An Expert Workshop On Sustainability Oriented Venture Capital And Entrepreneurship

Description
Brief description around an expert workshop on sustainability oriented venture capital and entrepreneurship.

Sustainable Venture Finance
An Expert Workshop on Sustainability Oriented
Venture Capital and Entrepreneurship June 7 – 8 2002
Workshop Report

Organised By

With the Support of

2

Sustainable Venture Finance
An Expert Workshop on Sustainability Oriented
Venture Capital and Entrepreneurship

Workshop Report

Editors: Anastasia O’Rourke and Jacob Malthouse

November 2002
Copyright 2002 by UNEP Finance Initiatives and INSEAD.
All rights reserved.

Acknowledgements
We would like to thank all the speakers, session managers, rapporteurs and
participants for their important contributions to the UNEP FI and INSEAD Expert
Workshop on Sustainable Venture Finance. We are also grateful to our keynote
speaker and sponsor Dr. Alan Gillespie of CDC Capital Partners and as well to
H. Landis Gabel of INSEAD for his support and introduction. Thank you as well to
the INDEVOR student club of INSEAD for coordinating the entrepreneurs’ panel.
Lastly many thanks go to INSEAD for the warmth of their welcome.

3
Table of Contents

Introduction 4

Part One 6
Current Issues in Sustainable Finance
State of the Venture Finance Market
Sustainability in Financial Services Companies
Regulatory Drivers to Sustainable Venture Capital and Investment
Financial Risk and Sustainability

Keynote Address 11
Alan Gillespie, CEO, CDC Capital Partners

Part Two 14
Financing Sustainable Ventures:
Leveraging Value and Experience
Sustainable Asset Management (SAM)
Quadris
Crocus Ventures
Parker Venture Management
Materials Productivity LLC

Part Three 19
Experiences of Social and Environmental Entrepreneurs
Future Forests
Natour Eco Tourism
Water Circle Technologies
The Little Gym
Ceres Power Limited

Part Four 24
For-profit / Non-profit Hybrids and Community Development
The U.S. model of Community Finance
Enlace
CDC Capital Partners
IUCN / Kijani Project
Norfund

Questions in Sustainable Venture Finance:
Key Points of Discussion 28

Next Steps for the Sustainable Venture Finance Initiative 30

Further Reading Online 33

Information on Organisers 33

4

Introduction

Solutions to environmental and social problems (be they technologies,
products or services) are being touted as the next wave of hopeful
monsters for investors. Is such enthusiasm for the business benefits of
sustainability justified? Others perceive sustainability as equalling high
risk and lower returns. But are their risk/return models simply too narrow
to see the opportunity?

A forward looking workshop was held at Fontainebleau, France in June
2002 to explore the broad theme of whether and when it is profitable to
invest in sustainability-oriented venture capital funds and entrepreneurial
ventures. Over one hundred participants were addressed by some
twenty-five speakers in a structured programme over a day and a half.
Participants (including venture capitalists, analysts, investors, NGO
representatives, academics, entrepreneurs and MBAs) questioned,
discussed and networked their way through two days that had many on
the edge of their seats discussing a new and highly stimulating topic:
Sustainable Venture Finance (SVF).

This conference report will remind participants of the event and the
outcomes and the ideas generated by the group. For those who were not
there it will give an overview of the presentations, a flavour of the
discussion, a description of the next steps for the research network and
highlight what participants felt to be the most pressing issues.

In preliminary investigation into the field, INSEAD and UNEP FI found that
there was a real knowledge gap between stakeholders active in the
sector. For example, few entrepreneurs or investors knew what SVF
funds already exist nor what environmental criteria are already being
used by some mainstream VCs. Nonetheless, we found many instances
of new funds being launched, new ventures financed and new techniques
for selecting deals - all being developed with a sustainability agenda.

It was this gap that led us to create an event that would bring together
relevant groups to exchange information, research and network with one
another. Our aims for the workshop were thus to stimulate participants’
imaginations, to take a rigorous look at the up and down-sides of this type
of investment field and to provide a framework for inspired people to
meet, exchange and fast track their learning and competence.

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We designed the event with the following five different points of view,
reflected in the subsequent workshop programme:

1. Trends in mainstream venture capital;
2. Trends toward sustainability in the finance sector and in
investment groups;
3. The emerging sustainable venture capital sector;
4. The sustainable entrepreneurial ventures they are investing in;
and
5. Hybrids entities that employ a combination of non-profit/profit
models and public/private partnerships.
The results? The Sustainable Venture Finance 2002 event brought a
range of diverse range of delegates together. For most this was their first
time talking about this issue in a group setting. The workshop certainly
sparked new ideas and initiatives – one new VC fund has been launched
as result, deals were discussed, several research efforts initiated, and
new collaborations forged. UNEP FI and INSEAD are now in the process
of setting up a SVF research network that we invite you to join.

For more information visit www.unepfi.net/venture

UNEP FI and INSEAD thank all the speakers for sharing their expertise
and passion; the participants for voicing their questions, comments,
concerns; the authors who generously provided their papers as
background papers found on the workshop website and lastly, our
sponsors CDC Capital Partners.

This was a highly successful event that had its participants buzzing. We
hope you also enjoy reading this summary report. As organisers we are
very pleased with the event, and look forward to seeing you at
Sustainable Venture Finance 2, in 2003!

Sincerely,

The Conference Secretariat

Anastasia O’Rourke, INSEAD
Jacob Malthouse, UNEP FI

6
Part One:
Current Issues in Sustainable Finance

Part One of the workshop provided an introduction to some of the broader
issues currently facing the sustainable finance and venture capital
sectors.

The morning began with introductory remarks from Professor H. Landis
Gabel, Deputy Dean of INSEAD, and Paul Clements-Hunt, Coordinator of
UNEP FI. Mr. Clements-Hunt spoke about increasingly negative public
perceptions of the financial sector as a result of losses and poor
governance during and after the IT bubble. The below cartoon, taken from
the Economist magazine, summarizes these perceptions. He suggested
that there is an opportunity for firms to distance themselves from the
damaged reputations of their competitors by focussing on long term value
and risk management; also core aspects of sustainable development.

Public Perceptions of the Financial Sector.
From UNEP FI Presentation June 7 2002, Originally from The Economist May 23 2002

Conference Secretariats Anastasia O’Rourke and Jacob Malthouse then
gave an overview of the event and some insights into the thinking that lay
behind it. They posed the following questions for the audience to keep in
mind throughout:
Where are the potential gaps and problems in Sustainable Venture Finance
for the different actors?
What societal and regulatory conditions will increase the likelihood of return
on investment for socially responsible investors who want to take the next
step and finance start-up ventures?
Is SVF just a niche market activity, or does it have the potential to make the
current mainstream VC market more sustainable?
What are the crossovers into other innovative financing mechanisms,
including micro-finance, venture philanthropy for non-profits, public/private
partnerships for governments, insurance and asset management?
How can Sustainable Venture Finance be adapted to different situations in
both the developing and the developed world?

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The speakers for this session were kindly introduced by John Cusack,
former CEO of Innovest. Adam Quarry of 3i plc began the presentations
with an overview of the state of the European venture capital market to
give some context for the field of Sustainable Venture Finance.

State of the Venture Finance Market
Adam Quarry, 3i plc

Adam Quarry joined 3i in 1994 as Marketing Director. During the last
eight years he has led the development of marketing as 3i has expanded
its business internationally.

In order to frame the debate Mr. Quarry presented an overview of the
current state of the venture finance market. He noted that venture capital
and private equity accounts for 0.6% of global GDP.

The US and Europe controlled 90% of this market but lost market share
to Asia by 4% and to Africa by 1% during this time. Between 2000 and
2001, investment declined sharply in North America from $131b to $63b
and in Europe from $32b to $22b, whereas in Asia Pacific investment
increased from $9b to $12b. In Western Europe funds and investments
were equal in 1996 and again in 1999. However, in the year 2000
fundraising increased significantly more than investment.

