Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment Input Paper for the G-20 Sustainable Finance Study Group © International Finance Corporation (2018). All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly, and when the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. 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Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment Input Paper for the G-20 Sustainable Finance Study Group Acknowledgments This report has been prepared by IFC as the key knowledge partner to the G-20 Sustainable Finance Study Group (SFSG). The lead authors are Reyaz A. Ahmad (Head, AMC Fund of Funds Team), Laird Reed (Senior Investment Manager, AMC Fund of Funds Team), and Rong Zhang (Global Coordinator of IFC-supported Sustainable Banking Network). The report was made possible by the valuable inputs provided by other knowledge partners including Jeff McDermott (Managing Partner, Greentech Capital Advisors); Xing’an Ge (CEO of China Emissions Exchange Shenzhen and Secretary General of Shenzhen Green Finance Committee); Can Jiang (Director of Research Department at China Emissions Exchange Shenzhen); Natasha Buckley (Senior Manager, Alternatives at UN PRI); Clara Barby, Adam Frost, and Brian Trelstad (Partners of Bridges Fund Management); as well as numerous practitioners and other subject matter experts interviewed for this report. Special thanks go to the following experts for their in-depth guidance and review: Dr. Ma Jun (Director of Tsinghua Center for Finance and Development, Co-Chair of the G-20 Sustainable Finance Study Group, Special Advisor to the Governor of the People’s Bank of China [PBOC], Member of the Monetary Policy Committee of the PBOC), Delfina Lopez Freijido (Director of Sustainable Finance, G-20 Unit, Argentina’s Treasury), Florencia Baldi (Analyst of Sustainable Finance, G-20 Unit, Argentina’s Treasury), Tomás Clark (Analyst of Global Economy and Framework, G-20 Unit, Argentina’s Treasury), Anabel Fazio (Central Bank of Argentina), and Cheng Lin (Economist, Tsinghua Center for Finance and Development). Table of Contents Acknowledgments 4 Background 6 Section 1 Why Sustainable Private Equity/Venture Capital? 7 Section 2 Market Experience and Lessons Learned 16 2.1 Sustainable Private Equity/Venture Capital in Emerging Markets 16 2.2 Sustainable Private Equity/Venture Capital in the United States 19 2.3 Sustainable Private Equity/Venture Capital in China 22 2.4 Sustainable Private Equity/Venture Capital in Argentina 25 2.5 State-Sponsored Waterfall Structure: The Case of the Yozma Group 26 2.6 Accelerators: The Case of NXTP Labs 28 2.7 State-Sponsored Funds: The Case of Ecotechnologies Fund 31 2.8 Market Building: The Impact Management Project 32 2.9 Market Building: The Principles for Responsible Investment 33 2.10 Sustainable Corporate Venture Capital 34 2.11 Summary Takeaways 36 Section 3 Challenges to Developing and Scaling Sustainable Private Equity/Venture Capital Markets 39 Generic Barriers to Private Equity/Venture Capital Development 3.1 39 3.2 Barriers Specific to Sustainable Private Equity/Venture Capital Development 40 Section 4 Options for Overcoming the Barriers 42 Endnotes 47 Background A defining characteristic of the private equity and venture capital (PE/VC) investment style is the injection of expertise (including technical knowledge, industry relationships, management skills, and so on) in conjunction with risk capital into enterprises to help them grow, improve their performance, and achieve strong financial returns. Harnessing this investment style in the pursuit of sustainable growth and investment is central to achieving the innovation needed for sustainable development.1 Sustainability-driven innovation offers an opportunity to boost economic growth, improve living standards, and generate a variety of employment options. Such innovation is constantly generated by businesses at all stages of development as they create, apply, and adapt breakthrough technologies and innovative business models. While companies that have a positive environmental or social impact are critical to driving sustainable growth, many of these companies, and particularly the smaller ones, face difficulties in accessing and attracting funding. Where more common financing channels (such as bank loans and bonds issued by large corporations with steady cashflows and deep balance sheets) may not be available, PE/VC could provide at-risk capital for many of these young, often innovative companies. Furthermore, private equity (PE) funds increasingly align with value creation linked to social and environmental considerations. PE firms are recognizing the material value brought by sustainable businesses and social enterprises, which has resulted in a greater availability of sustainable PE capital that follows, to varying degrees, one or more of the disparate standards being developed or already in the market. However, the private capital marketplace, including sustainable PE/VC, has developed unevenly globally and is least established in emerging economies. For example, nearly US$300 billion of private capital has been invested annually over the last five years in the United States, with an additional US$150 billion a year invested in Western Europe. By contrast, less than US$50 billion a year has been invested in emerging markets even though these areas account for nearly 60 percent of the world’s GDP.2 This paper focuses on key aspects of sustainable PE/VC market development and deployment.3 It discusses (1) why sustainable PE/VC is a useful tool to catalyze other types of capital to achieve sustainability objectives, (2) best practices and lessons learned from the experiences of knowledge partners, (3) the main barriers to further developing the sustainable PE/VC market, and (4) options for countries to voluntarily consider or adopt to overcome these barriers. 6 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment Section 1 Why Sustainable Private Equity/ Venture Capital? To meet the Sustainable Development Goals (SDGs), up to an estimated US$7 trillion annually4 will be required between now and 2030 to bridge the transformation to a sustainable global economy, with the bulk of the money coming from the private sector. While incremental changes to business- as-usual practices will have to be part of the transformation, “radically new or significantly improved products (goods or services), processes, or practices [will] contribute to economic and social goals of sustainable development.”5 This innovation will need to occur globally, including into emerging markets where much of the of the world’s economic and population growth is forecasted to take place, driven by several clear trends discussed below. However, this rapid growth will also present significant challenges for countries’ social services, urban areas, core infrastructure, limited natural resources, and fragile ecosystems. Sustainability-driven innovation, including the creation and adoption of transformative business models, can help develop technologies, expand their access, and provide for implementation in many different countries along the entire continuum of development. Technological innovation. By 2050, the world is expected key “component of corporate sustainability [that have] to hold 9 billion people, 3 billion of whom will be new only recently moved into the focus of sustainability middle-class consumers. This translates into various management research.”7 Furthermore, “evolving business challenges, including how to expand supply to meet models that alter not just how we produce, but how unprecedented demand. For example, by 2030, water we consume have the potential for major disruption.”8 demand is anticipated to exceed supply by 40 percent, These sustainable business models may include hiring with water demand increasing by about 300 percent or leasing of products and services, sharing products, in Sub-Saharan Africa alone.6 Technology will play a incentivizing the return of used products, as well as critical role in solving these challenges, including, in creating innovative new models for how we work, some the example above, more effective application of scarce of which are described in Table 1.9 resources in agriculture and more efficient water and waste treatment. Furthermore, no single technology will Growth. Innovative sustainable technologies and address the world’s sustainability challenges; instead, sustainability-driven business models offer great potential country-level or regional nuances are expected to evolve for not only improving social conditions and alleviating as solutions are developed or adapted for each country’s environmental pressures but also boosting economic unique circumstances and market context. growth and providing a wide variety of employment opportunities. Multiple reports and assessments Business model innovation. Prioritizing sustainability suggest that marginal improvements to business-as- within established businesses and developing innovative usual developments will not adequately or sustainably new companies with creative—and sustainable—solutions meet the needs and aspirations of the growing world will be crucial in transforming the global economy toward population.10 While incumbent, large corporations sustainable and inclusive growth. According to some will have an enormous role to play in transitioning scholars, innovative business models have become a to a sustainable and inclusive economy, incremental Section 1 Why Sustainable Private Equity/ Venture Capital? | 7 Table 1: Examples of Sustainable Private Equity and Venture Capital Investment Targets Company Goal and targeted Solution Latest financing (country) SDGs round ($US) Algramo Sustainability in retail. Establish a wholesale relationship with consumer 40K VC (seed) (Chile) SDGs 1, 2, 8, 9, 10, 11, goods manufacturers, to buy the products in bulk, 12, 13. saving costs in an environmentally friendly way without lowering their quality. AltSchool Children’s education. A comprehensive solution for personalized 173M VC (USA) SDGs 4, 5, 8, 10. learning, flexibly designed to meet diverse Last: Series C needs. Educators use one system to create and customize content. Apeel Minimize waste and Creates products using plant-derived materials 110M VC Sciences help family farms. that help fresh food suppliers and retailers Last: Series C (USA) SDGs 2, 11, 12, 14, 15. increase product quality and fight food waste. Avante Financial solutions to Empowers the massive, underserved, micro- 18.8M VC (Brazil) microentrepreneurs. entrepreneurs by leveraging technology and Last: Series C SDGs 1, 5, 8, 10, 17. providing them FinTech services. Cotopaxi Eradicate poverty. Direct-to-consumer gear and apparel B Corp 22M VC (USA) SDGs 1, 2, 3, 4, 5. financing health, education, and improving Last: Series B livelihoods in developing countries. Easybike Ecomobility solutions. Designs and manufactures a range of bikes that 22.3M VC (France) SDGs 3, 11, 13. run on electricity. E-Car Club Ecomobility solutions. UK’s leading low-emission-car club, offering M&A by Europcar (UK) SDGs 3, 8, 11, 12, 13. electric and hybrid vehicles on demand. Ecolibrium Energy efficiency. Smart grid and energy management technologies 4.2M VC (India) SDGs 7, 9, 11, 12, 13. to control energy usage (almost real-time data). It has an energy analytics platform based on IoT/ ML. EcoScraps Mainstream ing manufac­ Lead­ turer and distributer of natural 5.8M VC (USA) sustainability. den products that turn food waste into high- gar­ Last: Series B SDGs 3, 11, 12, 13 15. quality compost. Efishery Fight world hunger. Applying IoT to fishery through an “auto-feeder” 1.2M VC (Indonesia) SDGs 2, 8, 14. device that allows farmers to schedule feeding times using an app. General Transform energy Developing utility-scale fusion power, using 89M VC Fusion supply with fusion. a new magnetized target fusion (MTF), to (Canada) SDGs 7, 9, 11, 13. commercialize it. 8 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment Table 1: Continued Company Goal and targeted Solution Latest financing (country) SDGs round ($US) Ideol Wind energy. Designs and sets innovative foundations for the 41M VC (France) SDGs 7, 9, 11, 12 offshore wind industry. InspiraFarms Health and nutritious Provides refrigerated storage solutions, technical 4.9M VC (UK) food. support, and affordable leases to agribusinesses Last: Series A SDGs 2, 3, 11 and 13. for energy-efficient technology to cut energy costs and grow sustainably. MineSense Sustainable mining. Dedicated to improving the profitability and 60M VC (Canada) SDGs 8, 9, 12. sustainability of mining through first-of-its-kind technology. PayGo Finance energy A distribution service that allows customers 1.4M VC Energy purchases. to purchase gas on a pay-as-you-go basis, (Kenya) SDGs 1, 2, 3, 10. promoting clean cooking. PowerVault Energy efficiency. Designs and manufactures smart energy storage 5.4M Equity (UK) SDGs 7, 11, 12, 13. systems (for solar and grid electricity). Crowdfunding SeemlessDocs Paperless government. E-signature and automation platform that 16M VC (USA) SDGs 11,12,13. increases governments’ efficiency converting Last: Series B PDFs into fillable cloud documents. Sunculture Efficient agriculture. SunCulture is transforming agriculture with the 700K VC (Kenya) SDGs 1, 2, 3, 8, 11, 13. #AgroSolar irrigation kit for farmers in Kenya. TemperPack Sustainable packaging. Specializes in custom solutions of sustainable 14.5M VC (USA) SDGs 9, 11, 12, 13, 14, 15. packaging technology for perishable goods. Last: Series B Voltaiq Energy efficiency. Develops a software solution that predicts the 8.6M VC (USA) SDGs 9, 11,12,13 performance of batteries and battery-powered Last: Series A systems. Zola / Offgrid Clean, and affordable Designs renewable energy solutions with the 206M VC Electric energy. latest electronics technology, and its systems can (Tanzania) SDGs 7, 13, 11 and 12. be bought using PAYGo microfinance leasing and mobile money payments. Section 1 Why Sustainable Private Equity/ Venture Capital? | 9 improvements to existing solutions will be Figure 1: Summary Characteristics by Financial Product only part of the solution. Another part of this transformation to sustainability will be driven 100% by step changes and radical innovations that “disproportionately often originate(s) in smaller and entrepreneurial new firms.” • 20%-80% of total; low risk, low return to In fact, findings from research imply “a investors (2-7% internal rate of return (IRR)) Senior stronger impact of start-ups in the transition • Often secured by real assets or cashflows 75% (Bank) toward a sustainable or green economy.”11 Debt • No role in company strategy / operations • Limited flexibility Thus, fast-growing start-ups and small and % of Total Transaction medium enterprises (SMEs) will likely be engines not only for sustainable innovation but also job creation and rapid economic 50% • 0-20% of total; medium return (8-12% IRR) growth that accompanies innovation. High Yield / • Some risk, limited influence on company Mezzanine This dynamic will be particularly true in Debt • Junior claim on assets and cash flows developing countries, especially considering • 0-20% of total; medium return (12-15% IRR) that in emerging markets, SMEs presently Quasi - • Aspects of both debt and equity create four out of five new (formal) jobs 25% Equity • Some flexibility and governance rights and contribute as much as 60 percent of total employment and up to 40 percent of • 20-50%+ of total / high return (15%+ IRR) Common GDP. These numbers are significantly higher • Maximum influence on company Equity • At-risk capital; no downside protection when informal SMEs are included. Given the World Bank’s estimate that 600 million Simplified Capital Structure jobs will be needed, mainly in Asia and Sub- Saharan Africa, over the next 15 years to absorb the growing global workforce, innovative SMEs a much lower risk appetite and lower expected fixed will be essential for the developing world’s growth and returns. employment as well as for creating and accelerating the transition to sustainable economies.12 However, not all companies, especially start-ups and growing SMEs, whether sustainability focused or not, can Financing alternatives. A variety of green and social access suitable funding or have the necessary expertise financial products (for example, green bonds, social to continue their rapid growth. Furthermore, several bonds, mutual funds that screen investment opportunities studies have shown that sustainability-focused start-ups to eliminate non-green companies, and so on) have may face additional challenges in accessing funding given grown significantly in recent years as a means to channel that their business activities may focus on areas served capital towards efforts with a sustainable focus. Despite by less developed markets.13 In this context, addressing being accessible to larger or more established companies, the challenges of financing innovation becomes essential. these products do not necessarily direct funding toward Providing risk capital to sustainable companies is crucial innovation and are harder to access for SMEs and start- to enabling these potentially dynamic enterprises to grow up companies that lack an operating history and a and create sustainable products, services, and solutions significant balance sheet. Furthermore, these forms of as well as contribute additional benefits to the overall sustainable capital fall into specific asset classes and are economy (for example, a range of employment options not easily fungible between these classes. For example, [long/short term, high/low skill, and others], increased equity is very different from debt, which comes with 10 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment Figure 2: Illustrative Stages of Sustainable Technology Financing RESEARCH BUILD AND PROVEN CAPITAL COMMERCIAL AND SCALE SALES COMMERCIAL MARKET PROTOTYPE DEVELOPMENT GROWTH READY Lab Funding Seed Pre-Series A Series A Series B+ Strategic PE/IPO Acquisition Debt Financing tax revenues, improved regulation, developed capital Trends in sustainable investing. While there are many markets, and so on). different interpretations and means of implementing of sustainable investing, the trends are clear. Taking PE/VC funds, with their unique combination of risk capital impact investment as a proxy for the broader sustainable and expertise, are particularly well suited to identifying finance sphere, in the last five years, an analysis by the and using equity and quasi-equity to scale the best Global Impact Investment Network (GIIN) indicates that innovative business models and sustainable businesses in assets under management allocations to impact-focused both emerging markets and advanced economies. As seen PE have increased by 19 percent annually. According in Figure 2,14 these funds deploy their capital at different to Bloomberg, sustainable technology PE/VC investors stages of a company’s development, starting with high- in the United States have invested US$49 billion over risk seed capital in the tens or hundreds of thousands the past 12 years, in comparison to Europe’s US$20 of U.S. dollars and moving through growth-focused billion and Asia’s US$12 billion.17 Furthermore, in the Series A and B capital all the way to multibillion-U.S.