How Green Companies Attract Investment
The world is changing every day, and with it the way we do business. As environmental concerns due to the climate crisis become increasingly important, many companies have begun investing in green initiatives to make their operations more sustainable. These green businesses not only benefit the environment but can also be attractive investments for prospective investors looking to put their money into something meaningful.
Research has shown a growing demand for renewable energy stocks, investment funds, and other investments from environmentally conscious investors. According to a report by Morningstar, sustainable funds have witnessed an impressive surge in inflows over the past few years. From $5 billion in 2018, these funds raised nearly $50 billion by 2020 and surpassed that figure to reach almost $70 billion in 2021.
This massive upsurge has continued, in 2022 with $120 B in net new money in the first half of the year, despite the drip in the markets. With many investors saying they are looking for good green companies to invest in and financial advisors and discussing sustainable investment opportunities as part of investment advice, this trend is only expected to grow.
Furthermore, many large companies are now committing to making their operations more sustainable and eco-friendly, creating even more opportunities for green investments. These trends suggest that investing in environmentally friendly companies is becoming an attractive option for many investors looking to make a positive impact on the environment while also seeing a return on their investment.
If you are looking for something out, here’s a list of popular resources:
ESG & Climate Risk. What CFOs needs to know (2023).
Develop a Small Business Sustainability Plan
ESG incorporation is the most common type of green investment
By far the largest amount of green investment goes into companies that strive to work in a way that is economically beneficial but also embrace environmentally friendly business practices. This type of investing focuses on the long-term financial performance of a company and takes into account the impacts it can have on the planet.
For instance, investors who believe in sustainable packaging will likely look for companies that use recyclable materials and are committed to reducing their carbon footprint. Others may look for companies that integrate renewable energy sources, sustainable packaging and waste reduction efforts, eco-friendly manufacturing processes and other initiatives that can reduce their carbon emissions. What to know more about how to offset your company’s carbon? Our guide, Carbon Offset Program Guide for Business in 2023 will be a useful resource for you.
Many investors have favorable perspectives on ESG activities, actively investing in ESG funds and the best green stocks. For instance, interest in green funds has grown nearly fivefold since 2010 with assets rising to $17.1 trillion as of 2020. Investors looking for investments that make a positive environmental impact have a variety of options available to them, from renewable, green energy, pollution reduction and sustainable agriculture initiatives to carbon offset programs and waste management efforts.
Type of green investment vehicles for companies
Which asset classes are available to you will depend on yoru financial goals and what development stage your business is at.
Public equities
Green equities or investments involve buying stocks of companies that have made a commitment to sustainability, such as renewable energy producers, sustainable agriculture and clean technology companies.
Many investors choose to invest in ETFs (exchange-traded funds) or mutual funds that specialize in this type of investing. These funds typically exhibit lower risk (like traditional bonds) while still providing potential returns.
These actively managed mutual funds and ETFs that invest in stocks of companies with a commitment to sustainability. This type of funds seek out companies with strong, proven environmentally conscious business practices or ESG ratings. They are known by a range of names including sustainability funds, sustainable funds, green mutual funds or green funds, and ESG funds.
Morgan Stanley reports that sustainable investors are significantly investing in new green bonds or sustainability bonds and bond funds, accounting for 45% of their fixed income allocations. Fixed income investors buy green bonds sometimes referred to as climate bonds which are issued by governments, corporations and other entities to finance clean energy, sustainable transportation, and other environmentally friendly initiatives.
All of these green funds invest in publicly traded companies, listed on a stock exchange, that have a consistent track record of demonstrable sustainability or ESG performance. Some countries make is easier to list of the stock exchange than others, so while this might well be prohibitive for smaller companies, some creative options may be available here for ambitious entrepreneurs.
Private equity
Private equity green investments involve investors buying stakes in private companies that have a commitment to sustainability. This type of investing involves risk as their investment decisions involve companies with lower revenues and high earnings valuations but can offer higher returns as well.
To attract this type of capital you would need to demonstrate a clear long-term vision and strategy for achieving sustainable, socially responsible goals. Private equity involves larger investments in well-established companies, resulting in the acquisition of either a majority stake or full control over them. Private equity firms are driven by the potential to make substantial returns on their investments.
Venture capital
Venture capital green investments involve providing start-up companies with the funding they need to get off the ground. VCs typically invest in early-stage companies that have a commitment to sustainability and ethical business practices, as well as long-term potential for profits. These socially responsible portfolios are sometimes labeled impact investing.
To attract this type of capital you would need to impress investors with your vision, a detailed plan for success, and a track record of tangible results.
Angel investors
Angel investors are affluent people who invest in early-stage businesses for a share of the company’s assets or returns. Angel investors often look for businesses that have strong environmental and social values, so it is important to be able to demonstrate that your business is making an effort to make a positive impact on the environment and society.
To attract this type of capital you would need to demonstrate a well-rounded understanding of the market and industry, as well as a clear plan for making your business successful.
Grants
Grants are a form of investment that do not require repayment. They are typically provided by governments, philanthropic organizations and non-profits, with the goal of encouraging businesses to pursue projects that have positive environmental and social outcomes.
To attract this type of capital you would need to demonstrate your commitment to the cause and explain how your project will help to address environmental or social issues. You would also need to provide a clear plan for achieving success and a timeline for completion.
How can green companies attract investors?
Companies are able to attract sustainable investing by demonstrating their commitment to the environment through tangible initiatives.
Be transparent about your environmental policies and actively involve stakeholders in the decision-making process.
Clearly articulate and demonstrate a long-term vision for achieving sustainable, safety, and diversity goals in a sustainability plan (see our resource, Develop a Small Business Sustainability Plan for a useful guide).
Measure your environmental performance and set ambitious goals for improvement.
Invest in renewable energy sources like sola panels, eliminate fossil fuels and implement energy-saving technologies in the workplace.
Investing in ethical, socially responsible business practices and promoting eco-friendly operations. Human capital is an important part of a successful ESG strategy. Learn more about action you can take in our resource: 11 Ways to Create Belonging in the Workplace.
Highlight any awards, certifications or other recognitions your company has received for its efforts.
Ensure you have the right team in place to manage ESG commitments and deliver results.
Publish a Sustainability reports that incorporates the items above and shows investors how your company is working to embrace ESG.
Provide detailed financial data that outlines how incorporating green enhancements has or will benefit the company’s bottom line.
Invest in green marketing campaigns to help spread the word about your company’s commitment to sustainability.
Check out our resource, 21 Sustainable Business Practices at Work for more ideas on how to attract investors by greening up your organization.
Conclusion
Investing in a sustainable future is beneficial for both investors, businesses and future generations alike, as it helps to create an environment that is more socially responsible and economically prosperous. With the right strategies in place, green companies can position themselves for success and attract the capital they need to grow and flourish.