Investment rose steadily from 1995 to 2000 reaching its peak ($32,018m)
in 2000 and then falling to ($22,150m) in 2001. Fundraising reached its
heights ($43,701m) in 2000 and took a downturn (to $35,000m) by 2001.
Historically in the European Union, the United Kingdom (UK) has raised
the most funds. In Western Europe, sources of new funds are mostly
banks and pension funds.

Private equity investment as a percentage of GDP in 2000 shows that
Austria was the lowest with 0.079% and Iceland the highest with 1.497%.
In general, investments remain highly concentrated in the bio-technology
and technology-intensive sectors.

In Europe, for the first six months of 2002 vs. same period in 2001, the
value of the buyout market is down 40%. Technology investment is about
50% down by value for Europe.

In 2000 a
staggering
US$ 182
billion was
invested in
the global
venture
capital
market.

8
Sustainability in Financial Services Companies
Jean Pierre Sweerts, Rabobank

Jean-Pierre is currently Department Director of Sustainable Markets at
Rabobank. As such he is responsible for business development and
delivering financial services to the clients in two markets: the water sector
and sustainable asset management.

Mr. Sweerts focused on the role of Corporate Sustainability for
companies. Corporate Sustainability was described as “a business
approach to create long-term shareholder value by embracing
opportunities and managing risk deriving from economic, environmental
and social developments”.

Corporate Sustainability is part of the mission statement and strategy of
Rabobank. The executive management of Rabobank is convinced of the
contribution of Corporate Sustainability to the long term compatibility and
profitability of the bank. An example is the interest of investors in
Rabobank Bonds because of the combination of the triple-A nature and
the high sustainability performance of Rabobank (one of the four most
sustainable banks worldwide, as rated by the SAM Group from
Switzerland). Rabobank invests in early stage companies with a
corporate sustainability strategy by its Rabobank Innovation Capital Fund
and Rabobank Sustainability Fund of Funds.

Rabobank is active with sustainability in several fields. Firstly, in bringing
sustainability products and services to the market, such as investment
funds (e.g. the Robeco Sustainability Fund, Robeco Environmental
Technology Fund). Secondly, in incorporating sustainability criteria into
credit approval process (i.e. putting social and environmental criteria in
each credit application). Thirdly, in their internal environmental care
(energy efficiency and recycled paper). Fourthly, in advisory services to
the clients regarding sustainability issues (i.e. for farmers: the effect of
certain spatial planning initiatives on agriculture and as such on the
profitability of the farms). Fifth, in grants to local social and community
activities by the local banks, and to international co-operative initiatives by
the Rabobank Foundation.

Does Corporate Sustainability also contribute to the performance of early
stage companies? Of course, but exactly how would have to be seen
case by case. However, Mr. Sweerts believes that all companies with a
sustainability strategy have an advantage over companies that do not
have such a strategy. Reasons for this include: environmental care
stimulating effective and efficient processes from the start, focusing on
sustainability means that executive management not only focuses on
operational issues but takes time for strategic decisions, and
sustainability may contribute to both pride and customer focus of the
employees. Finally, a transparent corporate governance structure
minimises financial and reputation risks deriving from non-sound
accounting practises.

Companies
with a
sustainability
strategy in
general have
an advantage
over
companies that
do not have
such a
strategy.

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Obviously an early stage company has many things to worry about, such
as a positive cash flow, and a sustainability focus should be in balance
with the other focuses of the company. This is not only valid for
companies working in environmental fields (wind power producers, waste
water treatment producers) but for companies in general.

Mr. Sweerts concluded noting that “It is a challenge for venture capitalist
to stimulate early stage companies in applying a sound sustainability and
corporate governance strategy, with the objective to contribute to the
companies compatibility and profitability and at the same time increase
the value added by the company to the society in general”.

Regulatory Drivers to Sustainable Venture Capital
and Investment.
Brian Pearce,
Centre for Sustainable Investment
Forum for the Future

Brian Pearce is Director of the Centre for Sustainable Investment (CSI) at
the UK-based Forum for the Future. The work of the CSI aims to
demonstrate why financial institutions should take sustainability into
account and advises how they can most effectively do this.

Mr Pearce described the key role of venture capital in the financing of
sustainable development. He noted that access to new finance for
sustainable technologies, businesses and projects is key to promoting
sustainability. It is ultimately the technologies embedded in replacement
capital assets that will determine the sustainability or otherwise of the
economy, rather than changes in the behaviour of existing companies.
SRI funds play an important role in the latter but buy stocks on secondary
markets, providing little new capital to companies. However their impact
could be enhanced by allocating funds towards initial public offerings
(IPOs), and other asset classes such as property, project finance, and
venture capital.

Pearce described the importance shown in the London Principles project
of getting finance to the developers of clean technologies and sustainable
businesses. Providing access to capital is one of the key functions of the
financial system and, since many of these businesses are early stage,
venture capital is an extremely important financial instrument to do this.

In the UK the key regulatory drivers for venture capital investment in early
stage sustainable technology businesses have been:

Utilities deregulation (providing the opportunity to challenge
incumbent service providers)c
Environmental regulation (providing the incentive for service users
and therefore demand)

Added to these regulatory drivers have been technology developments
(making these clean services a commercial proposition) and of course the
increasing preference of customers for sustainable goods and services.

It is ultimately
the
technologies
embedded in
replacement
capital assets
that will
determine the
sustainability
or otherwise of
the economy

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Pearce also noted that regulatory changes elsewhere in the financial
system were having indirect impacts to encourage the provision of
venture capital for sustainable businesses. These are the various
disclosure regulations that are forcing companies, investors and lenders
to look more closely at non-financial risk, including environmental and
social impacts. Public governance, in the form of regulation, can provide
further incentives for the development of sustainable financial markets
such as:

Pension fund disclosure on SEE issues;
Stock exchange rules of corporate risk management
Company Law Review on reporting the material aspects of corporate
SEE performance.

Disclosure allows an assessment of impact. Since venture capital can be
one of the most effective financial instruments to generate new business
activity and sustainability benefits, these regulations in themselves should
encourage a reallocation of assets towards venture capital investment in
sustainable businesses.

Financial Risk and Sustainability
Leo Johnson, International Finance Corporation

Leo Johnson is a consultant specializing in environmental and social risk
for the financial sector in emerging markets. He is the author of the IFC's
forthcoming best practice publication: "Environmental Risk for the
Emerging Markets Financial Sector".

Reciting Milton Friedman’s argument, Johnson began by asserting that
“the business of business is business”. Friedman believed that social
responsibility is a socially subversive doctrine and that the environment is
not relevant to emerging markets or the financial sector. Friedman’s
contention that there is no environmental or reputation risk in emerging
markets is often thought to be true for two reasons. First, because it is
often difficult to develop formal and enforceable regulation in emerging
markets. Second, because of a communication vacuum between
emerging markets where resources are extracted and wealthy nations
where they are consumed. This vacuum prevents consumers from
making informed decisions about the products they purchase.

Johnson embarked on a series of case studies to test whether Friedman’s
view is still standing up to reality. The studies included an IFC financed
hydrochloric acid plant in Thailand that was burnt down by the local
community and Rabobank financed pulp and paper plant in Indonesia that
met a similar end after engaging in unsustainable forestry practices. He
argued that in the absence of a sound regulatory framework risk arises
from the public itself. Citizens will often adopt a de facto regulatory role in
order to protect their interests. Johnson suggested that firms can account
for this risk by actively seeking to understand and respect these interests.
Friedman
believed that
social
responsibility
is a socially
subversive
doctrine

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Countering Freidman then, Johnson declared that the environment is not
only relevant to emerging markets but especially to investors in those
markets.