- public equities market, capital focused on sustainable, dollar investments for companies that have not gone responsible, and impact (SRI) investing in the United through an initial public offering (IPO) but have been States reached US$8.7 trillion in 2016 (up from US$6.6 profitable for years and have thousands of employees. trillion in 2014). Globally, SRI investing hit US$23 trillion Some real-world sustainable PE/VC examples are also in 2016 (up from US$18 trillion in 2014), indicating described in Table 1. that more than 25 percent of worldwide assets under professional management were incorporating ESG PRIVATE EQUITY/VENTURE principles in investment decisions.18,19 CAPITAL AND SUSTAINABLE INVESTING Sustainable investing standards. Within the broad universe of investment activity, many investors have their own In keeping with the characteristics of broader sustainable approach to sustainable investing. These include exclusion investment practices, sustainable PE/VC is an investment lists/negative screening, positive screening/focusing on discipline that injects capital into promising privately best performers and specific sectors, ESG integration (that held companies and considers environmental, social, is, systematic integration of ESG risk management and and governance (ESG) criteria to generate long-term performance improvement strategies across all parts of competitive financial returns and positive social impact.15,16 the investment), thematic investment (such as renewable As seen in the examples throughout this paper, this type energy, gender equality and others), and impact investing of capital can foster innovative technologies and business (that is, the selection of projects and companies made models. Consequently, the development of sustainability- on the basis of demonstrable, positive impacts of the focused PE/VC funds should help create sustainable investments on stakeholders and the environment).20 long-term jobs and make countries’ economies more No single approach is uniquely superior to the others, resilient while helping to address domestic and global nor are they mutually exclusive. Sustainable investments social and environmental challenges. generally adhere to a set of environmental and social Section 1 Why Sustainable Private Equity/ Venture Capital? | 11 (E&S) standards, ideally using a standardized mainstream methodology to ensure compliance. Furthermore, the What is Private Equity & Venture monitoring and measurement of the impacts associated Capital? with these sustainable investments over the life of the PE/VC, a subset of equity (that is, ownership investment are becoming more sophisticated. One interest or risk capital) investments, is the ESG framework widely used in emerging markets is term used for a set of financing instruments the Environmental and Social Performance Standards that enable investors to take a stake in of the International Finance Corporation (IFC).21 The multiple high-potential companies that are Performance Standards are outlined in more detail privately held (that is, owned by a small below and are complimented by the recently developed number of shareholders and not listed on Anticipated Impact Measurement and Monitoring22 a stock exchange). This equity stake sits framework, which provides a robust, ex-ante quantitative at the bottom of an investee company’s methodology for evaluating, measuring, and reporting capital structure, making it a riskier but on impact with respect to financial and nonfinancial risk. potentially higher-returning investment There is also the work of the Sustainable Accounting instrument, which also enables less risky Standards Board (SASB), a nonprofit, independent forms of capital (such as debt) to participate higher up the capital structure. standards-setting organization that provides sustainability accounting standards and disclosure requirements PE/VC funds invest in these high-potential for public companies, assisting investors in assessing companies and help them grow by working how sustainable a company is and how it measures to improve performance, operations, governance, and strategic direction. The impact. Other recognized standards include GIIN’s funds are long-term investors, typically IRIS catalog, which tracks performance, and the Global holding investments for 3–7 years (over the Impact Investing Rating System (GIIRS), an impact fund fund’s life of 8–12 years), with a commitment rating developed by B-Analytics. Another collaborative to building lasting and sustainable value. PE/ project led by IFC in partnership with asset managers, VC funds realize returns for their investors by asset owners, asset allocators, development banks, and exiting investee companies at a value higher other financial institutions will identify key operating than that at which they entered, reflecting principles for impact management. These principles will the value the fund manager has added. PE/ be drawn from best practices across a range of public VC fund managers are remunerated upon and private institutions that seek to enhance discipline exit with a minority share of the increase in around impact investing, mobilize more funds for impact value they have helped create and are thus investments, and increase the potential impact that such incentivized to help their portfolio companies funds could achieve. Lastly, the SDGs are increasingly grow and increase profits. Typically, private used by investors as a framework for reporting and equity funds will exit their stake in a company by listing on the public markets, selling to investment verticals and themes identification, including a financial or strategic buyer (a trade sale), suggesting quantitative metrics for each goal. These and or, in some cases, back to the company or other frameworks, metrics, and standards are currently its management. being developed, explored, and actively used by many institutional investors that participate in both public and private investments with a view to understanding and adding to the sustainability of their portfolio holdings. Sustainable investing performance. To help illustrate the commercial case for sustainable investing, research on the 12 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment performance of this investment theme has been growing UNIQUENESS OF PRIVATE over the past decade. Studies have increasingly shown that EQUITY/VENTURE CAPITAL TO there is no economic penalty from considering ESG factors SUSTAINABLE INNOVATION in portfolio construction and management; rather, they generate opportunities to increase revenues.23,24 During PE/VC funds have several characteristics that make periods of economic slowdown, companies committed to them suitable for boosting investments that support sustainability appear to outperform their industry peers sustainable innovation: in financial markets.25 In 2017, Cambridge Associates and the GIIN found that market rates of return are A. Provide equity capital. PE/VC equity financing is attainable through impact investing strategies in real particularly catalytic as the cornerstone of the capital assets, but for this to happen, it is paramount to select structure and is better suited to withstanding economic the right investment manager.26 Research also found that shocks than many other bank-dominated financial the performance of hedged green bond indices has been products. Many start-ups and SMEs, including those similar to that of global bond indices with a comparable with disruptive sustainable business models and credit rating.27 While this and other evidence suggests technologies, are unable to secure financing from sustainable assets’ capacity to achieve or exceed market banks or bond markets and are therefore reliant on rates of returns, further research in the performance of PE/VC funds for financing as well as other needs specific sustainable asset classes is needed, including such as strategic, managerial, human resources, and analysis about sustainable PE/VC. Indeed, GIIN’s Annual marketing value added. Impact Investor Survey from 2018 highlights investment B. Tolerate and intelligently manage risk. PE/VC investors performance and impact performance as the two most are willing and able to identify, develop, and scale important topics for further research. promising nascent technologies and companies with disruptive/transformative business models that address This GIIN survey, which comprises public and private large challenges. Such funds accept high investment debt and equity, real assets, equity-like debt, and social risks provided that they have the potential of realizing impact bonds, among other asset classes representing high returns; the funds are also adept at identifying 229 investors with US$228 billion of impact investment risks and either mitigating them or sharing them assets, also flagged that investors’ performance targets and with third parties better suited to taking them on. appetites varied widely.28 Sustainable investors targeted market-rate returns were the largest group, at 64 percent, C. Contribute managerial and technical expertise and 20 percent targeted close-to-market-rate returns, and key customer/supplier relationships. PE/VC fund 16 percent sought capital preservation. The majority managers bring specialized experience on how to of respondents from the 2017 GIIN survey reported address the unique challenges faced by start-up that their sustainable investments had met expectations companies and how to grow the most successful for both impact (79 percent) and financial performance opportunities into efficient, profitable companies, (76 percent), with another 20 percent and 15 percent, especially in less sophisticated markets where respectively, reporting outperformance across these two management expertise can be a relatively scarce dimensions. Only 2 percent of respondents said that commodity. As equity shareholders with significant their sustainable PE/VC investments had underperformed influence or outright control, active PE/VC investors their impact expectations and 9 percent, their financial are well positioned to bring their expertise to bear, expectations. The survey attributed this underperformance thereby sharing insights, new technologies, and best to a high degree of variance at the deal level and challenges practices with investee companies. in setting impact and financial targets, particularly in less developed markets where there is unclear regulation, underdeveloped infrastructure, or currency fluctuations. Section 1 Why Sustainable Private Equity/ Venture Capital? | 13 D. Maintain alignment of Figure 3: Emerging Markets Private Equity has More Consumer interests. The standard Exposure than Listed Equities in Emerging Markets design and structure of PE/VC funds is well suited 100% to the relatively long time 90% Basic Materials frames and significant levels of involvement associated 80% Utilities with growing young companies to a point of 70% Oil & Gas financial sustainability. The 60% Telecomms compensation that PE/VC fund managers receive is 50% Technology integrally tied to the success 40% Financial of their portfolio companies, the success of which, in turn, 30% Industrials provide the most capacity 20% Health Care to transform the economy. E. Origination capacity. Local 10% Consumer PE/VC funds are well 0% placed to identify SMEs and support them through MSCI EFM EM PE their growth phase. Often Source: MSCI for MSCI EFM data and IFC’s PE Fund portfolio 2000-2013 for seen as an engine for jobs EM PE data and innovation,29 SMEs, including start-ups, are difficult to reach and scale As outlined above, PE/VC fund investments have through traditional sources of equity finance, listed clear benefits to host countries’ underlying economies markets, or dedicated green bonds or lending programs. that further compound when the investments support sustainability. Not only are sustainable criteria important F. Provide greater access into the economies of host to the long-term financial viability of an investment, countries. PE accesses more sectors in many countries’ but by developing new, sustainable PE/VC funds and economies than listed markets, facilitating economic aligning existing PE/VC fund operations with sustainable growth in specific industries, as seen Figure 3, which standards, additional second-order benefits of PE/VC compares the MSCI Emerging + Frontier Markets investing can be realized in host markets, including Index (MSCI EFM) to IFC’s emerging markets private equity (EM PE) portfolio. By providing scarce capital A. Environmental and social benefits. By integrating to underserved segments of the economy, PE/VC funds ESG criteria, PE/VC funds’ portfolio companies should be able to achieve attractive returns as well have a positive impact on the environment and as stimulate growth in companies that can provide communities that can benefit from this additional much-needed jobs and market-based solutions to level of risk mitigation, for example by minimizing society’s challenges. PE/VC funds also stimulate the exposure to polluting companies. With the added development of capital markets by listing companies value and inherent risk mitigation that comes from on stock exchanges or selling to industry buyers as good ESG performance, these portfolios should be a way of exiting their investments. more valuable at exit. 14 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment B. Identification and development of profitable D. Bridge to other forms of sustainable capital. PE/VC opportunities. In nascent, fast-growing sectors, for funds provide equity finance to earlier-stage companies example fintech, cleantech, and technology-enabled that cannot access debt financing (cashflows too healthcare, PE/VC funds invest heavily in finding risky or too few tangible assets) and are too small companies in need of their capital and assistance. to access securities markets but too large to rely on Fund managers then work with the most promising friends and family. However, once anchored by a of these companies to refine their strategies, business fund, portfolio companies can rely on the strong plans and management teams to turn diamonds in connections that most PE/VC funds have with other the rough into true gems. PE/VC is almost unique financiers to facilitate information flow and trust. in this regard. Banks and stock exchanges tend to PE/VC funds strengthen businesses, which improves be more passive, waiting for firms in need of capital access to capital. By making businesses better at to come to them and expecting the companies to what they do, such as by strengthening the senior develop sound plans on their own to become eligible management team and making sure management for investments from banks and stock exchanges. information and accounting systems are in place, Many times, in sectors where the market capacity PE/VC firms make their portfolio companies more is limited and value chains are incomplete, PE/VC attractive to other investors. Once PE/VC funds exit funds discover companies and entrepreneurs who their investments, typically after a 3–7 year holding have part of what they need to be successful but not period, these better-established companies can grow the complete package. The fund will work with the their sustainable businesses by using other existing company to figure out how to turn its idea into an types of financial services products (more established investable business proposition and reduce the risk green bond markets, debt from banks or multilateral of failure by providing expertise as well as business organizations, etc.) that can be accessed at scale by and financing relationships. PE/VC fund portfolio company graduates. C. Accelerated availability of sustainable solutions. A E. Fundraising advantages. With some audiences, PE/VC key aspect of PE/VC investment activity is to identify, funds that market themselves as having a sustainable establish, and provide growth capital to innovative, investing focus may have an edge in fundraising, as disruptive solutions, applications, technologies, and investors are increasingly open to, and many are business models. Shifting PE/VC fund managers’ actively engaged in, the impact and sustainability direction toward making long-term sustainable theme. investments accelerates the host country’s trajectory of transforming its economy into a sustainable one by implementing new technologies, business models, and innovative solutions earlier and growing them more rapidly. The ability of PE-backed companies to accelerate growth and employment at a rate that outperforms non-PE-backed companies has been documented in a number of studies, including one conducted by McKinsey on funds in India. In this 2015 study, two years after a PE investment, the revenue and earnings for the PE-backed companies was, respectively, 28 percent and 39 percent higher. Similarly, five-year direct employment for PE-backed companies in this study grew at 8.7 percent versus 2.9 percent for non-PE-backed companies.30 Section 1 Why Sustainable Private Equity/ Venture Capital? | 15 Section 2 Market Experience and Lessons Learned To better understand the role of sustainable investing through PE/VC funds, the G-20 Sustainable Finance Study Group (SFSG) asked IFC to organize this paper. IFC is the largest global development institution focused on sustainable private sector development in emerging markets. As lead knowledge partner, IFC is well positioned to share lessons learned from experience in emerging markets. IFC’s work on this paper was developed with the contributions from the following partners: Greentech Capital Advisors (Greentech), Shenzhen Green Finance Committee (SZ GFC), Principles for Responsible Investment (PRI), and Bridges Fund Management. Drawing on these organizations’ and their members’ capital and assist governments and regulators in emerging decades of combined experience in the field, together with markets to create stable business environments for inputs solicited via discussions and a focus group with sustainable investment. Together, they have a diverse asset managers, investment practitioners, sustainability- set of experiences on the sustainable investment side31 focused consultants, and officials, this section describes as well as through advisory services, capacity building, current practice and lessons learned about sustainable PE/ and knowledge management.32 In fiscal year 2017, IFC’s VC investing across a variety of geographies, strategies, equity investments, including through PE/VC funds, and sectors. As the crux of this working group and accounted for about US$1.6 billion of commitments paper is sustainable finance, more time will be given made for its own account. to barriers specific to increasing sustainable PE/VC in both emerging and advanced economies than to generic Background: Emerging economies. Emerging markets PE/VC barriers. are set to host much of the world’s economic and population growth for the foreseeable future. Among the trends propelling this are: ongoing political and 2.1 SUSTAINABLE PRIVATE economic reforms, favorable demographics, consumption EQUITY/VENTURE CAPITAL IN patterns of a rapidly growing middle class, and increasing EMERGING MARKETS urbanization.33 These factors and others drive economic growth and provide investment opportunities across a IFC was established in 1956 as the private sector arm diverse landscape of emerging markets. As such, they of the World Bank Group, and its mission is to advance present potential for investors with the resources, skills, economic development by investing in for-profit and and experience to navigate these complex markets. commercial projects and companies that promote However, as seen firsthand throughout many emerging development and help reduce poverty. As such, IFC has economies, this rapid growth will also present significant been making debt and equity investments in emerging challenges for a country’s social services, urban areas, markets for over 60 years and investments through PE/ core infrastructure, limited natural resources, and fragile VC funds for more than 30 years. In addition, the World ecosystems. These countries also face an urgent need to Bank provides a complementary role in understanding provide improved social services to a growing middle and assessing the host government’s role in facilitating class and create sustainable companies that provide PE/VC investment into these developing markets. IFC long-term jobs at fair wages while addressing workplace and the World Bank seek to mobilize private