Scaling up Environmental Entrepreneurship in Emerging Economies – Framing the Discussion
Editor’s Note: Led by contributors from NextBillion’s Managing Partner, New Ventures, this the first in a series of articles showcasing the acheivements of environmental entrepreneurs with insights from impact investing leaders on how to further scale sustainable enterprises.
If we are to collectively tackle climate change, lift millions of people out of poverty, and solve our energy, population and other resource constraints over the coming decades, the private sector increasingly holds the answers. Entrepreneurs, particularly in fast-growing developing markets, are already providing solutions to environmental and social issues by building and growing businesses that conserve resources and improve livelihoods. By finding new ways to cleanly provide energy or water, for example, entrepreneurs are creating profitable companies that benefit both people and the resources they depend upon. And entrepreneurs who lead small and medium sized enterprises are often the best equipped to understand the myriad resource and social problems they encounter in their communities, and find solutions to solve them.
Although environmental entrepreneurship continues to hold great promise for sustainable development, it also faces great challenges from an overall market perspective: a need for a steady supply of profitable and scalable companies, demand for these companies from investors ready to deploy capital, and solid transactional infrastructure to connect this supply and demand. These challenges have been evident in the sector since investors began to seriously look at environmental companies in emerging markets as potential investments over a decade ago.
To find some answers to these challenges, we interviewed a number of pioneers in environmental entrepreneurship development (several of whom were instrumental in founding the organization where we currently work, New Ventures) to glean insights into how the sector has grown so far, and what needs to happen to increase the prevalence and success of environmental entrepreneurs in emerging markets in coming decades. We highlighted the work of New Ventures specifically, given our professional roles and New Ventures’ long-standing experience in the market. However, we also wanted to feature the insights of other individuals from partner organizations who have been leading important work in this space.
A decade of growing environmental entrepreneurship
The notion that private enterprises can have positive environmental impacts while harnessing a profit is no longer radical. However, it was more so in the late 1990’s, when the clean tech concept was just entering the marketplace, and the idea of environmentally-beneficial companies was mostly untested, especially for investors and funds. Even the philanthropic sector hadn’t yet been employing venture philanthropy as a concept.
When founding E+Co in the late 1990s, a pioneer in the sector that funds clean energy companies in emerging markets, Christine Eibs Singer wrote, “(Because) this was long before…conversations included terms such as ‘blended value,’ ‘impact investing,’ ‘scale,’ ‘public-private partnerships,’ and ‘triple bottom line,’ there was a lot of explaining to do and a lot of pushback.” Not even the conservation groups were entirely on board a decade ago. Some players, like Eco Enterprises Fund and Verde Ventures, were just beginning to consider the idea of supporting business ventures to promote conservation and livelihoods, and their initial investments were focused squarely on protecting biodiversity.
The New Ventures Matchmaker Approach
It was in this context that the World Resources Institute decided to launch New Ventures, a center for environmental enterprise focused on emerging markets. New Ventures was created to find promising environmental investment deals and bring these deals to investors, thus proving that there was a pipeline of profitable environmental companies in emerging markets ready to grow. To test the concept, New Ventures held an initial investor forum in Brazil in 2002, showcasing companies from around Latin America, which was a big success. From then on, “New Ventures has played a seminal role, along with some of these early funds, like E+Co, in accelerating deals and bringing investors early on in the game,” said Luiz Ros, currently director of Enterprise for the Majority at the Inter-American Development Bank and a former New Ventures director.
“When New Ventures emerged on the scene, one of its radical new ideas was to not to ‘green’ existing companies, but to actually identify and select companies that placed environmental considerations at the core of their business model,” said Aram Kang, Global Network Officer at New Ventures. New Ventures began identifying leading environmental businesses, providing them with mentoring and acceleration services, and then presenting them to investors. “The idea was to provide companies that were ripe to grow with the necessary technical assistance services and then serve them up on a silver platter to investors,” explained Virginia Barreiro, a former New Ventures director and Global Profit specialist at the IFC. By creating a solid record of investment deals and successes, New Ventures aimed to prove that the investing in environmental companies was sound.
New Ventures was also one of the first intermediaries to tap into investment capital in-country. The program built up the concept of environmental investing in the six countries where it worked – Brazil, China, Colombia, India, Indonesia and Mexico – and convened investors to see the best of these companies at investor forums each year. In addition, these localized networks helped build valuable local networks, “New Ventures helped with the creation of a celebration of environmental entrepreneurship with in-country investor forums by building a group of people who are knowledgeable and excited about investing in environmental enterprises,” said Liz Cook, vice president of Development at the World Resources Institute.
What we have accomplished?
As we enter 2012, it is difficult to imagine a time when investing into environmental entrepreneurs was considered alternative and radical. “I’m not sure it’s a sector yet, but it is definitely an identifiable community or market, and I’ve seen real financial success with companies,” said Matt Arnold, head of sustainability at JP Morgan.
Since its inception in 1999, New Ventures has helped to facilitate over $230 million in investment into the companies it has worked with, and two of its portfolio companies have held IPOs in the past two years; each company has been valued at several hundred million dollars. Funds specifically devoted to investing in environmental companies within emerging markets have launched. In 2005, for example, Strauss Investment Fund, a traditional fund in Brazil and an early participant in the New Ventures Investor Forums, launched VC III, a US$15 million venture capital fund devoted solely to investing in environmental enterprises. And although environmental investing in emerging markets is not yet mainstream, many mainstream players are beginning to take notice and get engaged with the concept.
