Ask Eartha: New investment strategy painting Wall Street green (column)
I’ve been hearing more and more about environmental impact investments. Can you explain what these are? — Mark, Frisco
Thanks for the question Mark. In today’s cutthroat business environment, there’s a never-ending list of companies that pursue monetary profits over seemingly all-else. The impact these companies make on the natural environment seems to be an afterthought, sometimes quite noticeable through the spontaneous creation of some face-saving PR action committee (think any major oil spill over the past couple decades). Delivering wealth to stakeholders can and should be a focus of any company. After all, it makes sense to reward those who have devoted their time and invested their resources in your company.
The point I’m getting at is this: While there’s plenty of investment options available to the public, now more than ever there are ways to invest in, and support incredible businesses that account for more than just profits. These companies, start-ups, and entrepreneurial endeavors are building success through longer-term thinking. They are accounting for their impact and successes in three distinct arenas; the environment, human society, and of course the economy.
While there are great examples of large firms moving toward carbon reduction, a lot of the dynamic change is taking place within the very small company arena. These are companies that need $1-$10 million in order to continue their efforts and typically pursue equity financing as a means of raising funds. In layman’s terms, equity financing is the method of raising capital by selling company stock to investors.
To place it in perspective, most of these smaller firms do not even qualify as a micro-cap stock that is actively and publicly traded and worth anywhere from $50-$300 million in market cap. For this reason, these companies might not appear in typical investment searches. Most companies that are seeking $1-$10 million in equity financing are below this threshold and are high growth and potentially high-impact enterprises.
Many of these smaller enterprises will seek the help of an aggressive funding source. Think a bank on steroids. Venture capital firms are willing to take on higher risks with the potential for higher returns. These venture capitalists investigate emerging markets and invest large amounts of capital in smaller firms they believe can create the greatest wealth with the least amount of capital investment.
Venture capital funds help to bridge the financing gap between the bigger firms (who use large banks and stock offerings) and allow for these smaller dynamic impact firms to expand. $5 million in funding can go a long way toward the development of a product or service that can change the world we live in and even the way we view our current infrastructure. One venture capital firm, Kleiner Perkins, has done very well investing in California’s booming solar market, driven largely in part by a handful of powerful start-up franchises.
Crowd-source funding is booming in popularity as well for many of these socially and environmentally minded enterprises. Websites like Kickstarter and Indiegogo have made investing in these great start-ups incredibly easy and fun. With the click of a button, anyone with a computer and a bank account can support a worthy cause, a social entrepreneurship, or even the next great invention. Making these investment opportunities available to the public has been a grassroots movement that has largely contributed to the successful implementation of many outstanding ideas and new business ventures in the realm of sustainability.
The market will likely demand from companies a paradigm shift in thinking as investors seek creative ways to invest capital towards solutions to various environmental and social issues we currently face. We may soon find that the greatest marketplace advancements and wealth creation will exist in the space between the popular profit-only focus and a newer environmentally-minded paradigm. It is possible to call this an entirely new asset class, as these investments will hold a different place in an investor’s portfolio.
Ask Eartha Steward is written by the staff at the High Country Conservation Center, a nonprofit organization dedicated to waste reduction and resource conservation. Submit questions to Eartha at firstname.lastname@example.org.
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