Are Socially Conscious Investors Driving Growth for Green Startups?

Socially responsible investing is one of the fastest growing segments of the financial sector. The Forum for Sustainable and Responsible Investment states that socially responsible investments doubled from $64.3 billion to $121.6 billion between 2014 and 2016. This figure is expected to rise much further through 2025.

Socially responsible investing is driving growth in a number of emerging industries. Renewable energy is one of the many industries that stands to gain from socially responsible investing.

A number of new mutual funds have a strong focus on socially responsible investing. Some are specifically focused on renewable energy. Scott Schwartz of GreenBiz discussed the benefits of funds that focus on sustainable infrastructure.

“In recent years, new asset classes have emerged that allow investors a variety of options for simultaneously pursuing financial and climate objectives. Such choices include clean energy mutual funds; green bond offerings; environmental, social and governance (ESG)-focused Exchange Traded Funds (ETFs); and “green” real assets. Each medium presents investors with a set of different investment criteria that balance financial returns with the transition to a low-carbon future. Since the financial crisis of 2008-09, key shifts have driven investor appetite for real assets such as infrastructure, property and agriculture upward. This growth also has increased demand for real asset impact funds that can include affordable housing, efficient properties and sustainable infrastructure,” Schwartz writes.

Schwartz further writes that new classes of investments allow people to support specific causes they believe in. A number of new socially responsible investment funds focus specifically on clean energy and other environmentally conscious projects.

How will socially conscious Investing help with renewable energy?

The renewable energy industry is one of the most promising sectors for growth over the next two decades. However, growth is curtailed by limited financing opportunities. Green energy experts estimate that renewable energy startups will need nearly $4 trillion a year in investments for the next three decades to reverse the effects of harmful emissions.

In order to reach this goal, clean energy startups will need the support of both individual and institutional investors on a massive scale. Reaching out to socially conscious investors through clean energy mutual funds won’t be enough.  Socially conscious venture capitalists won’t be able to hit this target on their own either.

The startups will also need the support of mainstream financing as well. They will need to reach out to traditional mutual funds and other investment vehicles to drive investments.

A recent report from Cambridge associates and the Global Impact Investment Network shows that socially responsible investment vehicles can play a key role in meeting sustainability targets.

However, some risk-averse investors are still hesitant to back clean energy investments, even if they support the cause and principal. Part of the issue is the high beta coefficient and market risk. The market is also still rather inefficient, which creates new opportunities but also a lot more risk for people investing in clean energy.

The Global Impact Investment Network found that the returns on clean energy investments can vary tremendously. The adjusted annualized rate of return for equity in one clean energy company was 29%. In the same clean energy fund, three other companies had rates of return of -15% or lower. This indicates that investors have a very difficult time predicting the return they are able to realize on any clean energy investment.

This may mean that all but the most promising green energy companies will need to tap traditional financing options to raise the necessary capital to expand. Realistic Loans reports that many green startups are turning to services such as theirs to expand. This may change as VCs and green energy funds expand.

The green bubble in 2008 to 2012 demonstrated that the clean energy industry is more unpredictable than previously thought. This may have discouraged some investors from purchasing equity in these firms. They may be more likely to back renewable energy startups after the industry stabilizes and they have a better sense of the returns they can earn.

Nevertheless, interest in renewable energy has picked up since 2014. If more clean energy startups show promising yields, they should attract more capital.