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Editor’s Note: The following post was first published in Voice of the Planet, Stuart Hart’s blog, where you will find more insights on sustainable development with the BoP.

The financial crisis has produced a growing disgust with companies and financial institutions motivated only by greed and short term profits. Talk of sustainability is in the air and everywhere there are references to a “new” capitalism–a more inclusive, green, stakeholder-focus approach to business. Clean technology venturing is de rigeur. Social investing has also burst on to the scene, with the promise of capital for those businesses dedicated to the cause of poverty alleviation and social inclusion.

As someone who has been working in this space for better than twenty years, this is indeed exciting to finally see. But wait a minute. Houston, we have a problem: Despite all the hand-waving and rhetoric, we are still not at the tipping point. Why? Because for many entrepreneurs dedicated to incubating new sustainable technologies and business models serving the base of the pyramid, there is still a dearth of investment capital. In short, there is a“doughnut hole” in the field of sustainable finance.

On one side of the hole in the doughnut, there is the emerging domain of Impact Investing. This new space is made up of a hodge-podge of social investors, micro-financiers, and community reinvestment specialists. What they tend to have in common is a focus on “doing well by doing good.” Think Acumen Fund, E + Co, and IGNIA. Not that this is a bad thing. On the contrary, it is an exceedingly important development. But the central tendency for the Impact Investor is to place social impact over financial return.

Many impact investors are focused on providing finance to the “social entrepreneur”–the bootstrapping player from the developing world who is looking to grow a local enterprise, creating new opportunities for livelihoods and service to the underserved. Think Grassroots Business Fund, Ashoka, Root Capitaland New Ventures. Most expect, as a matter of course, a longer payback and below-market returns.

Others, like Muhammad Yunus, have advocated a form of enterprise called “social business” where investors simply get their money back, with no capital gain at all. Few, if any, in the impact investing space are interested in investing in “Western” (or Northern) technologists or entrepreneurs seeking market returns from new, clean technologies or business models in the developing world.

On the other side of the hole in the doughnut, there is the emerging Clean Tech Venturing space. Billions of dollars have flowed into these emerging technologies over the past decade. Think Kleiner Perkins, Technology Partners, and Clean Edge. Most investors in this new space are venture capitalists seeking market returns from deals that follow the same rules as conventional VC investments, such as Big Wind projects, battery technology, and large scale solar applications. Most want to see contracts with large OEMs, or at least $1 million in revenue, prior to investing and want to cash out within 3-5 years. Few in this space are interested in the developing world as a potential early market since it probably takes longer to develop, delaying the ultimate “liquidity event.”

And now for the doughnut hole: For Western (or Northern) entrepreneurs focused on incubating next-generation clean technologies, starting in the developing world at the base of the income pyramid, there is still a dearth of capital. You are caught between a rock and a hard place. I know, because I have some first-hand experience with this. For the past four years, I’ve been involved with a start-up company, The Water Initiative (TWI). TWI is focused on creating commercially viable, household scale (point-of-use) solutions to drinking water challenges in the developing world, starting in Mexico.

We had little problem securing first round financing from Angels to launch the business development process in Mexico starting 2008. After two years of hard work in co-creating a viable business concept, along with extensive new technology development in point-of-use water treatment, we were ready to begin scaling the business in 2010. However, the doughnut hole prevented us from securing critical second round financing until well into 2011.

Founder Kevin McGovern pitched our case to dozens of Impact Investors and Venture Capitalists in the 2009-2011 time frame. The story that emerged was clear: We did not fit the “social investing” pattern for Impact Investors nor did we fit the time frame or payout expectations for the traditional VCs. We fell between the cracks. In the end, we secured second round financing from an off-shore financier.

So despite the recent upsurge in attention to “social,” “impact,” and “clean tech” investing, there is still a structural gap – a doughnut hole – in sustainable finance. But this also means that there is a huge opportunity for visionary financiers to invent the new investment categories and asset classes needed to fill this gap. There is also an opportunity for corporate leaders to “plant the flag” by investing in the technologies and business models of tomorrow.

So far, emerging market financiers and corporations (e.g. the Indians and Chinese) seem more inclined to innovate the financing mechanisms needed to fund the sustainable enterprises of tomorrow–those that take a bit longer to incubate, but have the potential to transform the world and produce incalculable growth and profits in the long run.

The question is: Will the US, Western Europe, and Japan cede this emerging space to financiers and corporate leaders from the emerging economies thereby missing out on the opportunity of the century: the chance to participate in the creation of a truly sustainable future?

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