VENTURE CAPITAL and SRI

by Claros Consulting, Mark Mansley

Venture capital is often overlooked as part of SRI, which to date has focused mostly on listed companies and on equity funds. Yet venture capital has a strong claim to be considered in the broad family of SRI opportunities and those with an interest in SRI should seriously consider venture capital as part of that interest. There are several reasons why much venture capital can be considered a form of SRI:

Firstly, investment in venture capital is fundamentally about providing new money to enable unlisted businesses to grow and so directly encourages economic activity and growth. In contrast, most equity investment provides little new investment, as shares are merely bought from an existing investor. Furthermore, it encourages entrepreneurship; good managment and often a high degree of employee participation.

Secondly, venture capital is extremely effective at creating jobs and employment - creating employment is something that must be regarded as close to the core of most ideas of socially responsible investment. One study found that over a 4 year period, employment in companies funded by venture capital increased at 24% per year, compared with 1.3% by industry generally.

Finally, venture capital tends to avoid those sectors which are of greatest concern - few venture capital opportunities are in the arms industry, the oil and gas business or other resource extraction. That is not to say that there are no issues of socially responsibility with venture capital investment, but on average they are far less severe.

Thus, investors in venture capital can make an easy start by explicitly recongising the SRI potential of there enbture capital investments. For those investors not in venture capital, or considering increasing commitments to venture capital, the SRI potential gives additional reasons for making such investments to the basic financial considerations, such as the strong diversification and good return potential provided by venture capital

Sustainable venture capital

For those who would like a more strongly socially responsible response to SRI or one with a more directly thematic approach in tune with sustainable development there are some "dark green" or "sustainable" venture capital opportunities.

Those funds tend to target sectors which they see as offering good long term growth opportunities and which contribute positively to sustainable development and a just socitey. They include sectors such as:

Renewable energy	Energy efficiency technologies	Pollution reduction and prevention
Organic food and agriculture	Recycling technologies and services	Public transport
Education and training	Healthcare (especially prevention)	Cleaner transport (e.g. electric vehicles)
Social housing / sustainable buildings	Healthy living (food and leisure)	Small business support

Investing in these sectors is not without challenges - sometimes companies in this sector are not well managed or structured, and some of these sectors have had a mixed history, with some high profile failures. However, increasingly there is evidence that such companies can deliver produce results for investors, which has become especially evident as some companies have become listed - companies such as Vestas Power, Ballard Power and Astropower have delivered spectacular growth in recent years.

For most investors, investment in venture capital is best done through a fund managed by experienced venture capitalist. Recently a few such funds have been established which combine experienced management with a focus on sustainability. Institutional funds in this area are typically structured as limited partnerships and are not widely publicised but institutions interested in such opportunities should contact Claros.

In September 1999, the first ethical venture capital fund targeted at retail investors was launched - the Pennine Downing Ethical Venture Capital Trust. Mark Mansley of Claros is one of the non-executive directors of the fund. The fund's investment policy includes a general statement that it will seek "to invest in companies which make a positive contribtuion to society", a desire to invest in positive sectors such as those above, and a strict policy of not investing in "bad" sectors. Fund raising was successful, and the total capital now stands at £10.7m. The fund has now closed for new investors and is busy investing. There is a possibility that new opportunities will be launched in the autumn - those wishing to be kept in touch of developments please contact us.

Those who are particularly interested in the challanges and issues involved in financing the environmental sector may wish to read this article "Financing the Environmental Sector" which was published in the UNEP journal Industry and Environment, Jan-Mar 1999.

SUMMARY

What should investors do about venture capital?

Institutional investors:

Acknowledge any existing venture capital investment in the SRI policy
Consider the scope for increasing the total level of investment in venture capital
Consider the scope for investing in sustainable venture capital

Retail investors

Only consider venture capital if your resources and risk profile permit it (i.e. do you have money you can afford to lose?)
If so, consider making an investment in a retail SRI fund such as the Pennine Downing Ethical VCT
You could also consider the possibility of acting as a business angel - contact the BVCA for more information.

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