Retail investors are becoming interested in the investment potential of companies that place sustainability at their core. Chris Morris details the findings of a new report by Sustainable Ventures.
Retail investors are increasingly inclined to put a proportion of their capital into sustainable investments, but the definition of what constitutes a sustainable investment differs substantially from product to product. Investing in tech giants, investment banks or soft drinks companies with strong CSR policies is all well and good, but many retail investors want to go beyond that and invest in companies that have sustainability at the core of what they do.
Nearly one in three (30 per cent) sophisticated investors plan to increase their exposure to sustainable investments over the next 24 months compared to just 7 per cent who plan to decrease their exposure, according to research we recently commissioned. Over half (53 per cent) of these intend to do so because they want to do more to support environmental or sustainable companies, with 30 per cent saying they have been influenced by increasing media focus on environmental issues.
But it is not just social conscience driving this trend. Financial considerations also play a part, with 38 per cent citing growing evidence that sustainable investments out-perform non-sustainable ones as a reason for increasing their exposure, and the same percentage looking to diversify their portfolio from other asset classes.
However, retail investors seeking to put their money behind companies whose primary focus is rooted in technologies or services which solve environmental challenges can find it difficult to do so. All-too-often they are faced with a confusing picture of investment funds with varying and sometimes opaque investment criteria.
Our analysis has found that only a third (36%) of ‘sustainable’ or ‘environmental’ funds open to retail investors invest in businesses that actually provide solutions to the challenges of climate change and resource scarcity, with the remainder typically investing in companies which simply boast strong Environmental, Social and Governance (ESG) credentials. However, these companies’ primary activity could be highly varied, and include tech giants, investment banks and internet retailers.
For many retail investors, this is not enough to satisfy their personal investment criteria. Almost a third of investors wish there were more investment opportunities in companies that are truly sustainable. The same percentage say they would prefer to invest in companies whose central purpose or whose products and services are designed to reduce our negative impact on the environment, rather than companies which don’t have this central purpose but which have strong sustainable credentials.
The “inevitable growth” of the sustainability sector
The growing interest from retail investors is indicative of the increasing momentum behind the need to find commercially-viable solutions to the twin challenges of climate change and resource scarcity – momentum which is being fuelled by the evolving attitudes of a broad spectrum of stakeholders from corporates to politicians and consumers.
Since co-founding Sustainable Ventures in 2011 I have witnessed these evolving attitudes first hand, and we have seen a significant increase both in the variety of innovative green start-ups we come across, and in the level of interest in these companies from investors and other stakeholders.
Some of these businesses are achieving great commercial success already, such as E-Car Club, an electric car sharing business we founded and subsequently sold to Europcar in 2015 in the world’s first exit for an equity crowdfunded business. Successes like this, which generated a significant return for investors, have in turn stimulated interest in other sustainable investment opportunities as investors see a way to support causes they believe in without sacrificing commercial objectives.
Our Sustainable Accelerator Investment Fund (SAIF), which invests in and supports early stage ventures ready for rapid expansion is a good example, with its 2017/18 cohort including businesses operating in areas from circular economy to subsea innovation, agritech to domestic energy efficiency. Currently raising its second fund via Seedrs, the Accelerator will invest in around 5-8 high potential sustainability businesses which will then have access to a bespoke one-year programme of expert mentorship, network introductions, fundraising support, and growth services.
Of course, investing in start-ups carries significant risks, but these can be materially reduced by taking advantage of tax relief and grant funding available for sustainable businesses.
We have found that innovative business in this sector can be further stimulated through collocation with other likeminded companies. Central London is now home to Europe’s largest cleantech cluster with over 40 sustainability start-ups based in Sustainable Workspaces’ two sites in the capital. These affordable co-working spaces are home to innovative market leaders such as PowerVault, which designs smart energy storage systems for the modern home; DryGrow, which grows low-cost, high-protein animal feed using 95 per cent less water than traditional agriculture; and Halo Coffee, the creators of the world’s first home-compostable Nespresso compatible coffee capsule.
Businesses like these show that great innovation can help tackle environmental challenges while providing a commercial return for those who support them. The ever-increasing momentum behind businesses that can provide sustainable solutions will ensure a bright future for sustainable innovators. But this momentum can be increased if investors who wish to invest in truly sustainable businesses have clearer and more transparent sustainable investment choices available to them.
Chris Morris is the Co-Founder and Managing Partner of Sustainable Ventures.