In addition to environmental risk, there are many new stakeholders and
mediums that can report negligence to a wider audience. This has
resulted in an increase in reputation risk that can lead to brand erosion,
criminal liability, as well as SRI and IFI boycotts.

Banks attract initial investment largely on the basis of trust. Fund
managers develop this trust by focusing on risk control, innovation and
value added. By accounting for the environmental and reputation risks
outlined above firms can build trust with fund managers and fund
managers can in turn build trust with investors thus attracting even more
investment.

Keynote Address
ALAN GILLESPIE, CEO, CDC Capital Partners

Dr Alan Gillespie joined CDC in December 1999, at the time of its
transformation from the Commonwealth Development Corporation, a UK
Government statutory corporation, into CDC Group plc, a public limited
company wholly-owned by the UK's Department for International
Development (DFID). Dr Gillespie worked in investment banking for over
20 years. His activities at Goldman Sachs included mergers and
acquisitions and corporate finance across a wide variety of sectors, with
particular emphasis on financial services. As a Managing Director of
Goldman Sachs International in London, he was responsible for
investment banking activities in the UK and South Africa.

Dr. Gillespie began by noting that investment capital has been
traditionally divided into two broad categories. The first is government
capital, where funds are distributed primarily for job creation. The second
is private capital, where funds are distributed solely for returns. He
proposed a third category, enterprise capital, where investors are as
interested in the company in which they invest and the well-being it
generates, as they are in returns.

CDC began in the first category as a development bank financed by the
UK Government. For forty-five years CDC offered government capital as
a subsidy donor to developing countries. It has since moved into private
sector investment with the goal of falling into this new category of
enterprise capital. While there are many sources of debt financing for
firms in developing nations, CDC wants to fill the equity gap. This is a
difficult task in high risk emerging markets

Doing
business in
nations with
political
volatility, little
infrastructure
and little
regulation is a
challenge.

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Doing business in nations with political volatility, little infrastructure and
regulation is a challenge. This challenge is compounded by the need to
develop sustainable companies in these markets as well as getting a
return on capital. CDC aims not only to provide private equity but to
provide it with transparency.

Keeping this in mind CDC’s initial investments have focused on the
transport sector, banks, investment, power, telephony, healthcare and
agri-business. Specific examples of CDC’s investments include an
offshore gas pipeline in Tanzania that is being developed in order to set
up a electricity generating station and re-establish the manufacturing
base. The provision of electricity has a direct development impact and
energy is also a safe investment with solid returns. Hydrodelectric
investments of $160 million have been developed in Peru. CDC
persuaded Scudder in Boston to bring in $35 million for those investments
representing a diversion of first world institutional capital back to the
developing world.

Projects like these are redeveloped under CDC’s aim of enterprise
capital. Once they are developed or re-developed into an attractive
investment they can be sold on to private investors.

CDC believes that if it can make capital available as equity to sound
businesses and work directly with entrepreneurs, it is possible to
demonstrate that adequate returns can be made. Once this has been
demonstrated, private capital will follow.

Part Two: Financing Sustainable Ventures
Leveraging Value and Experience

The afternoon began with perspectives given from five sustainable
venture funds. Each venture fund presented their unique approach to
identifying winning sustainable enterprises in which to invest. A lively
debate ensued in an hour-long discussion. The participants and
speakers discussed the difficulty of finding winning opportunities, the lack
of supporting regulation to encourage entrepreneurship, the definition of a
sustainable venture, and the value-added that sustainability can bring to
investors. SAM Sustainable Asset Management gave the first
presentation.

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Sustainable Asset Management (SAM)
Dr Rolf Wüstenhagen

Dr. Wüstenhagen is part of SAM’s private equity team. He is responsible
for analysing investment opportunities in solar, wind and wave energy as
well as combined heat and power technologies.

Dr. Wüstenhagen began by describing SAM as an independent asset
management company exclusively focusing on Sustainability
Investments. SAM’s product range includes Mutual Funds, Investment
Companies, Private Equity and in 1999, they developed the first global
Sustainability Index together with Dow Jones.

Corporate sustainability for SAM is a business approach to create long
term shareholder value by embracing opportunities and managing risks
deriving from economic, environmental and social developments.

This forward looking and analytically rigorous approach leads SAM to
invest in leaders and pioneers. Sustainability Leaders are large cap
companies that excel in corporate sustainability on a global basis. They
are selected following a best-in-class approach. SAM also invests in
Sustainability Pioneers, that is private as well as small and mid cap
companies that substantially add to sustainability through their innovative
products and services. They have two PE funds, Sam Energy Fund (at 48
million Euro) and SAM Sustainability Fund (at 37.8 million Euro). The
identification of appropriate service/technology clusters is key for the
sustainability of SAM’s pioneer investments.

To illustrate both the opportunities and the challenges in sustainable
venture investing, Dr. Wüstenhagen presented Evergreen Solar (ESLR),
which was SAM’s first Private Equity investment in January 2000. ESLR
is a manufacturer of solar cells and modules specialised in string ribbon
technology that is 20 - 30% more material efficient than conventional
crystalline silicon solar cell technology. ESLR went public in November
2000. They have successfully ramped up their first large-scale
manufacturing line and continue to make good progress in technology
development. However the share price suffered when the company
announced it would delay expansion plans for a second manufacturing
line in order to conserve cash. This highlights differences between a
conservative management and the expectations of the financial
community. While Evergreen has a very promising technology base,
recovery of the share price depends on clarification of the financing issue.

Dr. Wüstenhagen concluded by identifying energy technology as an
area that can generate venture capital returns while making a substantial
contribution to sustainability. He noted that while sustainability plays a
large role in SAM’s strategy, all of their investments are best practice
within the broader spectrum of venture capital.

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Quadris
Ian Hook, Quadris

Ian Hook joined Quadris Group in 2000 with an objective to establish an
open-ended investment company and a UK sales and marketing
operation. Prior to this appointment Ian spent a number of years in the
international financial services insurance and reinsurance markets.

Quadris invests in the Floresteca teak plantation in Mato Grosso Brazil.
Floresteca is a large-scale efficient plantation forestry business, operating
in accordance with the Forestry Stewardship Council (FSC) guidelines.

The plantation currently occupies a management area of approximately
33,000 hectares, of which 9,000 hectares of land are teak plantations and
8,000 hectares nature conservation areas. Planned development will
enlarge this area each year by between 1,000 and 1,500 hectares.

Quadris was founded in 1993 by an entrepreneur, a lawyer and a forestry
engineer. The original funding costs in 1994 were initially financed by the
founders and since then financing has been secured by approximately
6,500 individual investors. The business was set up in order to meet
growing demand for hardwood anticipated as a result of diminishing
natural stocks.

Hook noted that Quadris’ initial challenges were finding an appropriate
investment vehicle, serving investor’s interest, adhering to commercial
objectives and measuring environmental and social standards. The
challenges for growth included maintaining investment for future planting,
remaining at the forefront of the industry, differentiating their product and
raising investor awareness.

Quadris wants to expand and diversify their activities, broaden their
investor base, improve shareholder value and promote broader
acceptance of environmental funds. Hook suggested that
communication and transparency are two key elements that define
success in sustainable ventures. Communication includes education and
the importance of targeting specific marketing and sales channels.
Transparency includes not compromising ethical nor commercial criteria,
refraining from overstating expectations, and not relying on sustainability
as a market niche or as compensation for poor performance.

15
Crocus Ventures
Fred van Beuningen, Founder CROCUS

Fred van Beuningen is the founder of Crocus Ventures. Crocus is
planning on raising a venture capital fund in 2003 with a focus on
renewable materials and energy technologies. Crocus has expertise in
building businesses , assessments of business and technology and in
linking entrepreneurs to capital.