“Ten years ago, no banks were interested in ecotourism for example,” said Jennifer Morris, who runs Verde Ventures, a private investment fund that makes loans to small enterprises in areas of high biodiversity importance. “It was pretty challenging to work with any commercial local or international banks. That’s changed a bit – we’ve co-invested with banks that we couldn’t have worked with back then.” Even some multilateral and bilateral donors, like IFC and OPIC are involved in impact investing and working to incorporate investing in sustainable companies to further green economic growth efforts.
An important catalyst for the growth of environmental investing will be the creation of a clear set of impact measurement standards, so investors interested in creating environmental benefits can measure the success of their investments. The Impact Reporting Investing Standards (IRIS) developed by the Global Impact Investing Network (GIIN), has been working to provide a common language for reporting social and environmental performance, including indicators for energy, sustainable agriculture, and water. This type of infrastructure is crucial to the continued development both environmental and social investment.
Surfing the wave of impact investing: Where does environmental entrepreneurship fit?
As environmental investing has grown, more recently so has the buzz and community around “impact investing.” While investments in social and environmental companies have officially existed since the Quakers, and gained a lot of momentum during the 1960s, the term “impact investing” was actually coined less than five years ago – in 2007 by the Rockefeller Foundation.
The initial definition was investing with “environmental and social benefits.” Although the environmental and social missions that many organizations were striving for seem to coalesce in this definition of impact investing, there often seems to be a focus within the growing impact investing industry on social impacts.
But don’t social and environmental benefits go hand in hand? Protection of resources is often dependent on the economic improvement of surrounding communities, and economic growth will continue to depend on the availability of resources such as clean water and air. Funds like Verde Ventures already actively incorporate both social and environmental considerations into its investment philosophy. “Environmental and social can’t be decoupled; impact investing should include environment, and there’s no way you can talk about one without the other,” said Morris of CI.
But according to a recent JP Morgan report, 58 percent of the institutional respondents in the impact investing sector identified themselves as having a primarily “social” impact objective, 34 percent identified as both “social and environmental,” and only 8 percent defined themselves as purely “environmental.”
Why don’t more investors and intermediaries consider themselves to be both? “It’s really about the focus on market-based solutions, whether it’s to protect the environment or serve the poor,” says Luis Ros. “The difference in scale doesn’t prevent us from being creative, looking at the bottlenecks and having an integrated approach to both sides of impact investing.”
For instance, early environmental institutions are often criticized by focusing soley on biodiversity conservation. But many of these institutions have recently incorporated a social component into their mission statements. Conservation International (CI) is one of these institutions. “The whole aspect of giving people economic incentives for environmental conservation is at the core of what CI does – you can’t just create park silos with armed guards – this isn’t sustainable over the long term. You have to make sure the community is totally bought in and that there are social and economic benefits,” comments Jennifer Morris, who also is vice president and managing director of CI.
The areas of overlap and common challenges faced by the environmental and social investment communities provide a clear impetus for collaboration on development of pipeline, supply of capital and creation of infrastructure.
How do we grow from here?
Although environmental investing and entrepreneurship in emerging markets has undergone a transformation from a nascent concept to a burgeoning market over the past decade, clear challenges to greater growth remain. How do institutions collectively move from a retail approach – each institution supporting companies one by one – to a wholesale approach – truly developing an ecosystem of support for environmental SMEs in emerging economies? In other words, how do we get to scale so that these enterprises collectively are having real positive environmental impacts at a large scale?
We still need to examine the bottom line and address models that demonstrate savings, increase profits, and increase market access, but many believe that the case has been made for whether “environmental” companies have economic viability. “The conversation is not whether or not these companies are viable, as was the case ten years ago. We’ve seen that they generate profits, can grow, and are a good business investment. Now the question is: how can we multiply them?” Ros said.
Investment into environmental and social businesses is growing – many investors are pouring capital into emerging markets, and GDP growth rates of NV countries continue to grow. However, for environmental entrepreneurship to get to scale, there must be three conditions fulfilled, as in all other markets: there must be robust demand from investors for a pipeline of environmental enterprises, a promising supply of enterprises ready for investment, and solid transactional infrastructure to enable these investments.
In order to highlight the development of these three necessary conditions, NextBillion will be featuring a series of articles over the next twelve months, in addition to this introductory piece, to stimulate discussion around environmental entrepreneurship, with a focus on SMEs and emerging markets. Several authors will post monthly articles about growing the market conditions for environmental SMEs around these three main topics: supply (of companies), demand (with regards to investment capital) and infrastructure (i.e. exchange platforms and metrics).
The goals of the series are three-fold:
- To further the overall BoP sector conversation around environmental entrepreneurship (specifically how environmental SMEs can sell products and services that have positive environmental outcomes in emerging markets and BoP communities);
- To provide proof that environmental SMEs can have positive environmental and social impacts while making profit; and,
- To structure a comprehensive discussion about where the weaknesses are in the sector and how to most effectively address them.
Actors like New Ventures, Verde Ventures, E+Co, and a growing number of other institutions have been involved over the past decade in the development of environmental SMEs in emerging markets. However, much more needs to be done than just what these institutions can accomplish over the coming decades to bring bring environmental and social entrepreneurship to a scale that results in widespread positive impacts on the ground – for poverty alleviation and natural resource conservation.