sector inequalities and risks. Many of these growth-related 16 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment challenges can, in part, be addressed by ensuring that sustainability is taken into consideration when capital is mobilized to finance this growth rather than using only commercial filters. Various groups within IFC invest sustainable capital from its balance sheet across a wide range of asset classes, including through PE/VC funds. The PE practice area is led by IFC’s Funds Group, which focuses on making commitments to growth equity funds in emerging markets, most of which have a generalist strategy and provide expansion capital to SMEs and established mid-market companies across many sectors. IFC’s Venture Capital Single-axis solar PV tracking system in Central America (Photo credit: Laird Reed) Group invests not only in early-stage venture capital (VC) funds but also directly into companies that offer innovative technologies or business models geared to funds is in the top quartile against Cambridge’s global developmental impact in emerging markets. In 2009, emerging market benchmark, IFC’s Funds Group has IFC set up the IFC Asset Management Company (AMC) also been an early mover in helping to establish nascent as a dedicated, sustainable PE/VC fund manager that sustainable investment subthemes, including climate raises and invests institutional capital alongside IFC’s change investing. To date, IFC has backed 16 climate- own investments from its balance sheet. Today AMC focused funds across multiple regions, and, while still is one of the largest PE/VC fund managers focused relatively young, the performance of these climate funds on emerging markets, with 13 equity and quasi-equity as a group is lower than IFC’s generalist PE and VC funds’ focused funds, totaling US$10 billion under management, returns. IFC’s internal VC team is also an active investor investing growth equity across sectors in emerging markets in sustainable companies, using IFC’s balance sheet to countries worldwide. Two of these funds, with US$1.2 finance start-ups seeking VC to develop software-based billion of assets under management in aggregate, invest solutions and asset-light business models to sustainably in a portfolio of sustainable PE/VC funds alongside IFC’s address opportunities in emerging markets. Since 2000, own balance sheet investment activity. Lastly, additional IFC has invested approximately US$175 million in early- groups within IFC have contributed significantly to the stage cleantech companies. This portfolio of companies development of sustainable investing by establishing spans the cleantech space, including energy storage, market standards to help ensure third-party PE/VC funds solar technology, distributed generation models, and sustainably approach their investments (for example, IFC’s energy-efficiency technologies. The IFC Venture Capital Performance Standards,34 green-building-focused EDGE Group’s additional focus verticals include healthcare, framework,35 and Corporate Governance Framework36), edu-tech, internet (including e-commerce), advanced while other IFC teams have helped make the connection mobility, and e-logistics. IFC‘s key lessons learned from between sustainable investing and increased financial its sustainable PE/VC investing experience include returns. A. Limited investment scope. Thematic funds, such as Lessons learned: The IFC Funds Group has a long those focused exclusively on sectors such as climate history of backing impact-focused PE/VC funds. From or water, suffer from the same general issues as other 2000 to 2013, IFC committed US$2.9 billion to 159 PE/ single-sector funds, which include limited deal flow in VC funds across more than 1,000 portfolio companies a niche market, low investee company diversification, around the world. While the track record of these PE/VC and limited exit routes. Section 2 Market Experience and Lessons Learned | 17 C. Commercial by design. To mobilize capital, successful PE/VC investment vehicles need to be structured on Example IFC Group Private Equity a commercial basis, run by a trustworthy manager and Venture Capital Transactions with strong team members that have a great deal of Full Truck Alliance. An online logistics relevant experience, reach a minimum commercial size platform based in China that provides a (typically more than US$100 million of committed variety of services to the world’s largest, capital), and have a commercially attractive market but very inefficient, long-haul trucking and a strategy designed to provide attractive returns market, including i) an online marketplace in that market. or “loadboard” that matches shippers and Working closely with IFC’s Funds Group since 2010, trucks, ii) sales and top-ups of highway IFC AMC has sought to catalyze additional third- toll cards, iii) sales of insurance products, microloans, fuel cards, truck parts, and new party capital into climate-focused PE/VC funds. After and used trucks. canvassing a number of institutional investors, impact investors, and PE/VC fund managers, AMC developed Organica Water. Global provider of and implemented a 12-year resource-efficiency-focused innovative solutions for localized treatment and recycling of wastewater. Organica’s PE fund of funds, aptly named the IFC Catalyst Fund. management is based in the United States, The team raised US$418 million from eight investors and the engineering and R&D hub is located and has committed more than 90 percent of its capital in Budapest, Hungary. The company also to 13 funds and platforms and one co-investment has satellite offices in India and Indonesia. (representing over 100 underlying portfolio companies Microvast. Founded in 2006, Microvast and projects). Additional findings from IFC Catalyst’s is a fast-growing market leader in design, experience include development, and manufacturing of ultra- fast charging, long-life battery power D. Provides diversification. As compared with a direct systems with superior safety for electric investment into a PE/VC fund, a fund of funds is vehicles. In March 2011, the very first Ultra- inherently highly diversified, resulting in a lower Fast Charging full electric bus fleet in China likelihood of capital loss. The structure allows started commercial operation in Chongqing. investors to efficiently deploy sizeable amounts of capital through one vehicle and helps them gain exposure to, and learn about, unfamiliar sectors and geographies. B. Asset light business models. In IFC’s experience, asset development (infrastructure) funds are less E. Mobilize commercial capital. Equity enables the attractive than growth equity and venture funds formation of the rest of the capital structure in focused on less capital-intensive business models climate projects and investments, and accessing these and technologies. Similarly, IFC’s venture group investments through a fund mobilizes additional has had limited success investing in hardware (for equity alongside the fund’s own capital. Investing example, new wind turbines or other equipment) as through a fund of funds enables one more turn of they generally reach scale slowly and only if they mobilization by catalyzing additional equity into can attract significant capital. IFC has been generally climate-focused funds themselves. more successful investing in early stage companies F. Broad mandate. IFC and Catalyst’s working definition with software-driven “asset-light” business models, of climate-friendly investments includes infrastructure, which can be developed and scaled without significant growth equity, and VC-type opportunities focused capital investment. on resource efficiency, allowing for greater selectivity 18 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment and more diversification within the climate theme. Catalyst invests not only in funds but also in fund- like platform companies and direct co-investments IFC Performance Standards as well. As part of making the business case for In addition to actively investing its capital in sustainable mainstreaming ESG factors when making projects and companies throughout emerging markets, investment decisions, IFC’s research group IFC and AMC require all investee companies and funds has identified a positive correlation between investments with high E&S performance to adhere to IFC’s Environmental and Social Performance and strong financial performance based on Standards (see insert). Since the predecessor policies’ IFC’s portfolio. This analysis better informs original introductions in the early 1990s, IFC strengthened IFC about their clients’ E&S activities to help and mainstreamed these standards for direct investments, IFC assess and discover valuable investment investments in financial intermediaries, advisory projects, opportunities. IFC clients (including PE/VC and others, including requiring investee PE/VC funds to funds) use the Performance Standards as build capacity and train their employees to implement the a framework to track impact, identify and Performance Standards themselves, which increased the address risks, and focus their sustainable use of this standardized approach to ensure sustainable business activity. The Performance Standards investment. Over the past decade, an estimated US$4.5 include trillion in investments across emerging markets have 1. Assessment and Management of E&S adhered to IFC’s standards or principles inspired by Risks and Impacts them.37 For investing as a Limited Partner in Funds, IFC 2. Labor and Working Conditions divides investee funds into categories (low, medium, high) 3. Resource Efficiency and Pollution based on the risks of the portfolio companies’ activities. Prevention Once categorized, IFC works with fund managers to implement tools that help assess and manage risks related 4. Community Health, Safety, and to their investment. A key lesson from this experience is: Security 5. Land Acquisition and Involuntary G. Ongoing engagement. This factor is critical for Resettlement successful E&S risk management efforts, and IFC’s 6. Biodiversity Conservation/ E&S specialists conduct regular supervision visits Sustainable Management of Living of a sample of fund portfolio companies to assess Natural Resources E&S risks and provide support to fund managers. 7. Indigenous Peoples 8. Cultural Heritage 2.2 SUSTAINABLE PRIVATE EQUITY/VENTURE CAPITAL IN THE UNITED STATES infrastructure systems (namely, energy, transportation, Given the early-mover advantage of the United States food, water, and waste) to lower carbon emissions and be in sustainable PE/VC investing, it was critical to get a less wasteful and more intelligent by using 21st century U.S.-focused knowledge partner to help draw conclusions technologies. Greentech’s investment banking business from these early investments. Greentech Capital Advisors executes merger, divestiture, and acquisition transactions; (Greentech) was created 9 years ago as a dedicated expert raises capital through private placements; and provides advisory and asset management firm with a focus on strategic advisory services for sustainable infrastructure mitigating climate change and resource efficiency. Its companies and projects. The asset management business, work is directed at accelerating the transformation of core predicated on the indelible link between sustainability Section 2 Market Experience and Lessons Learned | 19 and alpha generation, has two public equity strategies However, the development of the sustainable PE/VC for institutional investors seeking global exposure to theme in the United States did not happen quickly: the companies with robust ESG standards profiting from PE/VC industry has been investing in advanced energy sustainability—the GCA Sustainable Growth strategy, technology companies since the 1970s. An early part of which focuses on companies in developed markets, the shift toward sustainable investing in the United States and the GCA Emerging Markets Sustainable Growth was a cleantech investment wave that began in 2006 strategy, which focuses on emerging and frontier market with a spike in oil and gas prices. At this point, many opportunities. With a 55-person advisory team and 12 established Silicon Valley VCs launched green-only VC investment professionals, Greentech has deep experience funds in an effort to capitalize on a potentially exciting working with companies focusing on sustainable new industry. In 2008, the United States experienced a technology and infrastructure investments as well as record deployment of US$6.5 billion of sustainable VC. an extensive network of PE/VC investors and strategic However, disappointed by initial returns and relatively relationships that helps provide insights from the U.S. shallow capital markets for this sector, by 2012, many market. Silicon Valley VCs, such as Kleiner Perkins, New Enterprise Associates, Kholsa Ventures, DFJ, and Sequoia, had Background: The United States. The United States largely left the field. While these early PE/VC investors is the birthplace of the PE/VC industry and home to were hurt by external factors, many of the causes for Silicon Valley, the world’s oldest, most successful, and the poor returns were structural. Some lessons learned largest entrepreneurial ecosystem. Overall, U.S.-based from this period in the United States include investors are the largest source of capital for PE/VC funds globally. Between 2013 and 2017, the five-year average A. Death by pilot. As with other nascent technologies penetration of private capital investments38 (PE/VC funds still in the development phase, the majority of start- included) was 1.55 percent of U.S. GDP, compared to ups needed extra time to field test and prove their 0.28 percent in India, 0.12 percent in China, and 0.12 commercial viability. Incorporating new technologies percent in Brazil. While the roots of sustainable investing into the electric grid and building energy management in the United States go back to 1758,39 investing focused systems or municipal waste or water systems must mainly on the environment and sustainable development be extensively tested and proven reliable. All of this started in earnest in the 1990s.40 Additionally, as part of takes time and relies on the approval, participation, a broader trend among U.S.-domiciled asset managers and adoption of incumbents, which was much slower (including PE/VC managers), the United States has also than expected. seen a 14-fold increase41 in investment strategies that B. Missing value chain. Many of the technologies lacked consider ESG criteria to generate long-term competitive a supportive value chain and were very expensive to financial returns and positive social impact. This was scale. Without certainty around end-market demand, reflected in a recent letter Larry Fink, Chairman and equipment manufacturers were unwilling to scale CEO of Blackrock, the world’s largest asset manager, up capacity and enable lower costs. wrote to CEOs in the first quarter of 2018: C. Commodity exposure. Many early stage start-ups “To prosper over time, every company must not were exposed to commodity markets. Low natural only deliver financial performance, but also show gas and electricity prices significantly reduced the how it makes a positive contribution to society. demand for potential disruptive technologies. As a Companies must benefit all of their stakeholders, result, start-ups had limited room for error. including shareholders, employees, customers, and However, since 2012, remaining PE/VC investors the communities in which they operate.”42 interested in the sustainability theme pivoted away from the hardware and physical science subsectors 20 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment and toward software and asset-light business models. periods, thus allowing start-ups to reduce capital Additionally, corporate strategics, including global costs and avoid costly mistakes while accelerating multinationals such as ABB Group, General Electric, the development cycles of high-impact technologies E.ON, ENGIE, Enel, Ørsted, Shell, and Saudi Aramco, that are too early for private sector investment. Some began making sustainable PE/VC investments. Some of examples focused on sustainable energy include Los the characteristics of the second phase in the sustainable Angeles Cleantech Incubator, human resources focused PE/VC market in the United States include ACRE, Elemental Excelerator, Argonne National Laboratory, U.S. Department of Energy’s Advanced A. Additional time. Sustainable fund managers need Research Project Agency-Energy initiative, the Tata to allow for additional time and resources for Center, MIT’s Energy Initiative, MIT’s The Engine, portfolio companies to be adopted and scaled, as Prime Coalition, New York State Energy Research well as understand the need to build out supporting and Development Authority, and Chicago’s Clean infrastructure and regulatory frameworks for new Energy Trust. sectors and business models. Furthermore, Greentech has observed increasing B. Asset light. Many sustainable PE/VC funds have “sustainable activist investor” interest from many investors pivoted away from the hardware and physical science seeking sustainability themes in their equity portfolios. subsectors, toward software and away from businesses In recent years, many large institutional investors have that are dependent on manufacturing scale-up in started to advocate for long-term value creation as well advance of proof of cost competitiveness or customer as social and environmental contributions, with some demand. Companies in these target areas generally estimates suggesting that more than 20 percent of the have a shorter time horizon to scale deployment, are funds under professional management in the United less capital intensive, and have the potential to disrupt States include socially responsible investment criteria.43 large global markets. Examples include energy storage, Some of these investors, including large institutional energy efficiency, and advanced transportation (fleet asset managers like BlackRock, Amundi, and Fidelity, tracking, autonomous vehicles, and ridesharing). are looking at the utility sector, food and agriculture C. Exits. Corporate strategic investors; large energy, food, value chains, advanced mobility solutions, and companies water, and waste incumbent companies; and forward- providing goods and services to support the transition looking utilities have committed to sustainability and to a more efficient, sustainable, and circular economy. to bringing their knowledge, commercial relationships, This increasing interest is captured in the US Forum for and lower cost access to customers to help start- Sustainable and Responsible Investment chart (Figure ups succeed and create confidence in the PE/VC 4), which covers US public and private sustainable investment and exit environment. investing trends. D. Consumer pull. Nearly half of Fortune 500 companies Lessons learned: Greentech believes that investors who have renewable energy or carbon reduction targets, put capital to work behind themes that will improve along with many U.S. states and major cities (including our electricity, transportation, food, water, and waste Los Angeles, Atlanta, and Salt Lake City). This infrastructure systems will generate above-market returns reinforces the belief that many of these sustainable and help accelerate change toward a sustainable economy. PE/VC backed technologies will find robust end- Investors who allocate capital to investment managers markets. with rigorous assessments of environmental sustainability E. Government support. In targeted sectors, government- and are actively engaged with their portfolio company’s sponsored programs and accelerators can provide management teams have an ability to influence companies shared centralized facilities with extensive equipment to accelerate their sustainability efforts. portfolios which shorten ramp-up / development Section 2 Market Experience and Lessons Learned | 21 Figure 4: Sustainable, Responsible, and Impact Investing in the United States (1995–2016) $10,000 $9,000 $8,000 $7,000 $6,000 $ Billions $5,000 $4,000 $3,000 $2,000 $1,000 $0 1995 1997 1999 2001 2003 2005 2007 2010 2012 2014 2016 ESG Incorporation Only Shareholder Resolutions Only Overlapping Strategies Source: US SIF Foundation A. Corporate venture capital (CVC). CVCs play an D. Increased Disclosure. In the public equity markets, increasingly important role in the growth of sustainable investors are also increasingly focused on corporations technologies. Global multinational companies are able executing on sustainability strategies and demanding to bring their knowledge, commercial relationships, compliance with ESG principles and disclosure and lower cost access to customers as well as an requirements, forcing management teams to become ability to test technologies at a large scale to help more accountable and transparent. In the absence start-ups succeed and create confidence in the VC of regulation, standardized metrics, and impact investment environment. measurements, corporate decision makers are increasingly looking for advice in relation to their B. Corporate strategics. Large corporations are also sustainability strategies. This is also relevant in the increasingly making direct investments into renewable context of PE/VC funds exiting their investments energy assets (mainly solar and wind) through long- via public listings. term power purchase agreements, diversifying their risks, and responding to investor and community demands. 