP Finance Initiatives, noted reaction from attendees broadly settled on two themes. First, the models and resources used by most VCs are not adapted to incorporate the different cost benefit structure sustainable development firms might offer, hence there is a value loss as sustainable development orientated firms try to communicate to traditionally focused VC firms. Second, sustainable development firms have an opportunity to express the competitive edge sustainable development offers with greater rigour. Specifically a number of VCs noted the dearth of sustainable development (SD) firms available to invest in makes it more difficult to target these firms for investment under a sustainability oriented fund or as part of an existing fund. No satisfactory conclusion was reached, however, since the SD firms turned the mirror on the VCs pointing out VC interest in this area was equally hard to identify. An online portal and annual sustainable venture finance event may address this problem.

The event concluded that there is huge growth potential for funds investing in sustainability-focused companies, spanning sectors such as biotech, energy, healthcare, information systems, tourism and education. However, there exists a knowledge gap between investors, venture capitalists and the sustainable development community. VCs need to develop ways of incorporating sustainability into their decision-making process and considering the opportunities and risks of environmental and social issues. Similarly, entrepreneurs need to improve the way they market themselves to investors, focusing less on environmental benefits and more on profitability.

It was also felt that systems for quantifying and expressing the real value of SD need to be co-developed and adopted by governments, VCs and entrepreneurs.

Other issues considered include the social and regulatory conditions that could increase the return on investment for socially-responsible venture investors. There are currently few policies supporting sustainable entrepreneurship and sustainable finance in VC firms. However, participants of the workshop have agreed to create working groups to begin researching possible incentives and what’s being done elsewhere to this end, with a view to submitting a proposal to the EU. As a result of the meeting work on an online database and networking portal for sustainable venture finance was also initiated.

Alan Gillespie, CEO of CDC Capital Partners, gave the keynote address about the challenge of providing sustainability-orientated enterprise capital to emerging markets while seeking competitive returns in the current market. INSEAD and UNEP FI will host the second Sustainable Venture Finance event in June next year.