Mr. Van Beuningen noted that it is essential for the investor to have an
adequate prediction on the opportunities and risks involved for a venture
to become profitable and sustainable. The business plan is an important
part of this prediction process, and serves two main purposes. First, it
thoroughly explains the business concept. Second, it is used to raise
funds and or assets from external parties.

For Crocus, only one in three of the feasible business plans received by
sustainable entrepreneurs were classified as winning propositions.
Though an investor will not base their opinion on the business plan alone,
a positive assessment is important to any deal. Following are some
suggestions to sustainability entrepreneurs on how to improve their
business plans.

Indicators of a sound business plan include:
Strong implementation focus;
Response to a direct and recognisable customer need;
The solution needs little explanation to the prospected customer;
Complete innovation and
A balance between marketing and process.

Indicators of a poor business plan include:
Claims of unique concepts;
Overly detailed financial statements;
Weak assumptions and reasoning;
Excessive use of fancy buzzwords; and
A business plan that mimics a business brochure.

It is important for SVF funds to develop a comprehensive set of criteria
to help assess the strengths and weaknesses of a business concept and
the qualities of the team involved. Along with the venture capital itself,
investors’ key asset is their business sense. Such criteria can help to
speed up the assessment process, and develop more accurate
judgements on the potential of new ventures – on both the business and
sustainability fronts.

16
Parker Venture Management (PVM)
Kerri-Lyn Hauck

Kerri-Lynn Hauck is a Senior Analyst and Associate with Parker Venture
Management (PVM) Inc. based in Toronto. The PVM team provides high
value venture services to investors seeking superior returns from
emerging clean technology enterprises. At PVM, Kerri-Lynn undertakes
research, due diligence and project management relating to clean
technology investment opportunities.

PVM has mandates with a major utility venture capital group, two large
endowments focused on sustainable development and a labour
sponsored venture fund focused on energy and efficiency investments.

PVM is doing deals primarily in the clean energy, water and advanced
materials areas. They are also performing research and designing
investment strategies, building and servicing investment networks and
developing capital pools for commercial and non-commercial investors.
This helps to promote interest in and understanding of sustainable
venturing.
PVM feels that there is an opportunity for clean technology to span
many industries ranging from alternative forms of energy generation and
water quality to new and innovative forms of low pollution transportation.
The market for clean technology is rapidly developing due to industrial
restructuring, scientific and engineering advances, changing
socio-political values and deepening concern for environmental
sustainability.

In fact, some clean technology markets are growing at compound annual
rates of more than twenty percent. Emerging fields such as
nanotechnology offer the prospect of products that cost less, perform
better, and sustainably satisfy human demand in ways that previously
could not be achieved. There are also market opportunities emerging in
the multi-billion dollar agricultural, manufacturing and transportation
sectors.

Some examples of the industries in which clean technology is flourishing
are agriculture, manufacturing, transportation, water. However the
venture community has traditionally favoured sectors such as
telecommunications, biotechnology, software and, most recently, the
Internet. So far in 2002 information technology and bio-medical have
captured ninety percent of venture investments in the US, with clean
technology related investments capturing less than three percent.

The Corporate Venturing Interest Group is a partnership between PVM,
the Sustainable Enterprise Academy and a group of multinational
corporations.

Some clean
technology
markets are
growing at
compound
annual rates
of more
than 20%

17
This group looks towards new ideas, models, market insights and
technologies for reducing or eliminating risks and identifying opportunities
in the sectors that PVM invests in.

Sustainability reflects long-term trends and venturers can play a key role
by picking out and nurturing the potential winners for high financial return
on investment and societal benefits.

Materials Productivity LLC
Kelly Collins

Since 2000, Kelly Collins has worked as a consultant with Materials
Productivity, LLC, an environmental management and investment
consulting firm. Her work includes researching and recommending
investments in companies that have positive environmental and economic
impacts in the marketplace.

Her presentation was entitled ‘The Basis of Ventures is the Basics of
Business: Finding the Trojan horse for environmental sustainability.’
Collins began by stating that people commonly see sustainability as
having a large cost, for example in the cases of end of pipe treatment and
radical reinvention.

In fact, there is a vast middle ground of opportunity when one focuses on
using existing resources in a sustainable way. This can apply equally well
to early stage ventures and established companies. Existing products
may have a sustainable application not currently being realized by the
firm that produces them. Materials Productivity calls this a Trojan horse.

For example, the firm Ciphergen developed a predictive toxicology
technology that already had corporate buy-in and market potential. The
Trojan horse in this case was predictive toxicology technology that can
also be used for more efficient drug toxicity testing, harnessing
associated social benefits.

Another example is the firm Strategic Diagnostics which is a leading
provider of biotechnology-based diagnostic tests for a broad range of
agricultural, industrial, and water treatment applications. The Trojan horse
here was that these tests could also be used for more efficient food safety
and drug efficacy testing.

In conclusion, Collins suggested that many barriers to sustainability exist
because of disparate practical definitions of environmental sustainability
that divide the debate and hinder broader understanding. This in turn
makes it difficult to put sustainability into practice. Materials Productivity
uses its innovative way of viewing sustainability, via the Trojan horse, to
generate return for its investors.

There is a
vast middle
ground of
opportunity
when one
focuses on
using existing
resources in a
sustainable
way

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Part Three: Experiences of Social and
Environmental Entrepreneurs

The entrepreneurial panel, organised by the Indevor student club of
INSEAD, introduced the experiences of five social and environmental
entrepreneurs. Each entrepreneur presented their venture: new
businesses that strive to achieve positive financial, social and
environmental results.

At the heart of sustainable development are those individuals with the
creativity and entrepreneurial spirit to successfully incorporate these three
concepts into their business models. Entrepreneurial ventures like the
ones introduced below are examples of how people are changing the
structure of the global economy and getting a head start on being
responsible corporate citizens.

After the presentations participants and speakers discussed the difficulty
of securing financing, the need for supporting regulation to encourage
entrepreneurship, the need for better knowledge of the value of
sustainable development amongst investors, and the best ways to
present a sustainable business plan to investors. David Tepper from
Future Forests gave the first presentation.

Future Forests
David Tepper

David Tepper advises Future Forests on the strategic development of the
business and assists in the development of large corporate clients. David
provides strategic advisory services for companies embracing
environmentally sustainable business models. He has also provided
advisory services to a number of private equity funds.

Future Forests developed a practical tool and facilitating mechanism to
help corporations take action on climate change. It is leading the way to
take a complex scientific and environmental problem (climate change)
and convert it into a simple branded label 'Carbon Neutral' and a simple
action. Customers can either 'neutralise' their greenhouse gas emissions
by planting trees in the forest of their choice, or support one of their
climate-friendly energy projects. Such projects invest in reducing CO
2

emissions at source by funding the use of clean technologies such as
solar power in developing countries.

The mission of Future Forests has two aspects that are aligned: to protect
the earth's climate and to meet its shareholders objectives of generating
the highest possible return on the funds invested. In both in its business
and its products, it demonstrates that business and the environment can
be aligned. We firmly believe that there is longevity in schemes built on a
solid commercial basis.

Future Forests
firmly believe
that there is
longevity in
schemes built
on a solid
commercial
basis.

19

Future Forests helps to move corporate sustainability initiatives from
being PR and compliance driven, to actions that have direct links to
shareholder value (through true brand building, consumer engagement
similar to loyalty programs, employee engagement which can be
integrated into human resource policy, and selling more products through
brand building. Future Forests have clients all over the world including:
Avis Europe, Hilton (Trafalgar hotel), Environmental Transport
Association, Swiss Re, Partner Re, St Luke's, Business in the
Community, Barclays Bank, O2, The Brit Awards, MTV, Pet Shop Boys,
Damien Hirst and Atomic Kitten. Equally important are the 30,000
individuals who have committed to carbon offset with trees or energy-
switch programmes in the last 18 months.