2.3 SUSTAINABLE PRIVATE C. Investor interest. There is an increased interest in EQUITY/VENTURE CAPITAL IN sustainability investing by institutional investors and CHINA pension funds and endowments, taking direct stakes As part of the drive toward growing China’s sustainable in renewable wind and solar projects with a goal to PE/VC market, knowledge partner Shenzhen Green Finance meet sustainable investing requirements. Committee (SZ GFC), a non-profit organization under the Financial Society of Shenzhen Special Economic 22 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment Zone, was formed in 2017. Its secretariat is run by China Emissions Exchange Shenzhen(CEEX). SZ GFC’s board of directors includes Deputy Director General–level The emergence of bike-sharing officials from 12 different governmental bodies and programs in China local financial regulators as well as support from the One notable example of the impact Shenzhen Municipal Government, China Green Finance of the emergence of sustainable PE/ Committee, and People’s Bank of China’s Shenzhen VC funds in China is the creation Central Sub-Branch. SZ GFC was established as a and rapid expansion of bike-sharing cross-government platform to engage in green finance programs, which has largely been research, promote the innovation of green investment driven and funded by PE/VC capital and and financial products, and coordinate and advance expertise. The business models of these green finance cooperation in Shenzhen, Hong Kong, companies have a number of distinct and beyond. characteristics, including low threshold of entry, large scale of demand, and Background: China. As China’s large population powers ease of expansion, which combine to a fast-growing and rapidly evolving economy, it also faces make the sector particularly attractive to PE/VC investors. By the end of 2017, significant challenges including pollution, food safety, more than US$4 billion in aggregate has overcrowded urban areas, and stressed infrastructure. been invested in various dockless bike- China’s government and private sector have recognized the sharing companies, enabling the dizzying need for sustainable business models as a key component growth seen across these companies of the country’s growth strategy. Accordingly, they have in China (and elsewhere). In terms of both encouraged (including through regulation) the the E&S benefits, in 2017 alone, bike- business community to address sustainability through sharing companies have brought about innovative practices and forward-looking policies. environmental benefits estimated at Innovative companies, many backed by domestic PE/ US$220 million, reduced CO2 emissions VC funds, have driven China to the forefront of many by 4.2 million tons, and reduced air sustainable industries, including electric vehicles, shared- pollution (PM2.5) by 3.2 million tons. In asset business models, and information marketplaces addition, China’s bike-sharing companies to more efficiently use resources, reverse the country’s have created an estimated 100,000 crippling levels of pollution, and meaningfully reduce direct jobs and 290,000 indirect jobs. carbon emissions (see example in insert). A combination of top-down and bottom-up approaches addressing entrepreneurship, innovation and green finance have combined to support the growth of the sustainable PE/VC market in China. In 2015, China launched its Green Finance Strategy, which enabled preferential industrial policies to encourage the development of green business sectors and help create a pipeline and market for sustainable PE/VC funds. With the government’s Mass Entrepreneurship and Innovation Campaign, also launched in 2015 and recently upgraded to boost employment, promote technological innovation, and stimulate industrial growth, millions of new businesses Biking sharing in Southeast Asia (Photo credit: have been registered in 2018 alone.44 Many of these start- Shutterstock) Section 2 Market Experience and Lessons Learned | 23 ups were developed through incubators, industrial parks, and policy-related frameworks to allow sustainable tech pilots, and innovation centers. These innovative new PE/VC funds to thrive. Despite advances in the areas companies created a nationwide pipeline of investible of environmental information disclosure, green fund projects that bring significant demand for investment standards, and environmental risk stress testing, there capital and start-up company expertise. In addressing this are certain aspects of the Chinese sustainable PE/VC financing gap, PE/VC funds were second only to industrial market that require further work. For example, when companies as the source of finance for start-ups in China. compared with the TMT investment sector in China, companies operating in green sectors in China are often In the early stages of developing the PE/VC market perceived as having less mature business models that in China, US$-denominated funds with capital from require additional time to grow a company in this sector international investors played a significant role. Although to a scale relevant for an exit. these funds, managed by foreign expatriates, were mainstream in 1990s and early 2000s, they helped create/ A. Standards. Many PE/VC fund managers are not spin-off a new generation of Chinese PE/VC managers. clear about which sectors are truly green sectors. While RMB-denominated PE/VC funds dominate the The environmental benefits generated by sustainable investment landscape in China now, US$-denominated investment are difficult to quantify given the PE/VC funds still pioneer investments in certain sectors lack of uniform and authoritative quantification and play an important educational role in China, methodologies, let alone to monetize the environmental especially concerning best practices in governance, ESG, benefits to improve the financial performance of corporate social responsibility (CSR), and sustainable green companies. investing. One example is IFC, which has played an B. Monitoring. It is encouraging when governments important and constructive role in propagating its best set up guiding funds to support the development practice sustainable investment standards/principles, green sectors. However, such initiatives need to look including spreading the IFC Performance Standards, for efficiency in operations to avoid underutilizing across many China-based PE/VC funds. In this context, valuable capital provided by governments. To improve China has been learning by doing; motivated by China’s the operational efficiency of government funds, Green Finance Strategy and industrial policy support, subnational governments in China are establishing many entities have set up sustainable PE/VC funds, the investment performance evaluation program to including local governments, stated-owned enterprises, monitor and supervise the operation of those funds. listed companies, private companies, and established C. Consistent policies. Preferential industrial policies, managers from overseas. In late 2017, there were 740 applied consistently over extended periods of time, sustainable-focused funds in China with approximately can accelerate the development of the value chain US$20 billion under management, registered with the in sustainable sectors, providing better and more Asset Management Association of China. These funds, attractive commercial prospects for the pipeline of along with other investment vehicles, have gone on sustainable PE/VC funds. to incubate and grow thousands of companies with innovative business models and sustainable themes D. Alignment with private sector. Government-guided throughout the country by providing not only financing incubators, funds, and industrial funds with a but also strategic, managerial, resource, and marketing sustainable mandate are more impactful when value added. they work with private sector PE/VC funds. This encourages the development of sustainable PE/VC Lessons learned: It is important to see the development funds by sharing the financial burden of their setup of the sustainable PE/VC market in China as an ongoing and deploying capital into sustainable investment process that continues to advance financial, regulatory, opportunities. 24 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment 2.4 SUSTAINABLE PRIVATE FONDCE’s Expansion Fund (EF) is a fund of funds EQUITY/VENTURE CAPITAL IN aiming at attracting local and international VC managers ARGENTINA to invest and build capacity within the professional fund managers in Argentina. Initially open to three Many of Argentina’s underlying characteristics make the experienced VC funds, the EF provides up to US$12 country ideal for technology disruption and sustainable million of public capital to experienced funds that can innovation. One of its most distinguishing features has match this commitment with at least US$18 million of always been the creativity, flexibility, and resilience additional private capital. The strategy of interested VC of its entrepreneurs, as the Global Entrepreneurship funds needs to include early growth capital to innovative, Monitor index shows. Nevertheless, Argentina’s economic high-impact, technology-driven companies based in challenges and its relatively shallow capital markets Argentina with global market potential. As part of the have curtailed the natural growth of the country’s selection process, candidate funds need to present their entrepreneurial activity.45 Argentina’s policy approach plan for addressing ESG issues and detail their responsible to address these challenges may provide lessons learned investment principles. As the EF also seeks to boost the and tools for other countries facing similar complexities. development of Argentina’s VC market, funds that apply must be registered in Argentina, though their team does Background: Argentina. Recently, Argentina sought to not need proof of Argentinian citizenship. This seeks to promote its entrepreneurship capacity. Entrepreneurship attract international talent, spread best practices, and is seen as an increasingly relevant form of employment drive market capacity building in Argentina. for both high-income industries as well as sectors with economic vulnerability. Within the country’s The other two FONDCE funds were designed to boost entrepreneurial community, there has been an increasing the availability of investible projects. The Seed Fund (SF) recognition and growth of social enterprises and B was launched in mid-2016 to develop and strengthen Corporations,46 with sustainable and impact investing SMEs that stand out as being especially innovative. The themes being discussed more frequently. For example, the SF provides technical assistance through incubators number of B Corporations in Argentina almost doubled and has an investment strategy that includes an impact between 2014 and 2016, and the majority are either focus with a selection criteria that favors innovation, start-ups or SMEs. Recognizing the economic benefits employment, local economic impact, and verifiable from entrepreneurial start-ups, in 2017 the government high social impact. For example, projects that promote passed Argentina’s Entrepreneurship and Venture Capital health, social-inclusion, education, gender-equality, and Law (N°27.349). It was created after reviewing lessons environmentally friendly business models have increased learned from Israel’s Yozma Fund (described below), chances of being selected. Lastly, FONDCE’s Acceleration Chile’s successful CORFO program, and various other Fund (AF) is directed at supporting the creation and innovation hubs and PE/VC initiatives and programs in strengthening of incubators and accelerators that are the United States and United Kingdom. The law created focused on companies in the technology, social innovation, the Fiduciary Fund for the Development of Venture or science sectors. The underlying premise of this fund Capital (FONDCE), which allocates public finance to is that by supporting a good accelerator, the impact of qualifying investments via loans, direct equity investments, public contributions is amplified (for example, with the and investments in funds, among other instruments. same amount of public money more resources reach To implement FONDCE, three state-sponsored funds more entrepreneurs in different regions of the country have been established to participate in different parts of to help validate, mentor, and scale a larger number of Argentina’s capital markets that need to be developed promising projects). or scaled. Section 2 Market Experience and Lessons Learned | 25 Lessons learned: The process of creating and implementing 2.5 STATE-SPONSORED FONDCE involved evaluating many different models WATERFALL STRUCTURE: THE from different parts of the world, engaging with a vast CASE OF THE YOZMA GROUP array of local and international stakeholders, including from public, private, and public–private partnerships, The Yozma Group originated from an Israeli government and analyzing the different needs, opportunities, and program aimed at promoting VC investments in trends in Argentina and beyond. Organizations such as high-growth companies in strategic sectors (namely, the Argentine Association of Private, Venture and Seed communications, information technologies, and life Capital and Association of Entrepreneurs of Argentina sciences) where the country had demonstrated world were instrumental in sharing insights from relevant leadership. stakeholders and moving FONDCE forward. This open and inclusive process sought to achieve positive Background: Israel. Today, Israel is considered one of the environmental and social outcomes as well as economic biggest VC centers in the world (with Tel Aviv considered and financial markets benefits. Among the lessons from the fifth-best city for entrepreneurs, after Silicon Valley, this process are the following: New York, Los Angeles, and Boston).47 The country’s success dates back to 1993 when the Yozma Group A. Communication matters. VC in Spanish is translated as formed Yozma I,48 which introduced a limited amount “risk capital,” which generated negative connotations of concessional finance through the state-sponsored for many people in the country and some prospective fund of fund’s “waterfall” structure. In the waterfall investors. To overcome this perception issue, local of typical fund structures, all investors participate pari policy makers started to refer to it as “entrepreneurship passu, equally sharing in profits and losses. However, to capital” to appeal to the ultimate goal of the VC accelerate investment into target areas, PE/VC funds can market (which is to support all kinds of entrepreneurs offer a modified waterfall structure that subordinates in their productive and innovative endeavors). some (public) investors’ returns to the returns of other B. Reducing the costs of failing is paramount. Simplifying (private) investors in certain circumstances. For example, processes, lowering set-up costs for a company, and a fund’s waterfall can be designed to attract investors by providing flexibility encourages entrepreneurs to dampening their losses if the fund does badly, or, as in form innovative companies. As some sustainable Yozma’s case, accelerating upside if the fund succeeds. business models and technologies may have more Yozma I was established with US$100 million of capital complex or less developed markets, this becomes by the Israeli government to anchor up to 40 percent (or essential to increasing the rate of sustainable start- US$8 million) of qualifying VC funds’ total commitments ups being launched. Argentina’s Entrepreneurship alongside additional private capital totaling at least and Venture Capital Law set up the Simplified Stock another US$12 million. The government provided this Companies, a business organization type that offers capital as equity; however, in the Yozma structure, the greater flexibility and makes it simpler and quicker other investors in these funds had the option to buy out to register a company. the government’s original investment after a few years. C. Target multiple goals simultaneously. In the case Buying out the government would be attractive only of FONDCE, frequent and thorough stakeholder if the fund was successful; however, private investors engagement when developing the law and the would pay the government only a nominal interest rate sustainable PE/VC market was fundamental to on its money, thus providing upside leverage to private addressing not only the generic market challenges investors. This feature was very attractive to investors but also bringing awareness and tools to overcome since it left them the majority of the economic benefits, sustainability-related challenges. 