Look out, banks: Sustainability funding gets creative
Emerging fintech options can back a range of risky business ventures, such as sustainable agriculture, local resilience projects or startups.
Nothing beats seeing a great idea turned into a business reality — especially when that dream realizes benefits for communities and the environment. But innovation requires risks that can signal red flags for mainstream banks.
There are now a variety of financing options for sustainability projects that big banks and investors won't fund: Apple and Starbucks have issued green bonds to catalyze energy efficiency projects and supply chain sustainability; and Wells Fargo has helped P&G infuse funds into the circular economy.
Here are several other emerging ideas for financing sustainability in the form of corporate energy projects, ecosystem restoration, local resilience initiatives and startups.
When it comes time for sustainably-minded startups to scale, it can be difficult to maintain control over supply chains and company values. Some financial services organizations thrive from offering early-stage, mission-driven companies capital at lower rates than from traditional lenders.
For a company such as Guayaki, which imports certified organic, rainforest-grown yerba mate plants from South America, a company sale or IPO could compromise the company's ethos. In 2009, RSF Social Finance provided growth capital to Guayaki, first from a mezzanine fund for higher-risk enterprises and then from its main loan fund, allowing the organization to grow in a way that makes sense for its culture. From 2008 until 2011, the company's revenue grew from $8 million to $15 million.
The companies RSF invests in through its Fair Trade Capital Collaborative are built around sustainable food and agriculture, or sell products with fair-trade or "high-integrity supply chains." Most businesses whose supply chains RSF finances have $1 million to $15 million in sales or budget, but some fall into the $50-$60 million range.
"What's unique is that these loans are risky," said Kate Danaher, senior director of social enterprise lending and integrated capital at RSF Social Finance. "When you make a loan to a coffee co-op in Mexico … The crop could be not high-quality or not available. Farmers are so poor that when the main breadwinner gets sick, everything crumbles. The longer you lend someone money, the harder it is to track if they'll pay it back."
But in the regenerative economy, she said, "trust and interdependence are key." A similar principle motivates the new Catalyst Credit Line from San Francisco-based New Resource Bank (NRB) and financial technology firm P2B Investor. It offers U.S.-based, B2B companies generating at least $500,000 a revolving line of credit up to $10 million.
Working with the bank helped worker-owned residential solar company Namaste Solar build in a low-income area in Denver, creating jobs that entail part ownership of the organization.
"We saw an opportunity to partner with an asset-based lender, to be able to bring the rates down using half of the loans and half of the risk — taking the senior piece, and allowing them to take the subordinated piece — and taking the rate down to a much more palatable for a borrower," said Groff.
As the company matures and moves into profitability, their rate continues to blend down, allowing the credit line to be a long-term financing solution for the company. To remain a viable investment, recipients have to meet sustainability criteria using the B-Lab impact assessment.
"If we take on a biodigester, we can measure the greenhouse gasses saved. Or if we finance a building, we can look at energy usage before and after," said Groff.
Both RSF and NRB manage risk by creating personal relationships with companies — which ultimately lessens the risk for the investor, too.
"The downturn in the economy proved to me that the intangibles of the companies that we look for are the things that make them the most resilient and the safest bet for us to invest in," said Groff, who said that NRB not only navigated the economic downturn of the mid-2000s, but remained profitable year-over-year.
Under the principle of crowdsourcing, people pool their time, cooperation and money (known as "crowdfunding") to help initiatives they believe in to lift off the ground. Potential funders usually connect with founders through an app or website; Kickstarter is the most famous example.
This helps multiple parties — from the company to the donors — profit from relationships and generate impact. Crowdfunding has realized interesting consumer-focused sustainability solutions, such as solar backpacks, sun-powered phone chargers, human-powered generators, water pumps and even films (such as the climate change documentary "Age of Stupid").
This can be good news for companies selling sustainability systems, not just products. The U.S.-based Solar Mosaic, for one, started out as a successful crowdfunding startup for solar energy projects (it has pivoted to residential solar loans).
P2B Investor, which helped create the Catalyst Credit Line, is one example. It underwrites and makes business loans that are crowdfunded by investors, who earn 8 to 9 percent on investments through its platform.
Another company, U.K.-based Abundance Generation, pools investments from individuals for renewable energy projects, who can invest as little as $6.55 but receive a 5 to 9 percent return on investment. Their first project was to raise funds to build a 500-KW wind turbine at a farm several years ago. Another organization, EnergyShare, specializes in diverse fundraising models for the U.K. low-carbon sector.
The power of crowdfunding is shifting from a donation-based model to a viable business strategy. Equity crowdfunding was illegal in the United States until 2016. Now, platforms can register with the Financial Industry Regulatory Authority (FINRA) as funding portals that offer equity opportunities for small-scale investors.
Crowdsourcing also can attract not just money, but valuable open-source ideas. GE’s ecomagination challenges, for example, aim to bring energy ideas to market.
Or, they can be used to generate money: In 2017, the Nature Conservancy and NatureVest (TNC's conservation investing unit) launched an accelerator, which offers capital and mentorship to promising startups, to catalyze the development of investment opportunities to solve environmental challenges such as coastal restoration in Louisiana.
Pay for success
In August, two financial technology companies — Neighborly and Quantified Ventures — partnered with the Rockefeller Foundation to offer the first publicly marketed environmental impact bonds (EIBs) for municipalities grappling with the impacts of climate change.
These projects often operate under a "pay-for-success" (PFS) model, which enables local governments to share performance risks with private investors. Contracts or grants to support social services are usually based on the volume of services delivered. Under PFS, investors provide upfront capital for the services and are repaid by the municipality (with interest) if the agreed-upon outcomes are achieved.
Essentially, investors have a stake in the successful outcome of a project, and governments have an opportunity to pilot innovate resilience efforts that could be implemented in other communities.
These arrangements have helped Washington, D.C., to manage stormwater runoff, have restored forests in California and were a critical factor in Louisiana's $50 billion Coastal Master Plan for natural infrastructure solutions.
As of this year, there are 17 social finance bonds in the United State and as many as 50 in development, according to the Massachusetts government. It recently released a PFS to help limited-English speakers in Boston transition to higher-wage jobs.
Yes, coral reef insurance is a thing. It protects natural assets the same way that health insurance protects human well-being. The Nature Conservancy and reinsurer Swiss Re AG are offering an insurance policy for a 40-mile stretch of the Mesoamerican coral reef off the coast of Cancun, Mexico. If a significant event such as reef bleaching occurs, insurance money is paid out to local businesses and conservation teams, who nurse the coral back to health.
It is designed to protect the reef from climate change-related damage, which is contributing to coral reef bleaching and destruction worldwide. The reef, in turn, ensures steady tourism for local businesses and helps to lessen the impact of storm-induced sea level rise. The premium pot is between $1 million and $7 million, and the payout will be up to $70 million per year (full coverage will begin in January).
While ecosystems and insurance providers seem strange bedfellows, protecting them guards the insurance industry from losses: Coastal wetlands prevented $625 million in flood damages to insured private property, including business interruption losses, during Superstorm Sandy.
Like nature, the business ecosystem is evolving and diversifying in order to address the myriad sustainability challenges facing our world.