We also work closely with NGOs, regulatory bodies and governments.
The Johannesburg Climate Legacy (seehttp://www.climatelegacy.org/)
which is managed by Future Forests is creating tremendous awareness
among the participants at the World Summit and bringing real
development support to the region.

Future Forests is operating in a pre compliance market. It has developed
high standards for carbon offset in a pre Kyoto environment. The products
offered will of course evolve as the carbon-offset market evolves and a
Kyoto compliant market approaches.

Future Forests is a professionally managed business with independent
board of directors. Venture capital shareholders have injected a few
million dollars into the business. Indeed, one of the key successes of
Future Forests was the founders' ability to bring in professional investors.
The VC money has helped transform Future Forests from a small
"garage" business to a company building international joint venture
agreements, hedging and managing carbon liabilities and assets, and
putting in place the appropriate risk management tools to grow in an
uncertain and evolving market. Future Forests has hired a professional
independent management team, including recent INSEAD graduates.

Mr. Tepper has personally worked with and analysed a number of
environmentally friendly business models and businesses. These
companies potentially have access to cheaper capital (environmentally
friendly angels), lower operating expenses (the ability to attract high
quality people at below market wages) and benefit from strong
stakeholder support (in the case of Future Forests it has had tremendous
trade and public press for doing good). However, these businesses also
face some greater risks from being in the limelight. Some NGOs and
press hold these small inexperienced and fast growing businesses to the
highest business standards and transparency.

Ultimately, to maximize the number of success stories of sustainable
enterprises, I am convinced that smart capital is required. Capital
providers should develop and push the management teams - these teams
are then properly compensated for the additional risk inherent in
managing small highly transparent companies operating in emerging
sectors such as environmentally friendly products and services.

20
Natour Eco Tourism
Eduardo Novaes

Eduardo Novaes joined Natour in May 2001 as a Business Marketing
Director / Partner of Natour. Natour’s mission is to improve the quality of
people’s lives by having them interact with preserved nature.

Natour is an enabler of top-end eco-tourism in Brazil. Natour has two
distinct operations: jungle lodge development and travel operations. Its
business principles and revenue model are based on strong
environmental preservation and employment of indigenous people. It is a
truly triple bottom line business.

Natour offers three types of products: sport fishing, bird watching, photo
safari and exploring. The benefits of sustainable tourism are shown by
the success of the Natour Thaimaçu Lodge, which is a successful Sport
Fishing Lodge in the heart of the Rain Forest.

The lodge’s social and cultural value comes from the creation of thirty-six
new jobs for people formerly involved with gold mining, lumbering and
agriculture.

In addition the lodge provides revenue sharing with the Kaibi Indians by
helping them protect their reserve. This is an area of very high
biodiversity value, especially in terms of fish and bird populations, many
of the species being endemic. The lodge led the process of creation of a
sport fishing reserve and today operates along ninety kilometres of
preserved river, which guarantees the preservation of this area. The
lodge has also undertaken various studies and monitoring programmes
of the surrounding wildlife in order to manage its operations in an
environmentally friendly manner.

Natour is currently developing a number of projects either for upgrading
or for building new jungle lodges in some of the richest ecosystems of
Brazil. Its main source of funding is from individual investors who are
passionate about nature, about some of the activities undertaken by the
lodges (fishing, photo safari etc) and who are after a responsible and
profitable investment. Natour also raises funds with institutional investors
and governmental bodies.

21

Water Circle Technologies
Michael Harrison

Michael Harrison founded the Groundwater Group in 1992. It is now the
largest independent supplier of borehole water to industrial customers in
the UK. He is now launching Water Circle Technologies, the 2001
winners of the INSEAD Business Plan Competition. The winning
company is provided financial assistance (by sponsors 3i and Roland
Berger) and incubator support at INSEAD’s Fontainebleau campus.

WaterCircle Technologies aims to provide industrial companies with cost
savings through the use of ecologically-responsible and technology-
driven water-recycling systems.

Mr. Harrison explained that currently, large companies across Europe are
spending in excess of 5 billion Euros each year on water and wastewater
services. The market faces considerable growth prospects as tougher EU
environmental legislation forces industrial companies to clean up their
wastewater to increasingly stringent standards.

WaterCircle have identified process technologies that offer the possibility
of considerable cost savings to industrial water users through water
recycling. The savings arise by reducing water needs and by lowering the
costs of waste disposal. The membrane recycling technology delivers
high quality water, often of a higher standard than municipal drinking
water supplies.

Water recycling can be cost saving. For example, in the case of cotton
bleaching, water that enters a factory at a cost of 1€ per cubic metre
leaves as effluent at a cost of 3€ per cubic metre. A firm can capture and
recycle that effluent into the bleaching process, reducing both the input
and output of water and saving money.

WaterCircle Technologies are currently in their first round of financing.

The Little Gym
Alexander de Wit

Alexander de Wit is the founder and Managing Director of The Little Gym
of Europe. In 2000 Alexander, together with Belgian partners, became the
master franchisee of The Little Gym in Belgium and in 2001 he created
The Little Gym of Europe.

The Little Gym aims to develop the concept of 'societal entrepreneurship'
by pursuing dual objectives, both financial and societal, while building
a company with strong performance and image. The Little Gym's mission
is to promote the long-term mental and physical development of children
aged 4 months to 12 years throughout the world.

22
The curriculum-based program provides a specific weekly lesson focusing
on building a particular motor skill in a non-competitive environment,
while adding to the child's intellectual and social development. The
specific teaching approach also builds children's self confidence and self-
esteem. The Little Gym franchise concept involves a network of
individuals exchanging best practices and contributing at a corporate
level.

Currently there are 40,000 children in a The Little Gym every week in
over 120 locations in 15 countries. After the success of two initial pilot
units, one in Waterloo, Belgium and the other in Lyon, France, the Little
Gym already opened gyms in Sevilla, Nancy and Amsterdam. Further
development is planned within Europe with additional units soon to be
opened in Belgium, France, Spain, Luxembourg, UK and Sweden.

The achievement of The Little Gym represents a large-scale societal
impact as well as an attractive investment opportunity.

Ceres Power Ltd
Bruce Girvan

Ceres Power was founded as a spin-off from Imperial College in 2001 to
commercially develop the technology that has been generated within
Imperial College in the area of IT-SOFCs over the last ten years. CERES
were winners of the European Business Plan Competition in 2001.

The core of Ceres Power’s business is a patented fuel cell technology
that overcomes many of the challenges facing existing traditional Solid
Oxide Fuel Cell (SOFC) technologies.

Ceres Power’s Intermediate Temperature for SOFC (IT-SOFC) operates
at around 550ºC allowing conventional materials, such as a steel
substrate, to be used in the fuel cell construction. This provides a
technology platform that overcomes the technical challenges impeding
the progress of fuel cell commercialisation. It endows a simple, robust,
modular design with the potential for reduced manufacturing costs, rapid
start up and dynamic load following capability.

When these advantages are combined with a choice of fuel supplies that
include natural gas, propane, methane, methanol, as well as hydrogen,
then the Ceres Power IT-SOFC technology matches many of the needs
within the rapidly expanding global distributed energy market.

With significant funding now secured, the company is expanding its
commercial and development team to complement its eminent technical
knowledge base.

Stakeholders
need to
increase
awareness
amongst the
investment
community of
the benefits of
environmental
payback.

23
According to Mr. Girvan the compelling reasons for investors to support
Ceres include:

A global market;
A strong, balanced team; and
Patented technology.

Mr. Girvan noted that Ceres Power has a strong lead investor with
knowledge of the energy market and wide investor links.