26 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment after the government had borne the Figure 5: Israel’s Yozma Fund Mobilization phase of greatest risk.49 $10,000 A number of additional features of Yozma’s design also contributed to the program’s success. First, the Fund size in millions of US$ $8,000 requirement to include foreign capital +$7 billion in the qualifying funds resulted in the participation of significant pools $6,000 of overseas capital (mostly from the United States, Japan, and Germany). Government’s $4,000 initial investment Second, these foreign investors had to have investment expertise, which was $100 million in 1993 and was key to ensure capacity building ended in 1997 $2,000 in the Israeli market. Lastly, “the +$2.6 project adopted a legal structure billion for the venture funds that foreign $0 investors would be comfortable with. 1993 2001 Included were features such as a ten- year fund life, limited partnerships Public investment Private investment Private investment in modeled on those that are standard in Yozuma funds in Yozuma funds non-Yozuma funds in the United States.”50 Yozma co-invested with 10 funds from outside Israel. Lessons learned: Although it is widely recognized that Many of these funds met with success, and the Israeli this supply-side measure jumpstarted the VC industry government was bought out of eight of these funds by in Israel, it is worth noting that the government also their private sector investors. Thereafter, these fund worked to stimulate the demand side for VC through teams no longer needed government support, as they several initiatives. Prior to Yozma, the Israeli government were able to raise capital from international investors for created a technological incubator program in 1991 that subsequent funding rounds. As summarized in Figure 5, provided selected entrepreneurs with tools, professional the returns achieved by the first wave of Yozma-backed guidance, and seed capital. In return, the government funds attracted other fund managers to the market, incubator could take up to 20 percent of the start-up and including domestic “spinout” fund teams, many of which would receive royalties of 3 percent of the company’s had worked at one of the original 10 Yozma funds but eventual sales. If the start-up never made it off the could now raise their own funds given their experience ground, the entrepreneur was not required to pay back and track record. Within five years of the initial launch the grant. Thus, by sharing the risks in the pursuit of of Yozma, 60 VC funds were active in Israel managing research and development, the government enabled start- over US$10 billion. By 1998, Israel had attracted over ups to flourish and created pipeline and a market for US$3 billion in VC investment—a 30-fold increase in domestic PE/VC funds. Some lessons from the Yozma less than three years, most of which was from foreign experience follow: sources—and had over 3,000 startup companies, or one for every 2,000 inhabitants. A. Seed fertile ground. The Yozma fund was extremely effective at capitalizing the Israeli PE/VC industry during the 1990s largely because it was launched Section 2 Market Experience and Lessons Learned | 27 in a project-rich environment. Israel Figure 6: Early Stage Venture Capital Risk Return Profile has a long history of developing new civilian and military technologies,51 in Top part because of the high-percentage of Performer entrepreneurs in the population52 and the country’s high level of investment in Rate of Failure research and development (Israel spends more on than any other country in the world: 4.25 percent as a proportion of Gross Profit its GDP).53 Moderate/ Walking Dead B. Golden mean. The total public sector contribution should be neither too small nor too large. As PE/VC funds need to be large enough to cover the minimum costs of running properly, this puts a floor on how small a single publicly supported PE/VC fund can be. Thereafter, a minor Failed contribution by a public sector investor can be too small to have a meaningful effect on the other investors’ risk-return profile, and thus have too little an effect Seed Stage Early and Late Stage in mobilizing capital. At the same time, there is a risk in being too large; if there is far more less focus on financial performance, the WFG could money in the funds than could be usefully invested, not effectively catalyze Germany’s PE/VC industry. the fund’s returns may be poor, defeating the principle behind the public sector’s involvement. 2.6 ACCELERATORS: THE CASE C. Commercial mandate. Sustainable PE/VC funds, OF NXTP LABS even those with public capital, should have a commercial investment focus to enable successful Complementary to incubators, accelerators are a follow-on capital catalyzation from the private sector. relatively new addition to the start-up ecosystem, and If institutional investors in the fund do not have a different players (that is, governments, corporations, commercial rationale for investing, or if the fund is nonprofits, investors) are increasingly joining forces run on noncommercial grounds, the capital that could to create accelerators targeting sustainable innovation. potentially be mobilized by a successful demonstration One of the primary goals of accelerators is to drive of performance will be muted. For example, the funds into promising early-stage ventures so they can German fund Deutsche Wagnisfinanzierungsgesellschaft stabilize and then scale their operations. This might mean (WFG), was created in the 1970s to invest directly in earning more revenue or raising more outside equity new companies to help catalyze the German market investment, debt financing, or philanthropic support. for technology-focused VC. Some stakeholders saw Numerous studies suggest that start-ups working with this as an exercise in corporate social responsibility accelerators have improved performance, including one by the German government and thus pressured the study that showed small and growing businesses that fund’s managers to dampen the fund’s returns by work with “…time-bound incubators and accelerators only making socially conscious investments. With demonstrate an average revenue growth over two times 28 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment and job growth over one-and-a-half times that of other .”54 Additional research by the Global Accelerator Learning Initiative (GALI) Accelerating Sustainable Private reinforces these findings (see insert).55 Equity/Venture Capital Recent data from GALI suggest that Background: Accelerating sustainable start-ups in Latin the number of accelerator programs America. NXTP Labs is a fund manager that provides continues to increase globally, reaching early-stage equity financing to companies that seek to more than 500 in 2017, with most apply new sustainable business models and technologies launching since 2014 and roughly half in the Latin American market. The NXTP team seeks focused explicitly on ventures with to fill a financing gap for “entrepreneur-driven digital social or environmental objectives. One ventures with an international footprint ...” and a focus of the primary goals of accelerators is on sectors “beyond the Internet … like biotechnology, to drive capital, ranging from revenue digital medicine, renewable energy, software security, to new equity investments, debt space tech, fintech and agtech.”56 financing, or philanthropic support into promising early-stage ventures to NXTP’s first accelerator fund focused on the seed stage stabilize and scale their operations. GALI of investments, typically investing US$25,000 in each reports consistently find that start-ups company that qualified for its program in return for participating in accelerator programs a minority equity stake. The fund could then make ”…report higher revenue and employee subsequent investments in the best-performing companies growth, as well as higher equity and and contribute additional coaching, support, business debt investment ...” A 2018 report also addresses the efficacy of accelerator development and facilitate discussions with potential capital, suggesting that in most cases, follow-on investors. NXTP Labs has made over 190 “$1 spent on an accelerator program investments with about one-third of these companies translates into more than $1 of additional receiving follow-on financing. The manager’s second funds for participating entrepreneurs.” fund is the NXTP Opportunity Fund, which will seek Drivers of performance within to make later-stage follow-on venture investments in accelerators include access to other high-growth technology companies (including those entrepreneurs, providing a guaranteed accelerated by NTXP) across Latin America in verticals investment, and focusing on diversity in such as fintech, agritech, edu-tech, cleantech, marketplaces, applicants. SaaS for SMEs, and in other disruptive business models and technologies. As the topic of sustainability has become increasingly impact. NXTP also measures and reports on its ESG discussed in the entrepreneurship ecosystem in Argentina, impact to its investors and other stakeholders and holds NXTP Labs has incorporated additional criteria to its investee companies to the same high standards it assess the sustainability of the business models and maintains internally for labor, investors, the environment, companies that it chooses to add to its accelerator and women’s advancement in the tech sector. program and portfolio of investments. NXTP’s mission now includes supporting and accelerating economic, Lessons learned: While much of the dialogue around social and environmental impacts by factoring ESG sustainable investing has focused on climate change, some into their investment analysis to reduce the risks of of NXTP’s existing sustainable investments illustrate that their investments and generate higher performance and a much broader interpretation is possible and indeed, Section 2 Market Experience and Lessons Learned | 29 Drone enabled precision agriculture (Photo credit: Shutterstock) needed. The NXTP team has already identified and for as long as possible, companies keep material out backed new sustainable, innovative business models of landfills, defer or avoid capital expenditure, and that include discover new sources of revenue. NXTP company Trocafone has built an e-commerce platform that A. Circular supplies. The circular supplies business model buys and sells (and guarantees) reconditioned mobile is particularly relevant for companies dealing with devices. scarce commodities, in which these are replaced with D. Sharing platforms. This model enables sharing products fully renewable, recyclable, or biodegradable resource and assets that have a low ownership or use rate. inputs. NXTP company Gone enables the sale or Companies that leverage sharing platforms maximize recycling of possessions by providing a secondary the use of the products they own or sell to enhance market and online tools to manage inventory, pricing, per-unit productivity. NXTP portfolio company Zolvers listing, reselling, and distributing items. is an online/mobile marketplace that allows users B. Resource efficiency. Resource efficiency leverages to outsource errands such as cleaning, delivery, and technological innovations and capabilities to recover maintenance. Another NXTP investment, CargoX, and more efficiently use resources that eliminate is an “Uber for Trucks” that connects businesses material leakage and maximize economic value. NXTP shipping partial loads with drivers that have excess company Kilimo provides a decision support tool for capacity in their trucks. irrigation that uses satellite, historical, and on-site E. Product as a service. In this model, customers use weather data to make irrigation prescriptions for products through a lease or pay-for-use arrangement each crop, improving yields up to 20 percent and versus the conventional buy-to-own approach. This water efficiency up to 70 percent. model is attractive for companies with high operational C. Product life extension. Product life extension helps or maintenance costs to provide a service. NXTP companies extend the life cycle of their products portfolio company Satellogic is a “space as a service” and core assets to ensure they remain economically satellite company that provides affordable, high- useful. Materials and systems that would otherwise resolution imaging in a microsatellite platform, with be discarded are maintained or even improved, such the ability to capture photo data of the Earth at as through remanufacturing, repairing, upgrading, one-meter resolution. or re-marketing. By extending products’ lifespans 30 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment 2.7 STATE-SPONSORED and economic impact. After an investment has been FUNDS: THE CASE OF approved, the fund team establishes a close working ECOTECHNOLOGIES FUND relationship with the management of their portfolio companies and actively seeks to add value on areas of France’s Ecotechnologies Fund is a public PE/VC fund particular need within each company as necessary (for structured as a fond professionnel de capital investissement example, recruitment, business development, international (equivalent to a limited liability partnership in the United expertise, communication, financial expertise, and others). Kingdom) and managed by BPI France Investissement, Lessons learned: the asset management arm of the French public banking institution BPI France. A. Flexibility in investing the fund. The pace of the investments by the Ecotechnologies Fund has been Background: France. In 2010, France’s Environment slower than originally expected. To overcome this, the & Energy Management Agency launched a program, fund extended the investment period by two years, Investments for the Future, with the aim of accompanying allowing it to complete the number of investments structural reforms and meeting France’s four major initially targeted. challenges: carbon neutrality, access to employment, competitiveness through innovation, and the digital B. Complementary support. To support the development state/e-government. In 2012, the Ecotechnologies Fund of sustainable technologies and innovation, ADEME, was created within the framework of the actions of PIA a Limited Partner in the fund, also provides policy 1 (2010–2014)57 to support sustainable innovation in actions and state aid to some of the fund’s early- SMEs. stage investments (subject to European competition regulations). This is organized through regular, public The fund is focused on early- and growth-stage requests for proposals and consists of either state aid investments in innovative private SMEs dedicated to with profit sharing, known as “repayable advances,” green and sustainable technologies, mainly those based or grants, which are primarily reserved for research in France. Eligible SMEs must have a workforce of bodies. These complimentary initiatives support very- less than 250 employees and a turnover of less than early-stage companies through proof of concept to a €50 million. Ecotechnologies Fund Investments range point where additional equity investment is possible. from €1 million to €10 million, and, as with Yozma, C. Thematic focus, sectoral diversification, focus on exits. significant pari passu co-investment from private sector Ecotechnologies Fund focuses on the following themes: investors is expected alongside Ecotechnologies Fund’s decarbonized renewable energy, green chemistry and minority stakes. Return targets sought by the team of six industrial biotechnology, circular economy (waste seasoned investment professionals are expected to meet recovery, industrial ecology, and others), smart commercial expectations. Each investment opportunity is electricity grids, and advanced mobility and vehicles evaluated and assessed by the dedicated team before being of the future. The main exit possibilities for portfolio presented to two different committees. The first committee companies in these sectors will likely be industrial is composed of representatives from the Fund’s LPs trade sales or perhaps an IPO. (Agence de l’Environnement et de la Maîtrise de l’Energie (ADEME), Secrétariat Général pour l’Investissement, Caisse des Dépôts et des Consignations, and Trésor Public), whereas the second committee represents BPI France Investment. This dual investment committee ensures that the fund’s investments are likely to deliver both financial performance and targeted social, environmental, Section 2 Market Experience and Lessons Learned | 31 2.8 MARKET BUILDING: THE reporting of a company’s effects on its stakeholders. For IMPACT MANAGEMENT example, a business that discloses the health benefits of PROJECT its product but does not disclose a high employee injury rate is akin to the company choosing to report only on The U.K.-based Impact Management Project (IMP) certain financial assets without disclosing liabilities. The is a global initiative with over 1,000 organizations IMP has developed an impact reporting framework that that seeks to establish shared fundamentals across enables any company to present a fair and complete countries, sectors and asset classes for assessing and picture of its impact performance as well as goals to classifying impact goals and performance. The resulting improve that performance over time. The framework consensus on a set of definitions forms the basis for a deliberately allows for use of existing asset class and shared reporting language for social and environmental sector-specific standards and organizes this information impact, which can lead to greater flows of public and into three categories: i) avoiding harm, ii) benefitting private capital flows to finance sustainable growth as its stakeholders, and iii) contributing to solutions. By investors are able to make and manage investments understanding the total impact of a company, the IMP in line with their impact and financial goals. As the segments the rather complex universe of responsible, IMP continues its work with leading sustainable and sustainable, and impact investment choices available to impact organizations such as the Global Impact Investing investors and connects them with investment products Network, the Global Reporting Initiative, the World that are appropriate for their intentions and constraints. Economic Forum, the PRI, and the OECD, it looks to As part of the project, both UBS, the global bank, and engage with governments to broaden the dialogue and PGGM, the large Dutch asset manager, have used the IMP’s eventually empower financial regulatory authorities in Investor Impact Matrix toolkit to map their portfolios countries to also support impact reporting standards. in ways that allow their investors to understand whether the funds are meeting both their financial and impact Background: Global impact assessment standards. goals. Convergence of international accounting standards began relatively recently, with the establishment in 1973 of the Lessons learned: first international standards-setting body, the International A. Common principles on impact are needed. There are Accounting Standards Committee. Today, the Generally many useful frameworks, standards, and measurement Accepted Accounting Principles and the International approaches under development and in active use Financial Reporting Standards, among other global by a wide variety of industries, organizations, and standards, have led to a harmonization of measuring disciplines. However, general agreement about and managing financial performance. This harmonization basic principles or procedures for sharing impact of accounting standards and performance fundamentals expectations in the financial system has not been (such as financial return, volatility, liquidity and asset addressed. classes, which enable investors to group investments with similar performance characteristicsIthe remarkable B. A single solution for impact metrics is helpful. It is growth in the global capital markets and the financial easier for global, diverse enterprises to understand system over the last half century. and manage their impact if they just have one dashboard of data and shared lexicon that summarizes The IMP starts with the recognition that all companies all material positive and negative financial, social, have impacts, both positive and negative, intended and and environmental effects of their business activity. unintended. To make an informed investment decision, an C. Indirect effects matter. Material effects, both positive investor needs transparent, consistent, and comprehensive and negative, can be generated indirectly for example 32 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment by a company’s products, services, distribution network, Background: Moving from awareness to impact. The PRI operations, or supply chain. Nevertheless, there is understands responsible investment to be an approach more awareness on effects generated directly. to investing that aims to incorporate ESG factors into investment strategies, investment decisions, and active 2.9 MARKET BUILDING: THE ownership, to better manage risk, create investment PRINCIPLES FOR RESPONSIBLE opportunities, and generate sustainable, long-term INVESTMENT returns. While investment approaches such as impact investing, ethical investment, and green investment fall Coming out of a workgroup sponsored by the United under the umbrella of responsible investment, responsible Nations (UN), the Principles for Responsible Investment investment is a holistic approach that aims to include (PRI) is a global