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What Motivates Green Investing?

Going green isn’t easy to do, and funding the green movement comes with its own set of challenges.

Investors at various stages of the investment cycle look at companies with different lenses based on their specific investment metrics. They also scrutinize the founder’s vision and ability to execute. But the stakes can be higher in the circularity space, particularly when evaluating the social and environmental impact that requires a focus on authenticity and transparency.

“What is a really attractive investable opportunity changes with time,” Danielle Joseph, managing director at venture capital firm Closed Loop Partners, said Wednesday during Sourcing Journal’s Sustainability Summit in New York City. The process of deploying clean energy has shifted to manufacturing supply chains because of the benefit from reusing materials at a lower cost, while also providing a sustainable and environmental impact, she added.

Because Closed Loop Partners invests in the early stage when startup founders are just beginning to pilot their initial product, even if they get to be a “$100 million company or $200 million company in our [investment timeframe], that’s a huge win for us,” Joseph said. “We don’t actually need [them] to become a unicorn or billion-dollar business within our lifespan.”

However, Joseph isn’t sure there’s a way to fully safeguard against greenwashing.

“We’re looking to invest in more transparency-related companies that are bringing authentic reporting standards to market,” she said. “We think that that level of granularity of data is coming, and it’s going to enable us to make smarter decisions around who’s greenwashing [and] who’s not.”

Another deep dive is onevaluating the founders’ commitment to doing the right thing from a sustainability perspective, because that’s often all that exists at the time that we’re investing,” Joseph said.

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As a science-driven firm, Regeneration.VC looks at science-based targets to help delineate truth from fiction, according to Katie Hoffman, partner and investment committee member at the Los Angeles impact investment firm. Regeneration, she said, likes to “invest in solutions that remediate some of the toxins that are already out, or out in the atmosphere and our water systems, and then also make sure that any new supply is going to be non-toxic and healthy for people on the planet.”

Regeneration prefers companies that “have a process or technological innovation that has the potential to leapfrog into existing marketplaces and potentially displace them,” Hoffman said. Firms with a single solution and single outcome are less attractive, although that could change if they can fit into a platform-oriented company, she said.

“We typically don’t take on investments if we don’t believe that they can perform at the standard to what we want to deliver to our [limited partner investors]. So financial returns and ecological returns are measured,” Hoffman said about investment criteria. “We’ve done pretty extensive modeling on how we can attribute value, and also support our companies on the impact side, even when it doesn’t always translate to the financial side.”

Peter Comisar, managing partner and founder of private equity firm Story3 Capital Partners, said his firm’s focus on established, later-stage companies means he’s more interested in how the business has progressed and its plan for generating cash flow.

“We’re investing in a point where the company’s generally got an immediate path to making money, or EBIT (earnings before interest and taxes) positive,” he said. “We’re looking for companies who are really making a meaningful impact from a social and environmental perspective, but also [have] an economic business model that’s really compelling. Without either of those, it doesn’t work from our perspective.”

Story3 in December 2020 invested in sustainable recycled cotton firm Recover, which is scaling recycled cotton fiber production from 12,000 to 20,000 metric tons per year by 2025.

“It’s been a fantastic journey to be alongside [Recover CEO] Alfredo Ferre and working with a company that’s got 100-year authenticity to it,” Comisar said, adding that the Recover was circular long before it became a fashion buzzword.

“There’s a tremendous amount of interest in purpose-driven companies like [Recover],” Comisar said, adding that Story3 is investing a “fair amount of capital” to help open additional manufacturing hubs across seven geographies to be close to the waste Recover relies on.

Comisar said all of Story3’s investments have been in support of a company founder’s passion, legacy and ability to move things forward.

“The last thing…we want to do is to be operating a business,” he said of backing visionaries who can steer startups to greater successes.