Ceres believes that Sustainability has a role to play and offers political
strengths and reduced power generation risks. However, the third and
fourth quarters of 2001 were not good times to use sustainability as a
means of securing funding - as many investors have become risk averse
with the decline of the markets. Stakeholders therefore need to increase
awareness amongst the investment community of the benefits of
environmental payback.

Part Four: For-profit / Non-profit Hybrids
and Community Development

Official development assistance (ODA) is an important part of the
development process. But as new markets are built on the foundations
provided by ODA new challenges are created that require specialised
solutions. Private direct and indirect investment flows from developed to
emerging markets have been increasing in recent years despite
perceptions of inherent increased risk. Most of this investment is
concentrated in large enterprises. Many start-up, small and medium
enterprises in emerging markets still have difficulty accessing this risk-
averse private capital. For-profit / non-profit hybrids are one response to
this challenge.

Hybrid organisations seek to combine the positive aspects of non-profit
assistance (e.g. less risk averse capital, guarantees to investors,
stakeholder inclusiveness, etc.) with the positive aspects of for-profit
enterprise (e.g. promotion of internal efficiency, accountability,
responsiveness, etc.). At the essence of this process is reconciling the
perceived conflicts of the triple bottom line in a high-risk environment.

The Saturday morning session of the workshop was introduced by the Dr
Ken Thomas who gave an overview of the US model of Community
Finance. We then heard from four such hybrid organisations working in
emerging markets.

24
Introduction and the U.S. Model of Community Finance
Dr. Ken Thomas, Wharton Business School

The morning began with an introduction by Dr. Ken Thomas, who has
been a Lecturer in Finance at the Wharton School since 1970 and written
two books on the Community Reinvestment Act (CRA) of 1977.

Dr. Thomas defined the "U.S. Model of Sustainable Banking" as a triangle
with three corners. Community interests, with longer-term social and
environmental concerns, are at the bottom left corner. Banking corporate
interests, primarily with short-term profit-maximizing concerns, are at the
bottom right corner. And, the government, operating through Congress,
the Administration, and regulatory agencies, is at the top of the triangle
acting as an arbiter trying to find the proper balance between community
(public) and corporate (private) interests in the context of regulated
capitalism.

There are countless examples of over-regulation, which stifles
competition and innovation, and under-regulation, which played a role in
the S&L crisis and Enron. The government, however, apparently got it
right (i.e., "fair regulation”) after 25 years with the Community
Reinvestment Act (CRA) This law "encourages" federally-insured banks
and thrifts through a carrot and stick approach to lend to their entire
communities, including low-and-moderate income (LMI) areas. LMI
people represent about 40% of Americans.

Banks are periodically examined and publicly rated on their CRA
performance. Those banks rewarded with good ratings are praised in the
media and often receive additional benefits such as tax credits and
government and other business. The few (about 2%) of banks with poor
ratings are precluded from certain corporate expansion activity (e.g.,
branches and mergers) in addition to suffering from public ridicule and
even possible government regulatory enforcement action.

Despite the successes of the CRA model in terms of significant increases
in LMI lending, this process can break down when government regulators
get too close to banks and inflate CRA ratings (estimated to be the case
about half the time according to www.CRAHandbook.com). It is also
possible that community groups can get too close to banks as a result of
grants and other benefits and cease representing community interests.

For these and other reasons, CRA is periodically reformed as is being
done this year, its 25th anniversary, and Dr. Thomas' recommendations in
this regard are found in "Optimal CRA Reform: Balancing Government
Regulation and Market Forces" (Public Policy Brief No. 68, 2002, The
Levy Economics Institute) at www.levy.org.

25
ENLACE
Christian Arce

ENLACE is a non-profit private organization sponsored by the Avina
Foundation devoted to catalysing sustainable development projects.
Christian Arce is one of its founders.

ENLACE prepares entrepreneurs for presentation to a network comprised
of venture capital funds, business leaders with social responsibility,
academic institutions and NGOs. It also promotes the creation of local
venture capital funds with a sustainable approach.

ENLACE believes that a development model rooted in entrepreneurship
and sustainable development is the most highly leveraged way to achieve
economic, social and cultural development in emerging markets.

Mr. Arce noted that there is already venture capital looking for sustainable
business projects but very few entrepreneurs in Paraguay and its
surrounding area know that.

ENLACE promotes the concept of venture capital in the region and helps
the sustainable venture capitalists feed their deal flow. Their key
challenge is to find enough interesting projects in a region with little
entrepreneurship culture to feed the pipeline of funds.

The example of sustainable forestry was given. The forestry industry in
Paraguay thinks that sustainable forestry is not profitable or possible.
ENLACE demonstrated that sustainable exploitation is feasible by
implementing a pilot project with progressive players of the forestry
industry.

CDC Capital Partners
Lucy Heintz

Lucy Heintz joined CDC Capital Partners in March 2001, having
completed an MBA at INSEAD during 2000 after several years in the
financial services sector.

CDC has 50 years of experience in building businesses and as a risk
capital provider focusing exclusively on emerging markets. Originally the
CDC was formed in 1948 with a focus on creating strong and sustainable
private sector businesses in Commonwealth countries through the
provision of debt finance.

Investment policy shifted during 1980s and 90s towards provision of risk
capital financing, on the path towards public private partnership since
1997.

There is
venture capital
looking for
sustainable
business
projects, but
very few
entrepreneurs
in Latin
America know
this.
Within the
public sector
CDC focused
on the
reputation and
the halo effect
of UK
government
ownership, risk
management,
returns and
timescale.

26
CDC is building a successful business through investment in emerging
markets. This will then act as a catalyst to mobilize larger private sector
capital flows.

Within the public sector CDC focused on the reputation and the halo
effect of UK government ownership, risk management, returns and
timescale. This is slightly different from the private sector where the focus
is on a commercial approach and an ability to attract and incentivise
talent. This investment model will be proven when CDC has
demonstrated a track record of exits at commercially appropriate returns.

One example of this model being used successfully is CDC's investment
in GrameenPhone. Bangladesh has one of the lowest telephone densities
in the world. Women in rural villages purchase mobile phones from
GrameenPhone and generate income by selling telephone services
locally. GrameenPhone has created 40,000 jobs and improved access to
market information in rural industry. GrameenPhone has 50,000 users
and has seen growth rates of 100% p.a. in its subscriber base over the
last 5 years. GrameenPhone has exceeded budgeted profit in 2001.

CDC’s model reflects the belief that true sustainability must be profitable.

IUCN / Kijani Project
Frank Vorhies
Frank Vorhies heads up IUCN's new initiative on business and
biodiversity. Frank has worked for IUCN since 1995 when he was hired
as their first full time economist. IUCN is the world's association for nature
conservation with approximately 1000 government and non-government
members as well as commissions of technical experts.
The Kianji project focuses on engaging business in triple bottom line
biodiversity objectives. This includes promoting corporate biodiversity
strategies and biodiversity benefiting business investments. The concept
of sustainability focuses on 3 components when applied to biodiversity:
conservation (environmental aspect), sustainable use (economic aspect),
and benefit sharing (social aspect).
Africa, especially rural Africa, desperately needs socially responsible
capital. For this reason Kianji Project is focusing on private equity which
includes financial and biodiversity due diligence, medium sized
opportunities $0.2 to 8m with long term requirements from 5 to 10 years
involving active and engaged management support.

The biodiversity business is terribly complex and often controversial. Risk
has been mitigated through the merging of biodiversity and banking
expertise; in this case the Kianji Project is a joint venture of IUCN and the
IFC.
Africa,
especially
rural Africa,
desperately
needs
socially
responsible
capital

27

The two key features of the model are a bio-financing and bio-service
facility (pre-investment technical assistance such as developing
biodiversity business plans and providing access to export markets).