network of asset owners, investment any information that could be material to investment managers, and service providers. The Principles were performance. This means that responsible investment launched in 2006 at the New York Stock Exchange. can be pursued even by investors whose sole purpose Since then, the number of signatories has grown from is financial return, on the basis that to ignore ESG 100 to 2,000 from over 50 countries, representing over factors is to ignore risks and opportunities that have US$80 trillion in assets under management. The PRI’s a material effect on the returns that a fiduciary must goals are to understand the investment implications of strive to deliver to clients and beneficiaries. ESG issues and support its signatories in integrating Responsible investment does not necessitate the use these issues into investment and ownership decisions. of specialized products. It is primarily about bringing The Principles were developed by investors and commits additional data and analysis into existing approaches. signatories to Tailored products whose remit overlaps with areas 1. Incorporate ESG issues into investment analysis and responsible investment do exist, such as environmentally decision-making processes; or socially themed funds, green bonds, or social impact bonds, and these can form part of a portfolio of responsible 2. Be active owners and incorporate ESG issues into investments. their ownership policies and practices; 3. Seek appropriate disclosure on ESG issues by the Since 2006, the PRI has established itself as a global entities in which they invest; voice of the responsible investment movement, building awareness of the benefits of ESG integration in investment 4. Promote acceptance and implementation of the decisions. Over the next decade, the PRI will build on Principles within the investment industry; this awareness to understand and support the role of 5. Work together to enhance their effectiveness in ESG integration in real world impact. It will continue implementing the Principles; and its focus on empowering asset owners to implement and realize their responsible investment strategies, through 6. Report on their activities and progress toward ESG incorporation tools and through engagement implementing the Principles. with managers, investment consultants, companies, Currently, as part of its work to strengthen the link governments, policy makers, and other stakeholders. between the work of responsible investors and real-world The PRI will also continue to showcase leadership and impact, the PRI is exploring how its signatories can transparency from investment managers and provide a contribute to the achievement of the UN’s Sustainable platform to evaluate investment opportunities linked to Development Goals. sustainability, climate change, and innovation. Section 2 Market Experience and Lessons Learned | 33 Lessons learned: research. Although perceptions of materiality differ, the evidence from academic and practitioner literature on A. Asset owners move markets. The theory of the PRI ESG performance is viewed as being robust enough to is that asset owners set the direction of markets, and argue that, at a minimum, fiduciaries should consider that their implementing responsible investment at these issues as part of their investment process. On scale and depth can accelerate its uptake through the topic of this paper, more research must be done on the investment chain and ultimately affect company the potential return profiles of emerging sustainable behavior by pricing in risks and opportunities that technologies. derive from responsible and irresponsible company E. The role of patient capital. Breakthroughs in hardware, behavior. as opposed to digital technologies, require more up- B. Lack of standardization in reporting. The lack of front capital and can take significant time from first standardized reporting and the disparity of Limited investment to exit. This long time frame means that Partners’ requests for information have resulted in the early equity investment rounds are unsuitable an acute reporting burden for General Partners and for closed-end funds. As a result, there can be a underlying portfolio companies. The PRI understands role for more patient capital, provided by public its role to be one of streamlining ESG reporting institutions in partnership with the private sector, wherever possible and has made this the focus of to increase the availability of capital to innovative, its PE program. In doing so, the PRI has found sustainability-related companies with long-gestation working with its signatories and the established business models. PE associations to be invaluable both in terms of developing market-appropriate resources but also 2.10 SUSTAINABLE CORPORATE for achieving industry buy-in. VENTUE CAPITAL C. Reporting = accountability + transparency. The PRI’s method of ensuring accountability to its Principles is The role of CVC has become increasingly evident in an annual reporting obligation. The PRI’s reporting the past decade. In 2017, US$31.2 billion was invested is the largest global reporting project on responsible by CVCs, and, according to the report “Investing in investment, developed in close collaboration with Breakthrough Corporate Venture Capital,” CVC groups investors. Besides ensuring accountability of the PRI are also often more closely aligned with the sustainable and its signatories, the process offers a standardized and impact investing theme, including SDGs, than transparency tool for signatories’ reporting and many purely financial investors. This is because many an assessment process that allows signatories to modern corporations have already made impact and benchmark, learn, and develop. Limited Partners CSR commitments (often public) to their customers and can use the PRI reporting to evaluate manager suppliers and are more culturally familiar with evaluating approaches to responsible investment. The PRI both financial return and the long-term strategic impact has recently established accountability criteria for of their activities. The UN Global Compact’s (UNGC) signatory status, based on the key components of 2017 Progress Report notes that 75 percent of UNGC its annual reporting. A failure to meet these criteria participants have actions in place to address the SDGs, will ultimately results in the signatory being delisted and 70 percent report publicly.58 Thus the addition of from the PRI. societal and environmental performance metrics in CVC investment decisions could be easier to manage than D. Convictions need evidence. The PRI signatories for other purely financial VC managers. As with VC believe that ESG issues can affect the performance funds, CVC teams deploy a similar skill set and make of investment portfolios. As fiduciaries, this belief equity investments into innovative external businesses must be supported by well-supported analysis and 34 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment (most CVCs invest using cash from balance sheets and involves creating an internal dedicated VC fund where some also invest in third-party funds). However, as the parent corporate is an Limited Partner, and a third there generally needs to be clear alignment between approach involves investing in third-party funds. An investments and the strategy of the parent company and/ example of this second option is Sapphire Ventures, which or its business units, this expertise and an established is backed by the German software company SAP and value chain can bring tangible benefits to their portfolio has US$2.5 billion under management (as of 2016).64 companies.59 Corporations cannot bring only market Formerly known as SAP Ventures, the unit was started intelligence, as they also mobilize product, technology, in 1996 and spun out of SAP in 2011, becoming an and distribution capabilities to drive the growth of independent manager named Sapphire Ventures. The portfolio companies. Additionally, as CVC groups are fund has invested in companies such as 23andMe and not bound by closed end, roughly 10-year fund lives TransferWise. Another example is Orange Digital Ventures, like most standard VC funds, CVCs can bring patient a €150 million early-stage opportunity launched by capital to allow breakthrough companies to develop the French telecommunications company Orange. It at their own pace rather than pushing through changes targets entrepreneurs from across the globe developing and racing to an exit. In short, the objectives of impact businesses related to services and technologies that are in and sustainability can be directly aligned and consistent line with Orange’s fields of expertise. One example of a with CVC goals. qualifying portfolio company is PayJoy, a mobile phone financing solution, and Fenix International, a pay-as- Background: Sustainable CVC. The upward trend in you-go solar system manufacturer that has connected CVC showed an increase from US$9.9 billion in 2013 180,000 African households to clean energy.65,66 Orange to US$31.2 billion in 2017 globally, going from 989 to Digital Ventures Africa was launched with €50 million 1,791 deals, respectively. The proportion of CVC activity (US$61.6 million) in capital commitments and offers as a percentage of overall VC activity grew from 16 early stage investments of up to €3 million to start- percent to 20 percent in this same period. Furthermore, ups in Africa and Middle East, where demographics, based on CB Insights Global CVC Report, over 180 new economic growth, and digital innovation can create corporate VC firms were active in 2017, representing 66 percent growth over the level of activity in 2016.60 While the number of CVC investors active at the seed capital stage grew by 45 percent over this period, at the other end of spectrum, the largest CVC-backed deal was a US$1 billion Series H investment in Lyft by CapitalG (Google Capital). On average, CVC deal sizes tend to be bigger than noncorporate VC investments.61,62 While research on impact VC and CVC are still limited, one study estimates corporate impact investing to account for US$2.4 billion annually in the CVC sector.63 Different models have emerged for how large corporations can use their experience, in-house expertise, R&D investment, and operational footprint to work with early-stage companies to stay competitive and abreast of fast-moving, disruptive developments in their sector. While some corporations make direct venture Wireless broadband infrastructure (Photo credit: investments from their balance sheet, a second model Shutterstock) Section 2 Market Experience and Lessons Learned | 35 opportunities that will benefit from Orange’s client can leverage growing interest in and engagement of base of 120 million users in 21 countries. Orange is corporations in the sustainability theme, but it is also exploring the impact investment theme, as many important to align expectations on financial, business, of the SDGs relate to Orange’s core business including and impact priorities among investors, CVCs, and Industry, Innovation, and Infrastructure; Sustainable Cities investee companies. and Communities; Affordable and Clean Energy; Good B. Increased value-add. Corporations have agency Health and Well-Being; as well as Gender Equality.67 to drive strategic value, and by extension, impact. Other examples of in-house CVC funds include Unilever Resources brought to bear by corporations can drive Ventures and Hydra Ventures (Adidas’ CVC arm focused significant value to a portfolio company. on the footwear and apparel sectors). Hydra Ventures was launched in 2011 with the goal of investing in early- and growth-stage companies to explore strategic 2.11 SUMMARY TAKEAWAYS and viable innovations that would contribute to the The following high-level observations, focused on various Adidas Group’s path toward improving its sustainability. aspects of establishing and fostering sustainable PE/VC Unilever Ventures is interesting in that it does both funds and companies, may be drawn based on the varied direct and fund investments to identify companies that and extensive experience of the knowledge partners could become strategically relevant to Unilever and can and the market practices outlined above. benefit from access to Unilever’s assets and capabilities. A. Commercial PE/VC propositions are needed to A third way corporations have found to engage in mobilize private sector capital. Successful PE/VC VC investing is through participating in third-party investment vehicles need to managed external funds alongside other like-minded Limited Partners. One example of this model is Closed • Be structured on a commercial basis; Loop Fund, which invests in recycling infrastructure and the development of the circular economy in North • Be run by a trustworthy manager with a strong America. Investors in this fund include many of the team, bringing robust relevant experience; world’s largest consumer goods companies, reflecting • Reach a minimum commercial size (typically more the importance of and attractive opportunities in than US$100 million equivalent of committed innovation-driven sustainability venture investments. capital); and After a successful experience with different investment approaches in the United States, Circulate Capital was • Have a commercially attractive market and a launched to make early-stage investments in catalytic strategy designed to provide attractive returns. technologies and disruptive business models built around a circular economy in emerging economies. Sample Fund terms, vehicles, and incentives should be as pipeline investments include waste management and “market standard” as possible so as to be familiar recycling companies in South and Southeast Asia to to commercial investors. Anchor investments into help reduce the flow of plastics into the oceans as well an investee fund can mobilize significant capital as improve economic development and public health since the underlying portfolio companies will also in these developing countries. raise equity and debt capital from third parties to fund their growth (by some estimates about 10x Lessons learned: mobilization). Similarly, investing through a fund of PE/VC funds enables one more turn of mobilization A. Successful co-investment with corporations requires by catalyzing additional equity in a cascade at three alignment of strategies. Sustainable PE/VC investors 36 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment levels (fund of funds level, investee fund level, and in E&S rating, the performance was less than for underlying portfolio company level). the subset of the portfolio that maintained its rating. Preliminary analysis indicates that a drop in the B. Established (and ideally best practice) legal, regulatory, E&S rating by one category (out of a total of four), taxation frameworks are needed to give investors is associated with an ROE decrease of 8.1 percent comfort investing in PE/VC funds investing in a and an ROA decrease of 3.1 percent. Conversely, an given country. PE/VC investments are subject to a increase in E&S performance by one rating category countries’ legal, regulatory, and taxation drivers is associated with an ROE increase of 3.6 percent and impediments. The World Bank’s Finance, and an ROA increase of 1.9 percent. Naturally, the Competitiveness & Innovation Global Practice seeks correlation identified in this data does not necessarily to educate governments on the PE/VC industry by illustrate causation, but is consistent with the thesis formulating and sequencing reform recommendations that better, more focused management is better both at that can ensure a well-calibrated design and managing company’s operations and at implementing implementation of the critical legal, regulatory, and a proper ESG framework. taxation framework. For example, the administrative D. Government/university-sponsored incubators can and approval process of sustainable companies, such help create an innovation ecosystem and pipeline as registration and IPOs, should minimize unnecessary for early stage venture investors. The United States complexity to encourage PE/VC funds to deploy Department of Energy and several state governments capital in those companies. Additionally, laws and set up funds to foster advanced early-stage research regulations should encourage foreign investment into and start-up funding. New funding sources, such sustainable PE/VC funds, as institutional investors as the Department of Energy’s Advanced Research often propagate best practices in ESG. When PE/ Project Agency-Energy, have helped advance high- VCs have international and regional development potential, high-impact energy technologies that banks and big multinational companies as Limited are too early for private sector investment. Other Partners, those investors not only focus on economic important initiatives include the Tata Center, MIT’s returns but also often on environmental benefits Energy Initiative, MIT’s The Engine, Prime Coalition, and impact on sustainable development. Argentina’s New York State Energy Research and Development new entrepreneurship law is a clear example of the Authority, and Chicago’s Clean Energy Trust, all role of regulation in promoting entrepreneurship. of which support the initial stages of technology C. Integration of ESG factors into PE/VC decision making development and early commercialization. In the can contribute to outperformance. In addition to the United States, the number of energy accelerators has aforementioned evidence supporting the financial increased from 5 to 19 since 2010, with new entrants performance of sustainable assets, IFC is finalizing such as Greentown Labs, Los Angeles Cleantech an internal study (covering 2010 to 2015)68 that has Incubator, Human resource focused ACRE, Elemental found that companies in the top quartile of E&S Accelerator, and Argonne National Laboratory. In performers outperformed the bottom quartile of China, through cooperation with government funds E&S performers on all financial indicators: by 210 and green industrial funds, some PE/VC funds get basis points (bps) for Return on equity (ROE), 110 access to project and technology resources, subsidized bps for Return on Assets (ROA), and 1,370 bps for rent, and other concessions as well as investment Internal Rate of Return (IRR). Similarly, changes opportunities (pipeline). These types of labs provide in E&S performance and financial returns tend to shared centralized facilities with extensive equipment move in the same direction. For example, for the portfolios that shorten ramp-up development periods, subset of the IFC portfolio that experienced a drop thus allowing for reduced capital costs. In Saudi Section 2 Market Experience and Lessons Learned | 37 Arabia, the King Abdullah University of Science unwilling to scale up capacity and enable lower and Technology has the Innovation Fund, which costs. For some early-stage (seed) investments, this becomes a strategic partner and makes sustainable VC challenge has been addressed through an accelerator investments (seed to early-stage growth equity with plus follow-on fund model (examples include U.S.