Sustainable investment to make its mark on the Venture Capital industry

Sustainable investment to make its mark on the Venture Capital industry
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Climate change is a crisis in the face of which action must be taken. With a scenario of droughts, fires, floods and natural disasters, sustainable investment in Venture Capital is an alternative to face the new reality. 

The United Nations is promoting the Sustainable Development Goals (SDGs) as part of the 2030 Agenda which serve as a framework for creating and investing in projects that combat climate change and create social impact. 

In recent months, this type of investment has gained relevance among Venture Capital investors due to the growth of more ventures and start-ups focused on this market. However, there is still an important capitalization gap. 

According to José Carlos Martínez, director of innovation at Reforestamos México, sustainable investments are one of the most promising markets for private investment. Currently, the primary investors in projects that address the SDG goals are organizations and the public sector.

You can also read: ¿Qué es ESG? Todo lo que debes saber para invertir con impacto.

Why invest in sustainability?

To meet these objectives, it will be necessary to invest between $500 and $700 million annually worldwide.Private capital and specialized funds play a strategic role in promoting sustainable investment projects. The lack of momentum for investment alternatives remains a major challenge. 

Investing in sustainability offers investors long-term growth opportunities while addressing critical environmental and social challenges. Projects in this industry can generate solid financial returns while contributing to the environmental and social crisis. In addition, with increased environmental awareness and stricter regulations, sustainable companies are well positioned to thrive in an increasingly sustainability-oriented future.

Over the last two years, sustainable investments have yielded returns of up to 13% annually. As a result, 60% of investors have incorporated sustainable projects into their investment strategies.

Although sustainable investments are still emerging in Latin American countries, they are gaining traction in these markets. For example, the promotion of such projects in Mexico requires an annual investment of $5 to $7 millionglobally, as stated in thestudy on the Impact and Sustainability of the Mexican Association of Private Equity (AMEXCAP). 

What does it mean for a project to be sustainable?

A sustainable project is one that seeks to meet social, environmental and governmental needs. This implies balancing these areas to ensure long-term development that is viable, equitable and environmentally friendly. In other words, a sustainable project is one that seeks to minimize its negative impact on the environment, maximize its social and economic benefits, and promote equity and justice both now and in the future.

How to invest in sustainability?

Among the alternatives for investment in the United Nations' environmental goals, the following stand out health, quality education, community inclusion and development, clean energy, responsible consumption, environmental action, and the protection and life of terrestrial ecosystems. 

One of the most important tasks on the UN Agenda is the restoration and reforestation of forests. 

For the specialists at Reforestamos México, the emergence of early-stage companies requires an initial investment between government programs, incubators, and accelerators, as well as angel investors, to detonate this market. 

“We see that there is strategic and philanthropic value. That gives us a diversity of types of investments. We see private companies up to angel investors. When we see diversity, we need to raise awareness and improve our environmental and forestry culture.”

Daniel Sánchez, Director of Private Sector Advocacy at Reforestamos Mexico.

Currently, private companies with a high dependence on forests are adjusting their supply chain practices to be more environmentally friendly. 

Daniel Sanchez explains that institutional investors are natural players in the forestry market. However, there is a lack of communication between the needs of the market and the terms of an investment. 

For the specialist, these stakeholders are looking for capital tickets with the expectation of high profitability in the medium term. However, forestry projects take time. 

You can also read: Emprendimiento social, ¿por qué invertir en este mercado?

Why invest in climate change?

For years, climate change has been at the top of the list of global crises. For investors interested in addressing this issue through Venture Capital, there are several alternatives, such as:

  • Renewable energy: investing in various energy alternatives helps reduce dependence on fossil fuels and greenhouse gas emissions.
  • Transportation: the development of electric vehicles, electric mobility infrastructure, efficient public transportation and ride sharing solutions are key actions to reduce greenhouse gas emissions in the transportation sector.
  • Agriculture: investing in sustainable agricultural practices, such as regenerative agriculture and sustainable forest management, reduces greenhouse gas emissions, increases carbon sequestration and promotes biodiversity.

Sustainable Venture Capital Investment

It aims to drive social innovation and promote environmentally friendly alternatives while providing an attractive return for stakeholders. It has a positive impact on the local economy and community. This investment opportunity includes private equity. 

According to a study by the plataforma Dealroom investments over the last five years have been split into: 

  • 1 to 4 million dollars in seed capital. This is in the face of a growing number of emerging companies focused on social or environmental development.
  • 4 to 40 million dollars in private capital between series A, B, and C. For companies already consolidated in this market.

Sustainable projects stand out for certain characteristics that industry stakeholders value, given that it is crucial that these companies, whether emerging or consolidated, offer a positive impact on both the social and environmental spheres.

You can also read: Sustainable trends, what to invest in 2024?

What are sustainable investments looking for?

In recent years, Latin America has seen sustained growth in venture capital investment. Within this industry, projects have a dual impact.On the one hand, the business idea offers high growth potential without neglecting a positive impact on the local economy.

As an investor, you should consider the following factors when deciding whether to include a sustainable project in your strategy:

  1. Investing in a startup should include a sustainable vision in its plan, no matter what sector it belongs to. The clearer the goal, the greater the impact.
  2. To measure the performance of a business with sustainable impact, the investor must take into account that these are not the same conditions as a traditional business since the end goal is not the same.
  3. From the outset of your strategy, consider your goals as an investor. You need to be clear about whether your goals are aligned with the business model of the company you are investing in.

Although a sustainable investment strategy presents a challenge in determining risk and return, the investor must not lose sight of the objective of this type of project.

As a result of this trend, concern for the environment is driving the growth of companies that promote a green strategy. In addition, more and more start-ups are incorporating green technologies into their strategy.

On the road to achieving the 2030 Agenda, sustainable and impact investing will be fundamental. The emergence of companies focused on solving environmental and social problems will require capital and specialized funds. This will make alternatives such as private or entrepreneurial capital a value investment for the future.

WORTEV CAPITAL, as an impact Venture Capital fund, includes social impact projects in its investment thesis as part of its goal to create an ecosystem for investors and entrepreneurs that positively impacts everyone.

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El cambio climático es una realidad que nos está alcanzando. ¿Cómo la inversión sustentable puede ser una solución?

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