Sustainable venture grants for Kijani bio-services have been used to
promote biodiversity conservation, poverty alleviation, indigenous
entrepreneurship and sustainable development in Africa. Sustainable
venture capital for Kijani bio-finances has been used to promote socially
responsible investments, greening private equity, capitalising emerging
markets and triple bottom line project in rural Africa.

Mr Vorhies gave the Vilanculos Coastal Wildlife Sanctuary as an example
wherein 25,000 ha have been converted into a private sanctuary of
islands, coastline, coral reefs, wetlands and bush. This has enabled
ecosystem restoration and the protection of endangered species. The
Conservation is put to sustainable use through eco-tourism lodges,
private holiday homes, community-based fishing and sustainable
agriculture. Such a development has presented far-reaching benefits
through the development of the integrated local community development
in the form of education, health, and jobs.

Norfund
Svein Ove Faksvåg

Mr Faksvåg started in Norfund 1st September 2001 as Head of
Investment Committee and Deputy to the Managing Director at Norfund,
after 22 years in different top positions in the company Orkla ASA.

Mr Faksvåg began his presentation with some reflections on the difficulty
of really practising corporate sustainability with so many different versions
of the sustainability concept being contested. He stated that this is a key
challenge, and one that needs the finance sector’s support.

The Norwegian investment fund for developing countries came into
operation in 1998. Capital was provided by the Norwegian government
over the development assistance budget. Norfund’s mission is to invest in
profitable private enterprise in developing countries and promotes
business development in developing countries. The instrument is risk
capital i.e. fresh capital and risk sharing through equity and quasi-equity.

Norwegian developmental support attempts to separate traditional, grant-
based forms of aid from investment-related commercial support. This
enables Norfund to focus on the use of the development of the private
sector as the vehicle for growth in developing countries. Norfund uses
three models of capital organisation: venture investments, local funds,
and separate business units (energy).

Influential
factors for
growth include:

Infrastructure
and good
governance,
local venture
managers,
a commercial
focus,
avoiding
bureaucracy,
a long term view,
exit markets, and
deal flow.

28
Along with CDC, Norfund is part of a Joint Venture Company (50:50)
named Aureos Capital that operates in a number of countries including:
Sri Lanka (Ayojana), Mauritius (VCP), Mozambique (MCP), Zimbabwe
(TAK), Zambia (ZCP), Tanzania (FCP), Kenya (KCP), Ghana (VFMC)
and Central America (CAIM). The Norfund international network consists
of: Aureos Capital, IFC, IDB, CDC Capital partners, NORSAD, Nordic
based IFIS, SEAF, Local investment funds and Norwegian and
international consultants organisations and companies.

The influential factors involved with growth in developing countries, are:
infrastructure and good governance, local venture managers, a
commercial focus avoiding bureaucracy, a long term view, exit markets,
and deal flow.

Given the above issues are taken into consideration, private investors,
international industrial actors and top venture managers are able to invest
in developing countries promoting sustainability and growth through
profitability.

Questions in Sustainable Venture
Finance: Key points of Discussion

The workshop participants catalysed a number of thoughts, comments
questions and areas where more work is needed. Highlights from these
have been loosely grouped and are described below to stimulate further
work in the field
1
.

General Issues of Financing Sustainability
The key issue is actually not a lack of capital but rather how best
to organise it for sustainable ends.
If sustainable venture capital is perceived as more risky – how can
one break down this risk, quantify and manage it so that this risk is
not such a threat? One would need to make this work very
accurate to ward off the pre-conceived notion that environment
and ethical approaches necessarily involve a trade-off.
We need more proof that sustainability can be profitable.
How can one best leverage the current interest in SRI towards
Sustainable Venture Capital?
Why is there such a mismatch between the sustainable
development rhetoric and fraternity (the SRI Niche), and
mainstream capital?
How does one package the interest in Sustainable VC for the
mainstream asset management community?
There is a need for the public to realise that finance is ‘both an art
and an institution’.

1
The opinions expressed below are below are solely those of participants and are not necessarily
those of UNEP, UNEP FI, INSEAD or CDC Capital Partners.

29
Reflecting on the possibility of the September 11
th
attacks as an
attack on ‘capitalism’: what does the attack mean for sustainable
development, and for financing sustainable development in
particular?
How can we develop markets for sustainable products and
services – are they currently there, but hidden, or do they actually
need to be created? If so, by whom?

On the Concept of Sustainability for the VC sector
A useful definition of sustainability is: ‘to meet the capital needs of
the present, so as to not compromise the capital needs of the
future’ (here capital means financial, social and environmental
capital).
Can one ever have sustainability without profitability? This reflects
the idea that markets are only sustainable if they are profitable.
Mainstream VCs use a sector-focused approach to sourcing
deals. Though useful, this approach covers over the intersection
between businesses, new business ideas, and new technologies.
Are they missing an opportunity?
What are the different meanings of sustainability in each of the
VCs and funds?
How can one measure the sustainable element and outcomes of
the enterprises? (i.e. social or environmental return on investment)
There is a need to develop the concept of ‘responsible ownership’,
and to make it both attractive and practical.

On developing the field of Sustainable Venture Finance
There is a need to develop a common language between
environmental and social worlds and finance sector. Translators
are needed.
Problem – there is bottleneck created by a lack of experience and
skills in the varied fields that SVF calls on (which is also a problem
in the VC market generally).
There is a need to develop the finance, VC, and entrepreneurship
skills of environmental/ social professionals.
There is a need to promote sustainable entrepreneurship.
Not enough VCs are looking into this sector - indeed there are not
enough deals in general.
There is a need for more angel investors – more capital and
support needed to develop entrepreneurs in pre-VC stages.
Helping them to get to the VC level is also a challenge.
A key challenge for investors is to find interesting projects to
invest in and then to help develop them.
There is a need to build good governance systems to manage the
growth and to provide accountability of these firms in the long
term.

30
Why aren’t entrepreneurs working together more?
A better network is needed so that sustainable entrepreneurs and
VCs can find each-other, and learning can be accelerated.

On Regulation and Government Incentives
What regulatory instruments would best stimulate innovation?
Does SVF and Entrepreneurship provide a way to connect the
sustainability goals of governments to their economic
development roles?
If the EU was to pass the ‘Sustainable Venture Finance’ Act, what
would it look like?
What existing regulation is hindering the development of the
Sustainable Venture Finance industry?
What role does government have in creating and regulating new
markets that favour sustainable products and services? How can
they better regulate externalities?
How should government money be most effectively used to
stimulate sustainable technology development?

On Developing Country Issues: From Global to Local Capital
Currently there are two levers: government money and mission
investing. However there is too large a gap between government
grant money (which floods the market and is not accountable) and
possibilities for private equity investing in emerging markets.
There is a lot of cash floating about – but the question is who has
access to it and for what. Funds tend to be targeted towards large
scale, large cap infrastructure projects that do not promote
entrepreneurship and local responsibility. Equity investment has
the possibility to fulfil this need.
Sustainable growth in developing countries can be achieved
through profit making ventures and entrepreneurs.
Specifically, what can private equity achieve in these contexts?
How can it facilitate entrepreneurial development, capacity
building and empowerment – as well as provide capital?
Who is in the best position to take the fundamental risks – and
who should come later. Government money first – e.g. CDC –
then private equity later? A partnership approach?
Is private equity more efficient and effective than official
development assistance? Why? Why not? In what situations might
it be?
Investors need to adopt a long-term view when going into
developing markets: 5 - 10 year horizons.
There is a need to modify venture concepts in developing
countries, one cannot expect the same systems, infrastructure,
and cultures to prevail.

31
There is a need to channel external savings and investments
through local venture capital funds to invest in projects in a more
efficient way (e.g. via the ENLACE project in Paraguay).
There is also a need for a sophisticated exit strategy that leaves
entrepreneurs self-reliant or creates opportunities for local
investors.
Difference in values – have to be careful that we are not simply
applying a G8 nation ethical model to countries where this does
not have credence. Can we really impose our models of returns,
ethics and sustainability on cultures that are simply struggling to
survive?