- investments ranging from US$200 thousand to US$2 based Y-Combinator, 500 Startups, TechStars, and million) in high-tech start-ups.69 These collaboration Argentina-based NXTP (discussed above). This model opportunities help start-ups avoid costly mistakes has a number of benefits, including a lower risk of and accelerate their development cycles. failure by investing significant capital into companies only once they have a proven concept, operating E. Governments should establish and maintain a consistent model, and revenue. This is especially true when the set of regulations and incentives over the long term. follow-on fund backs promising companies from the Political shifts in 2010 created some uncertainty with in-house accelerator, as the team will have known the U.S. sustainable infrastructure marketplace. As the companies since inception. The benefit works a result, many incumbent companies did not feel upstream as well, as the manager can use some of its the need to invest or acquire risky start-ups or new management fees to continue the accelerator’s work. technologies, leading to a limited number of exit opportunities for PE/VC investors in funds nearing G. Diversified options for exiting are critical. Corporate the end of their 10-year life. Accordingly, many VC strategic investors, large energy-, food-, water-, and funds were unable to monetize their investments waste-incumbent companies and forward-looking and had to shut down after suffering significant utilities have committed to sustainability. They bring losses. Similarly, renewable energy-related companies their knowledge, commercial relationships, and lower and project developers in the United States watched cost access to customers to help start-ups succeed as the Production Tax Credit and Investment Tax and create confidence in the PE/VC investment and Credit, which lowered the cost of renewable energy exit environment. In the United States, nearly half by providing project owners with a tax credit based of Fortune 500 companies have renewable energy on production or eligible capital costs, were extended, or carbon reduction targets, along with many U.S. often at the last minute, only for short periods, bringing states and major cities (including Los Angeles, Atlanta, increased uncertainty and disincentivizing long-term and Salt Lake City). This consumer-driven interest investments. Likewise, the Spanish government’s abrupt reinforces the belief that many of these sustainable changes to its generous feed-in tariff program has left PE/VC backed technologies will find robust end- many commercial investors deeply suspicious about markets. the longevity of any government incentive program. F. Fund structure that allows additional time for growth can be beneficial. Learning from experience, many U.S.-based sustainable fund managers have, in their next generation sustainable PE/VC funds, allowed for additional time and resources for portfolio companies to gestate, be adopted, and scale. Having learned from the first generation of U.S.-based sustainable funds (outlined above) managers now understand the need to build out supporting infrastructure, value chains, and regulatory frameworks for nascent sectors and business models. Without certainty around end- market demand, equipment manufacturers can be 38 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment Section 3 Challenges to Developing and Scaling Sustainable Private Equity/Venture Capital Markets A wide range of barriers can contribute to the lack of sustainable PE/VC investment activity. As mentioned above, in some less advanced markets, these barriers apply not only to sustainable PE/ VC funds but also to generalist, traditional PE/VC investment activity. These generic barriers are key barriers to the majority of the world’s countries that have only a fledgling PE/VC market. This section will break down the barriers into those that are generic to all PE/VC funds and those that are specific to sustainability-focused PE/VC funds. 3.1 GENERIC BARRIERS TO B. Few national markets have the required sophistication, PRIVATE EQUITY/VENTURE scale, and access. Few markets, especially in developing CAPITAL DEVELOPMENT countries, have the sophistication and scale to support native PE/VC markets that offer the depth and deal A. The lack of exit mechanisms. Key to building any selectivity necessary for a PE/VC fund ecosystem to PE/VC ecosystem is providing the possibility of exits, evolve. PE/VC investing works best in an ecosystem such as a liquid stock market, an active mergers with universities, incubators and tech companies and acquisitions market, and, equally importantly, growing winners, as well as active M&A markets. In the regulations to allow domestic and international addition to market scale, local PE/VC capital, and the capital to flow into and out of companies. Financial ancillary services, including accounting, banking, and markets that offer diverse capital sources the ability regulatory capacity are needed to identify and grow to participate in these exit opportunities, provide the market. Without scale, PE/VC funds often have stable macroeconomic and political conditions, and to take a fly-in or regional approach to investing, compliance with international business standards will which can distance them from the opportunities and allow local or regional PE/VC managers to commit make raising capital more difficult for entrepreneurs. capital, create value alongside a deepening pool of C. Legal and regulatory hurdles can make PE/VC investing local skilled labor, and exit their investments. A great and exiting more difficult. Even if there is a PE/VC share of respondents to the GIIN’s Annual Impact market, unintended legal and regulatory barriers Investor Survey 2018, highlighted “suitable exit could impede the deployment of capital from these options” as a challenge in the impact investment funds. Legal and regulatory impediments can take industry (along with “appropriate capital across the various forms, including lack of relevant legislation, risk/return spectrum” and “common understanding opacity, or discretionary nature of existing rules, of definition and segmentation of impact investing and over-regulation. For example, a lengthy and market”).70 Countries that can provide this important complex competition approval process can prove competitive advantage in the global competition for both expensive and time-consuming for small PE/ private capital should see investors gravitate toward VC funds. The approval process can be particularly their markets. burdensome if countries are under a regional market Section 3 Challenges to Developing and Scaling Sustainable Private Equity/Venture Capital Markets | 39 and multiple regulatory bodies have the responsibility years hence, the pensioners’ lives would be adversely for competition policy. Similarly, PE/VC investments, affected by environmental degradation, meaning that particularly for offshore funds, can be made more investing to mitigate such damage should be a factor complicated, time-consuming, and costly if the in today’s investment decisions. government has put steps in place for the acceptance B. Perceptions of a less attractive risk/return profile. of foreign direct investment. Countries that intend Most commercial investors look to invest with fund to facilitate PE/VC investments should benchmark managers that have long track records, including their legal framework against the best practices of multiple fund generations. However, funds with established financial centers. a sustainable theme have a relatively brief track D. Regulatory restrictions slow domestic investors’ record, and examples of undersized, understaffed, allocations into PE/VC. Especially in some developing and poorly managed sustainable impact funds have countries, local governments may restrict the ability tainted some commercial investors’ perceptions of of long-term domestic investors, such as local pension sustainable investing. In addition, commercial investors funds, to invest in PE/VC funds, including sustainable perceive that sustainable PE/VC funds’ long holding ones. This cuts such funds off from a natural source periods, illiquidity, additional investment restrictions, of long-term local capital and limits the range of and limited exit prospects may translate into a less assets the pension fund beneficiaries can access. In commercially attractive propositions. Furthermore, addition, in some developing countries, the regulatory they may believe that specialized capabilities, with the framework and investment guidelines for domestic associated additional costs, are needed to screen for, pension funds or insurance companies are biased monitor, and measure an investment’s sustainability, toward investments in the country, and specifically again reducing the prospect for commercial returns. in government securities or listed markets, making A majority of the GIIN’s 2018 Survey respondents it particularly difficult for PE/VC funds, most of commented on the need for more research on impact which are established offshore, to attract domestic investment performance, both regarding financial capital even if the investment mandate itself focuses performance as well as impact performance.71 exclusively in the country. C. Inadequate instruments or incentives to price and internalize environmental externalities. Globally 3.2 BARRIERS SPECIFIC and in most jurisdictions, pricing of environmental TO SUSTAINABLE PRIVATE externalities associated with conventional investments EQUITY/VENTURE CAPITAL is difficult, and such externalities are often not DEVELOPMENT internalized. This is partly due to the lack of a carbon market and inadequate laws and regulations penalizing A. Commercial investors’ interpretation of fiduciary pollution and emissions. Without internalization of duty has limited their preference for sustainable these externalities, it reduces the financial returns investing. Some categories of investors, notably pension of sustainable projects that deliver environmental funds, maintain a conservative interpretation of their and social benefits. fiduciary duty. This might mean that, in considering D. Lack of sustainability standards and data (information) a prospective investment, the pension fund manager for screening sustainable projects/assets. Despite cannot take on more risk, or accept higher costs rapidly growing interest in sustainable and impact or any prospect of potentially lower returns, if the investments, the capital markets currently lack market offers equally attractive alternatives without standards, let alone harmonized standards, across these attributes. A broader interpretation of fiduciary geographies, sectors, and asset classes for both assessing duty might take into account the reality that 30 or 40 40 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment and classifying any investment’s effects on society G. Risks associated with new technologies/business and the environment. This lack of standards has models. Very often, disruptive sustainable investments inhibited investors from quantifying the environmental may be in nascent industries with technologies still in footprints and managing associated risks. Resolving the development phase, in which most start-ups need this challenge could lead to greater flows of public and more time to field test and prove their commercial private capital flows to finance sustainable growth. viability. For instance, incorporating new technologies Nevertheless, some relatively new standards have into electric grids, building energy management systems, sought to address this gap. One such effort is the or municipal water systems, must be extensively tested U.K.-based Impact Management Project, a global and proven reliable—all of which takes time. The initiative, akin to GAAP for financial reporting, that adoption rate of existing energy, water, and waste seeks to establish shared fundamentals for assessing and incumbents can be slower than expected. Many new classifying impact goals and performance. Adopted by technologies lack a supportive value chain and are PGGM, UBS, and others, consensus-driven initiatives very expensive to scale. Without certainty around like Impact Management Project could form the basis end-market demand, equipment manufacturers may for a shared language for social and environmental be unwilling to scale up capacity and enable lower impact reporting, leading to additional sustainable costs. Similarly, investments reliant on preferential finance mobilization. industrial policies can suffer from any hint of variation in the duration, stability, and consistency of these E. Maturity mismatch with traditional PE/VC fund policies, adding to the uncertainty of exit and making structures. Some sustainable sectors, particularly sustainable PE/VC funds less willing to participate. those that involve selling hardware solutions and have utilities and other heavily regulated incumbents as customers have shallow capital markets and long business or sales cycles, and the development pathways are characterized by slow but steady growth. Sectors such as these (for example, forestry, core infrastructure) are generally not suitable for traditional 10-year PE/ VC funds. Additionally, some small business and VC managers that focus on building companies to succeed over the longer term, rather than targeting a short- term exit, are also pioneering investment vehicles with longer lives to give their portfolio companies additional time to gestate. F. Lack of knowledge regarding norms of sustainable investing, including ESG risk management standards and practices. A lack of standardized verification for what constitutes a sustainable way of investing and consistent ESG risk management standards and practices are barriers for investors in the space, including PE/VC funds. This contributes to an information asymmetry between investors and specialized fund managers focused on the relatively immature theme. Section 3 Challenges to Developing and Scaling Sustainable Private Equity/Venture Capital Markets | 41 Section 4 Options for Overcoming the Barriers Earlier sections of this paper have described the importance of sustainable PE/VC investments and some of the main challenges in increasing penetration for such investments within the broader investment universe, drawing on the experience of the knowledge partners. In this section, we summarize the options for overcoming these barriers for consideration by G-20 members. As for overcoming generic barriers to PE/VC development, papers to highlight why trustees should take account this paper provides only a very brief list of options, of broader societal sustainability concerns when as most of these are already well studied in literature: evaluating the interpretation of fiduciary duty. The legal frameworks that enforce contracts and protect groups could explore options to add environmental, investors; efficient financial markets that offer diverse social, and other sustainability issues into investment capital sources and exit opportunities (including IPOs processes and decision making as well as encourage and M&A market); compliance with international high standards of ESG performance in the PE/VC business standards and practices for attracting global funds, companies, or other entities in which they capital; a transparent and properly enforced legal and are invested—and thereby support the stability and regulatory framework supporting the PE/VC industry and resilience of the financial system. The PRI has an effort intellectual property rights; the capacity for innovation, underway that seeks to address the gaps between including universities and a significant pool of human countries with customized recommendations for all resources devoted to technology development. While stakeholders, from industry practitioners, service these and other key success factors remain challenges providers, and their market exchanges to financial for some developing countries, the remainder of this regulators and policy makers. section discusses options that stakeholders can consider B. Demonstration effect in pioneering projects via public- when seeking to increase sustainable PE/VC investment private partnerships. An effective way of stimulating activity: greater development of sustainable PE/VC investing is the market signal of demonstrated profitability via A. Stakeholders, working with existing efforts, should sustainable projects sponsored or cosponsored by the seek to progress the interpretation of fiduciary duty public sector or developmental finance institutions obligation on sustainable investing. Currently, there are (DFIs). Various approaches may be employed to broad differences in understanding what fiduciary duty accelerate the achievement of such signaling. An entails across various countries and sectors. While there example is the development and implementation is a general understanding that investment decisions of the IFC Catalyst Fund managed by AMC. The should take into account environment and social risks, Catalyst Fund is a commercially structured fund of much beyond that remains unsettled. Resolving this funds that mobilized commercial capital with the requires leadership from governments, regulators, and help of governments, with a view to explicitly seeking the pension funds themselves. Stakeholders should to demonstrate that investing in the climate space engage in working groups that bring trustees with in emerging markets can be profitable. Involving different interpretations together. There, they could investors in the design phase of Catalyst Fund helped discuss their differences and organize studies and stimulate their interest and secure anchor investments 42 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment from supportive governments, which helped to get D. Practitioners need to develop a wide range of PE/ the fund to a critical size at its first closing. Some VC products that will be suitable for an increasingly commercial investors who had been involved in the broad range of investors. A number of specialized design process were sufficiently comfortable to invest financial vehicles can help address some of the barriers at first closing, and this mobilized other investors to investing in sustainable PE/VC funds. Vehicles also to come in. Other challenges, such as pipeline like funds of funds and managed accounts can be development, can be addressed via city-sponsored used to, relatively safely, learn about the sector, add incubators, governments, DFIs, or donor organizations diversification, and access smaller specialist funds, that can also give grants to cover some of the excess particularly for those institutional investors that have costs associated with bringing capacity in the target a very large minimum investment size. Currently, in sectors and other market-building steps necessary many sustainable investing sectors, specialization in a young sector. provides unique technology and investment insights and deep sector-specific relationships and is commercially C. Stakeholders to consolidate sustainable standards. warranted for a fund’s strategy as long as the underlying Recognizing that there are a growing number of market is large enough. However, vehicles that invest initiatives that seek to develop, harmonize, and across a number of PE/VC funds can mitigate the mainstream standards for sustainable investing, concentration risk inherent in many of the sustainable stakeholders—including governments, industry, PE/VC markets by adding diversification across sector, and civil society—can work together to consolidate strategy, manager, geography, and other factors. these disparate standards into a set consistent ESG Alternatively, if a PE/VC fund manager has enough standards, with reference to international good scale and in-house resources, a larger PE/VC fund practices such as the SDGs, IFC Performance Standards team can attempt to invest across a broader range of and Impact Principles,72 IMP, and the PRI. As part the overall sustainability landscape, bringing sectoral of this, stakeholders could play a significant role in diversification to experienced institutional investors acknowledging the importance of and working with that are willing to commit to individual fund managers. businesses to integrate ESG into decision making and These specialized fund and fund of funds managers share information on E&S factors, with a view to can work with other stakeholders (including the task identifying sustainability risks and increasing investors’ force suggested above) to establish standards and understanding and trust in investee companies. To demonstrate the business case in nascent markets enhance the consistency and comparability across and sectors. Having sustainable investing standards, sectors and markets, regulators or industry bodies could measurement tools, and reporting templates in place also consider mandatory disclosure of nonfinancial will allow sophisticated institutional investors to information by companies of certain size. Such invest directly into sustainable funds or companies disclosure should include information on a standard and match their financial and impact risk/return goals set of key performance indicators covering issues such with the sustainable assets in the market. While PE/ as significant impacts on the environment, society, VC funds are suitable for certain types of underlying community, or employees. They should also include investments (normally in asset-light businesses), a description of company’s policies, information practitioners should strive for the development of on the due diligence process used by the company, other innovative structures, such as an extended life of and, where relevant, its supply and subcontracting a sustainable VC fund that can address challenges like chains to identify, prevent, and mitigate existing and the maturity mismatch that many renewable energy potential adverse impacts. The industry bodies and assets and hardware solutions have found. Other market-supporting institutions could provide capacity structures, such as open-ended platform companies, building for PE/VCs and their investee companies are better suited to more capital-intensive, longer- to implement these ESG standards. Section 4 Options for Overcoming the Barriers | 43 term asset investments, such as large-scale power for sustainable investing and impact measurement, infrastructure. and the sustainable PE/VC industry needs to be a driver in establishing and implementing them (as it E. Governments can provide clear policy signals to foster has in accounting and financial reporting standards, the incubation of sustainable PE/VCs. As seen in auditing standards, governance practices, and, in some of the examples outlined above, governments some cases, environmental and social standards and at the city, regional, or national level, can play a key practices). role in developing sustainable PE/VC by providing regulatory support, transparent processes, and F. Governments could consider developing incubators or economic, regulatory, political, and legal environments encourage privately owned incubators for sustainable that are as stable and certain as possible to cultivate technologies and nontechnological innovations. investment. Clear, comprehensive policies to promote Incubators can help develop and prove new sustainable investment in target sectors should be technologies that can then be turned into successful formed, communicated, and steadfastly backed. These companies and grown by the PE/VC community efforts should create an enabling business environment into successful companies of significant scale and to promote innovation and start-up investments in impact. Participants can include local governments sustainable businesses in targeted strategic sectors that can establish city-based or regional sustainable by promoting research and knowledge sharing, technology incubators focused on the specific goals developing incentives, and supporting core research and capabilities of the region and the particular and innovation. To the extent that cultural barriers needs of early-stage sustainability-focused companies. and a lack of appreciation of sustainable investing are When paired with local grants, subsidies, or tax impediments, stakeholders should seek to disseminate breaks, incubators enable cities to attract young knowledge that could increase awareness of best entrepreneurs and connect start-ups with incumbents practices and the potential benefits from sustainable active in those markets. Benefits of incubators include investing. Regulators can play a significant role in reducing the transaction and operation costs of new acknowledging the importance of shared information companies, enhancing their capacities, accelerating and mandating businesses to share on sustainability the development of their markets, and providing deal issues such as environmental and social factors with flow and human capital to the broader sustainable a view to identifying risks and increasing investors’ PE/VC ecosystem. understanding and trust in investee companies. To G. Active dialogue among governments, limited partners, enhance the consistency and comparability across and PE/VC practitioners can accelerate the global sectors and markets, regulators could also consider development of sustainable investing; scale can be mandatory disclosure of nonfinancial information addressed through a regional versus single-country by companies of certain size. Such disclosures strategy. As seen in the United States and China should include information on a standard set of examples, citizens and their governments making a key performance indicators covering such issues significant, long-term commitment to sustainability as significant impacts on the environment, society, can help raise awareness to pull capital toward community, or employees. They should also include a sustainable investment by creating consumer demand description of company’s policies, information of due and exit-friendly environments. Other participants diligence process used by the company, also regarding, can include industry associations to help define and where relevant its supply and subcontracting chains, establish the sustainable PE/VE asset class, setting in order to identify, prevent, and mitigate existing and up databases and conferences to disseminate data potential adverse impacts. These standards should and knowledge. be part of a clear and widely accepted framework 44 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment H. For small economies, consider developing a regional market strategy. In some cases where scale is not available within a single country or market, trading partners could collaborate to create a regional market strategy to implement some of the above recommendations. Certain sectors such as internet- based software-as-a-service (SaaS) business models and other technology-based platforms have characteristics that make cross-border implementation more viable. Incubating or supporting pan-regional technology- focused PE/VC funds with a number of local offices in participating countries that help originate sustainable technology-focused transactions across the larger, aggregated market could help accelerate the development and adoption of innovative business models in subscale countries. Section 4 Options for Overcoming the Barriers | 45 Endnotes 1 The concept of sustainable development was introduced 13 Bergset, Linda & Fichter, Klaus. (2015). Green start-ups for the first time by the 1987 Brundtland Report that – a new typology for sustainable entrepreneurship and described it as “meeting the needs of the present innovation research. Journal of Innovation Management. without compromising the ability of future generations 3. 118-144. P. 123 to meet their own needs.” It has more recently been 14 Source: Ceres, CleanTech 3.0. codified in the UN’s 2030 Agenda for Sustainable Development, along with a set of 17 SDGs. 15 Definition from: https://www.ussif.org/sribasics. 2 Source EMPEA, “Year-end 2017 Industry Statistics”; note: 16 ESG criteria cover a broad set of themes along all private capital includes private equity, private credit, three dimensions of the “ESG” definition, including: (i) and private infrastructure and real assets; IMF: www. environment: climate change, clean technology, water imf.org/external/datamapper/PPPSH@WEO/OEMDC/ use, sustainable agriculture; (ii) social: workplace safety, ADVEC/WEOWORLD labor relations, diversity, community development, and human rights; and (iii) governance: executive 3 As used in this paper, PE/VC funds are defined as growth compensation, board diversity, and anti-corruption equity funds (including VC), and excluding funds focused policies. on infrastructure, forestry, debt, and listed equities (even when these funds have strategies that include a 17 www.bnef.com Clean Energy Investment database; sustainability aspect). extracted January 11, 2018 4 https://www.weforum.org/agenda/2017/09/the- 18 US SIF Foundation, US Sustainable, Responsible and money-is-there-to-fight-climate-change/ Impact Investing Trends 2016 5 Bergset, Linda & Fichter, Klaus. (2015). Green start-ups 19 Morgan Stanley Institute for Sustainable Investing – a new typology for sustainable entrepreneurship and and Morgan Stanley Investment Management, innovation research. Journal of Innovation Management. 2018. Sustainable Signals: Asset Owners Embrace 3. 118-144. Sustainability 6 McKinsey Global Institute analysis; DHL Globalization 20 These are increasingly aligned to the UN’s Sustainable Index Development Goals (SDGs). 7 Stefan Schaltegger, Erik G. Hansen1, and Florian 21 IFC’s Sustainability Framework: http://www.ifc. Lüdeke-Freund, “Business Models for Sustainability: org/wps/wcm/connect/Topics_Ext_Content/ Origins, Present Research, and Future Avenues,” SAGE IFC_External_Corporate_Site/Sustainability- Publications, 2015. At-IFC, Environmental and Social Performance Standards: http://www.ifc.org/wps/wcm/ 8 World Economic Forum. “Can technology save connect/c8f524004a73daeca09afdf998895a12/ the environment?” https://www.weforum.org/ IFC_Performance_Standards.pdf?MOD=AJPERES, agenda/2014/09/circular-economy-sustainable-planet/ Environmental, Health, and Safety Guidelines: http:// 9 Data is based on the official websites from the www.ifc.org/wps/wcm/connect/topics_ext_content/ companies and from https://imsva91-ctp.trendmicro. ifc_external_corporate_site/sustainability-at- com:443/wis/clicktime/v1/query?url=www.crunchbase. ifc/policies-standards/ehs-guidelines, Corporate com%2c%20a&umid=DCB158AC-7809-1105-867A- Governance Framework: http://www.ifc.org/wps/ 1D5D55B9F704&auth=d8b56f5c97e5a7a4e09c3752ac13cc wcm/connect/52e2e6804a7184689953dbe6e3180238/ 25d9c36f88-7a2fbf7fa99b7ddfb47af729b1e266d52fc8bb97 Corporate%2BGovernance%2BDevelopment%2BFramework. platform of business information about private and pdf?MOD=AJPERES&ContentCache=NONE, public companies. and Corporate Governance Methodology: http://www.ifc.org/wps/wcm/ 10 Bergset, Linda & Fichter, Klaus. (2015). Green start-ups connect/52e2e6804a7184689953dbe6e3180238/ – a new typology for sustainable entrepreneurship and Corporate%2BGovernance%2BDevelopment%2BFramework. innovation research. Journal of Innovation Management. pdf?MOD=AJPERES&ContentCache=NONE. 3. 118-144. P. 121 22 Anticipated Impact Measurement and Monitoring: 11 Bergset, Linda & Fichter, Klaus. (2015). Green start-ups http://www.ifc.org/wps/wcm/connect/ – a new typology for sustainable entrepreneurship and corp_ext_content/ifc_external_corporate_site/ innovation research. Journal of Innovation Management. annual+report/2017-online-report/leadership- 3. 118-144. P. 121 perspectives/ar17_plh+letter 12 https://www.worldbank.org/en/topic/smefinance Endnotes | 47 23 “ESG and Financial Performance: aggregated evidence 33 The IMF reports that emerging economies forecast from more than 2000 empirical studies,” (2015) Gunnar 5.2% GDP growth through 2019 versus 2.2% in advanced Friede, Timo Busch, and Alexander Bassen economies. emerging markets have a median age of 26 years of age compared to 40 in developed markets. 24 “Demystifying Responsible Investment Performance - A Sources: IMF World Economic Outlook Database, April review of key academic and broker research on ESG 2015, World Bank Doing Business Report 2014, McKinsey factors” (2007) UNEP FI and Mercer 2012, Economist Intelligence Unit, United Nationals “Does it pay to be green? A systematic overview” (2008) Population Database, Brookings Institution, 2014 Data, Stefan Ambec, Paul Lanoie United Nations 2014 Revision of the World Urbanization 25 “Green Winners – The performance of sustainability Prospects, Bloomberg 2015 Data, and Emerging Market focused companies during the financial crisis” (2009) Private Equity Association (EMPEA), March 2015. A.T. Kearney (D. Mahler, J. Barker, L. Belsand, and O. 34 www.ifc.org/wps/wcm/connect/ Schultz) c8f524004a73daeca09afdf998895a12/IFC_Performance_ 26 “The financial performance of real assets impact Standards.pdf investments – Introducing the timber, real state and 35 www.ifc.org/wps/wcm/ infrastructure impact benchmarks” (2017) The GIIN, connect/907ed4004aa88a1bb49ef69e0dc67fc6/EDGE- Cambridge Associates; “ESG and financial performance: Brochure.pdf aggregated evidence from more than 2000 empirical studies” (2015) Gunnar Friede, Timo Busch and Alexander 36 www.ifc.org/wps/wcm/ Bassen; “The Impact of Corporate Sustainability on connect/52e2e6804a7184689953dbe6e3180238/ Organizational Processes and Performance” (2011) by Corporate%2BGovernance%2BDevelopment%2BFramework. Harvard – R.G. Eccles, I. Ioannou, and G. Serafeim. pdf?MOD=AJPERES&ContentCache=NONE 27 “Green bond finance and certification” (2017) - T. Ehlers 37 https://www.ifc.org/wps/wcm/connect/news_ext_ and F. Packer content/ifc_external_corporate_site/news+and+events/ news/impact-stories/how-ifc-has-changed-finance 28 The GIIN’s survey analyses self-reported data from 229 organizations that collectively manage US$228 billion in 38 Source EMPEA, “Year-end 2017 Industry Statistics”; note: impact investing. private capital includes private equity, private credit and private infrastructure and real assets. 29 Per IFC, SMEs account for about 90% of businesses and more than 50% of employment worldwide and are 39 Aptheker, H. The Quakers and negro slavery. J. Negro key engines of job creation and economic growth in Hist. 1940, 25, 331–362 as quoted in Sustainable Venture developing countries. Source: http://bit.ly/2DLrBhg Capital Investments: An Enabler Investigation 2018, Antarciuc, Zhu, Almarri, Zhao, Feng, Agyemang 30 McKinsey & Company, Indian Private Equity: Route to Resurgence, June 2015 40 Richardson, B.J. Keeping ethical investment ethical: Regulatory issues for investing for sustainability. J. Bus. 31 Between 2000 and 2013, IFC’s Funds Group committed Ethics 2009, 87, 555–572. and Richardson, B.J. Socially US$2.9 billion to 159 PE/VC funds across more than Responsible Investment Law: Regulating the Unseen 1,000 portfolio companies around the world. The track Polluters; Oxford University Press: Oxford, UK, 2008 record of this set of PE/VC funds is top quartile against Cambridge’s global emerging market benchmarks; IFC’s 41 To US$8.7 trillion or about 22% of the US$40 trillion of Asset Management Company, raised and manages a assets under professional management resource-efficiency focused fund of funds; IFC Venture 42 Source: https://www.blackrock.com/corporate/en-no/ Group makes early-stage, venture capital investments investor-relations/larry-fink-ceo-letter into sustainable companies and VC funds and incubators that target them. 43 The Economist. Sustainable Investment Joins the Mainstream. Available online: goo.gl/mypL7A; and US 32 On the advisory side, IFC has contributed Forum for Sustainable and Responsible Investment. significantly to the development of sustainable Report on Us Sustainable, Responsible and Impact investing by establishing market standards to help Investing Trends. Available online: https://www.ussif. ensure the PE/VC funds sustainably approach org/trends (accessed on 23 February 2018) their investments (for example, IFC’s Performance Standards: http://www.ifc.org/wps/wcm/connect/ 44 http://www.xinhuanet.com/english/2018- c8f524004a73daeca09afdf998895a12/IFC_Performance_ 09/06/c_137450275.htm Standards.pdf?MOD=AJPERES, green building focused 45 Silvia de Torres Carbonell, Directora del Centro de EDGE framework: https://www.ifc.org/wps/wcm/ Entrepreneurship del IAE Business School, Directora connect/907ed4004aa88a1bb49ef69e0dc67fc6/ del GEM, Co fundadora y Vicepresidente del Club EDGE-Brochure.pdf?MOD=AJPERES, Corporate de Business Angels de Antiguos Alumnos IAE, (2012) Governance Framework: http://www.ifc.org/wps/ Fuentes de financiamiento para innovadores en wcm/connect/52e2e6804a7184689953dbe6e3180238/ Argentina: venture capital, inversores ángeles, inversores Corporate%2BGovernance%2BDevelopment%2BFramework. institucionales. Revista de la Bolsa de Comercio de pdf?MOD=AJPERES&ContentCache=NONE) as well as Rosario helped make the business case between sustainable investing in emerging markets and increased financial 46 Certified B Corporations are businesses that meet the returns. highest standards of verified social and environmental performance, public transparency, and legal 48 | Private Equity and Venture Capital’s Role in Catalyzing Sustainable Investment accountability to balance profit and purpose. For more 66 https://impactalpha.com/global-corporations-seek- on B Corporations, refer to: https://bcorporation.net/ innovation-by-supporting-impact-entrepreneurs- about-b-corps eb3838d4bf61/ 47 https://www.bbva.com/es/secreto-potente- 67 https://medium.com/@orangesv/how-corporate- ecosistema-innovacion-israeli/ impact-investment-can-solve-a-6-trillion-global- problem-bc424fb2b25f 48 http://www.yozma.com/overview/default.asp 68 Public release forthcoming 49 https://apolitical.co/solution_article/government- venture-capital-fund-boosted-israels-start-economy/ 69 KAUST Innovation Fund. Explore High-Potential Partnerships with High-Tech Startups. Available online: 50 Public Private Equity Partnerships and Climate Change, https://innovation.kaust.edu.sa/entrepreneurs/browse- IFC 2011 startups/ (accessed on 24 February 2018) 51 Israel has a long history of developing new civilian 70 Annual Impact Investor Survey (2018) GIIN technologies. Conversely, while the New Zealand Venture Investment Fund virtually copied the Yozma 71 Annual Impact Investor Survey (2018) GIIN structure, it has, thus far, been less successful and taken 72 https://www.ifc.org/wps/wcm/connect/Topics_ far longer to find projects to invest in. One plausible Ext_Content/IFC_External_Corporate_Site/Impact- reason is that New Zealand does not have yet the Investing pipeline of start-ups with promising new technologies for the VC funds to invest in. Photos: Shutterstock 52 https://www.jewishvirtuallibrary.org/technological- incubators-in-israel 53 https://apolitical.co/solution_article/government- venture-capital-fund-boosted-israels-start-economy/ 54 “Accelerating Entrepreneurs: Insights from USAID’s Support for Small and Growing Businesses” (2018); https://www.usaid.gov/pace 55 “What’s Working in Startup Acceleration” (2016); ”Accelerating Startups in Emerging Markets” (2017); and “Accelerating the Flow of Funds into Early-Stage Ventures” (2018), Global Accelerator Learning Initiative 56 Inter-American Development Bank, Report “Technolatinas: Latin America riding the technology tsunami.” Link: https://publications.iadb.org/bitstream/ handle/11319/8722/Tecnolatinas-Latin-America-Riding- the-Technology-Tsunami.pdf?sequence=1&isAllowed=y 57 After PIA 1 (2010-2014) and PIA 2 (2014-2017), France is currently implementing its third program, PIA 3. 58 Private Equity’s Role in Delivering the SDGs. EMPEA. (May 2018) 59 http://archive.volans.com/wp-content/ uploads/2014/05/BreakthroughCVC.pdf 60 Global CVC Report 2017: https://www.cbinsights. com/research/report/corporate-venture-capital- trends-2017/ 61 https://medium.com/@orangesv/how-corporate- impact-investment-can-solve-a-6-trillion-global- problem-bc424fb2b25f 62 https://www.bvca.co.uk/Portals/0/library/documents/ BVCA%20Guide%20to%20Corporate%20Venture%20 Capital.pdf 63 Investing with Purpose, CECP (2016) 64 http://sapphireventures.com/ 65 https://www.gsma.com/mobilefordevelopment/ programme/ecosystem-accelerator/orange-digital- ventures-launched-a-e50-million-african-corporate- venture-fund-to-stay-at-the-helm-of-africas-mobile- revolution/ Endnotes | 49 2121 Pennsylvania Ave., NW Washington, D.C. 20433, USA www.ifc.org November/2018