Next Steps for the
Sustainable Venture Finance Initiative

As this conference deliberated upon, most socially responsible investors
currently cover large-cap companies who strive to minimize their
environmental footprint while contributing to the economic and social
development of the communities in which they operate.

We posited at the outset that large-cap companies are not the only
organizations focused on corporate social responsibility and delivering
investors a substantial return. We also stated that ‘Innovative solutions to
environmental and social problems are often found with entrepreneurs
and new ventures’.

What we found in this conference was that there is clearly a big potential
for sustainable entrepreneurship. An entrepreneurial spirit is required not
only by those developing the new businesses, but also by their investors.
We heard many stories that illustrated that by focusing on sustainability –
the innovative capabilities of businesses were also developed.

In almost every area of the economy, new ideas, concepts, inventions
and techniques are emerging that, collectively, will form a new market.
Particularly in these young markets there is a need for risk-bearing
capital.

INSEAD and the UNEP FI Asset Management Working Group (AMWG)
are implementing a work programme that intends to develop the field of
SVF further. This collaborative effort will identify the barriers and
pathways towards profitability in sustainable venture finance. Specifically,
it will develop a research proposal, supervised by a peer review process
as illustrated below.

Entrepreneurial
spirit is required
not only by those
developing new
businesses,
but also by their
investors.

32
Peer Review Process

Potential Outputs of SVF Resarch and Collaboration

A roadmap of the sectors and different main issues in each (to
scope and prioritise areas).
A Substantial literature review – including historical perspectives
on SVF development.
A Review of best practice cases demonstrating successful lessons
for investors and entrepreneurs.
Business cases of sustainable VCs and entrepreneurs / start-ups.
A regulatory assessment and policy review.
The development of new instruments: e.g. baseline screening
criteria or business plan guidelines.
Performance attribution for best methods of ensuring ‘social and
environmental return on investment’.
Outline the barriers and opportunities for mainstreaming SVF.
Develop a framework for a European sustainable business plan
competition
Design a SVF / Sustainable entrepreneurship networking portal.

We look forward to your input into this effort.

To contact us and for more information visit:

www.unepfi.net/venture

Research Network:
(academic – Yale,
INSEAD)
Industry Practitioners:
Investors / VCs
Entrepreneurs
NGOs, think tanks,
consultancies
UNEP FI / INSEAD
Research Proposal
STAKEHOLDERS
Public and Private
Funding Sources
Launch at SVF
Event 2004
VENTURE
CAPITALISTS
ENTREPRENEURS
REGULATORS
AUDIENCE
Contract Study and
Review Process
Government – Policy:
(e.g. UNEP DTIE
OECD, EU)

33
Further Online Reading

British Venture Capital Association Environmental Investment Survey
Escponent - Sponsored by WWF-UK

Community Development Venture Capital
A Double-Bottom Line Approach to Poverty Alleviation
Julia Sass Rubin - Harvard Business School

FEE Discussion Paper Providing Assurance on Sustainability Reports
Fédération des Experts Comptables Européens

How Carbon Neutral® Programmes Generate Business Value
A Future Forests occasional paper

Social Entrepreneurship in Developing Nations
Sara Foryt - February, 2002

The Emergence of Green Venture Capital
Anastasia O’Rourke, Jelena Randjelovic and RJ Orsatto, INSEAD working paper,
March, 2002

The London Principles of Sustainable Finance:
The contribution of UK-based financial institutions to sustainable development.
Forum For the Future UK

Toward Sustainability Venture Capital:
How venture capitalists can realise benefits from investing in sustainability-
oriented start-up businesses
Jelena Randjelovic - Thesis for the fulfilment of the Master of Science in
Environmental Management and Policy Lund, Sweden, September 2001

Venture Capital/Private Equity: Environmentally Conscious Investing
Diana Propper de Callejon
EA Capital Spring 2001

Information on Organisers

The UNEP Division of Technology, Industry and Economics (DTIE)
www.uneptie.org

The mission of DTIE is to help decision makers in government, local authorities
and industry develop and adopt policies and practices that:

- Are cleaner and safer;
- Make efficient use of natural resources;
- Ensure adequate management of chemicals;
- Incorporate environmental costs;
- Reduce pollution and risks for humans and the environment.

UNEP DTIE activities focus on raising awareness, improving the transfer of
information, building capacity, fostering technology cooperation, partnerships and
transfer, improving understanding of environmental impacts of trade issues,
promoting integration of environmental considerations into economic policies,
and catalysing global chemical safety.

34
UNEP Finance Initiativeshttp://unepfi.net

Project Team:
Paul Clements-Hunt
Jacob Malthouse

UNEP FI is a global partnership between the finance, insurance and public
sectors that develops and promotes sustainability best practice in financial
institutions.

In 2002 over 278 signatories in 51 nations work with UNEP FI towards the
common goal of maintaining the health and profitability of their businesses within
the framework of sustainable development.

INSEAD Centre for the Management of Environmental Resources
www.insead.edu/cmer

Project Team:
Kai Hockerts
Anastasia O’Rourke

In 1992 INSEAD created the Centre for the Management of Environmental
Resources (CMER) as a specialised environmental research and teaching
facility. CMER research activities focus on corporate decision-making, studies in
industrial ecology and industrial metabolism, studies of European environmental
policy and policy-making processes. Research topics include building the
business case of environmental corporate strategy, life cycle analysis, full-cost
pricing, competitive opportunities from the green consumer movement, green
accounting, sustainability in the financial sector (SRI’s, Venture Capital,
Shareholder Activism), the international trade implications of pricing
environmental resources, and clean technologies.

Disclaimer

The information and data contained in the INSEAD/UNEP FI document,
“Sustainable Venture Finance, An Expert Workshop on Sustainability Oriented
Venture Capital and Entrepreneurship Conference Report” has been gathered
from publicly available sources. The United Nations Environment Programme
(UNEP), including the UNEP Finance Initiatives, as well as INSEAD and the
Centre for the Management of Environmental Resources, take no responsibility
in any manner for the veracity of the information contained in the document or
actions taken by readers or users of the directory in its draft or final forms.

Their respective offices and employees do not warrant the accuracy or
completeness of the information contained in the report. The information in the
report does not constitute investment advice, and users are urged to undertake
their own investigations and seek their own professional advice before taking any
investment decision.

End of Document.

35
Sustainable Venture Finance
An Expert Workshop on Sustainability Oriented
Venture Capital and Entrepreneurship
Conference Report

The emergence of sustainability as a profitable business strategy is rapidly
transforming the landscape of the financial industry. Investors are increasingly
targeting companies that are sustainable and being rewarded through their
financial returns.

So far most socially responsible investment funds cover large-cap companies
who strive to minimize their environmental footprint while contributing to the
economic and social development of the communities in which they operate. Yet
large-cap companies are not the only organizations focused on corporate social
responsibility and delivering investors a substantial return. Innovative solutions to
environmental and social problems are often found with entrepreneurs and new
ventures.

On June 7 and 8 2002 INSEAD and UNEP FI hosted a workshop in
Fontainebleau France that brought together a unique network of participants
representing the full spectrum of the field to discuss whether and when it is
profitable to invest in sustainability oriented venture capital funds and
entrepreneurial ventures. This report summarizes the presentations and key
questions and answers from that workshop.

Partners

United Nations Environment Programme
Division of Technology Industry and Economics
Finance Initiatives Unit

INSEAD
Centre for the Management of Environmental Resources

Contact
[email protected]
Tel: +41 22 917 8178

Details and presentations available for download at:
www.unepfi.net/venture

doc_420113910.pdf