Sustainability is becoming an increasingly important factor for all businesses, not just those offering environmentally friendly products and services. Governments are implementing stricter environmental targets and regulations, and a growing number of consumers are seeking out companies with sustainable practices over those without. But meeting these targets and expectations can be expensive, which is where sustainable financing comes in.
Many governments offer grants and other programs, while an increasing number of investors and creditors are electing to work specifically with green businesses or to give them better than average terms. In fact, over the past two years, investment firms have increased their focus on environmental, social, and governance (ESG) factors when evaluating companies. Whether a business is inherently sustainable — such as a green energy company or one making fully biodegradable products — or is integrating sustainability into their operations by using clean energy or cutting out plastic from its products, there are many sustainable financing options to take advantage of.
1. Government Grants, Subsidies, and Loans
Grants and subsidies both supply businesses with funds that don’t require repayment or an exchange of equity in the company. They can be instrumental in starting a business or introducing sustainable practices and infrastructure. However, government grants can often be highly competitive, so applying for them can be time-intensive with no guarantee of receiving them. Subsidies can be easier to obtain but tend to only apply to specific things, such as purchasing an electric vehicle or installing solar panels. They are less flexible that a grant might be and typically will only cover part of the cost. However, the fact that they do not need to be repaid is still a significant benefit, and it’s worth checking to see if there are any applicable subsidies when seeking out sustainable financing for green projects.
Availability of grants and subsidies will vary by country, but many governments at various levels offer assistance to green businesses. In places like the US, there may be multiple offerings from several different departments catering to different industries and needs. For example, the US Environmental Protection Agency (EPA) sponsors multiple programs for green initiatives, while the NSF helps fund various types of scientific research. Meanwhile, the UK’s 2023 Green Energy Finance Strategy is providing funding to help businesses become greener.
Governments also offer loans for various purposes, and while these do need to be repaid in time, they can still end up being more favorable than loans from private lenders. The US Department of Energy, for example, sponsors several loan programs to support clean energy.
2. Green Loans and Bonds
Green loans and bonds function similarly to government initiatives but are typically offered by private entities. They are designed to support and incentivize businesses that are adopting sustainable practices. As such, they may be linked to either a specific eco-friendly endeavor (such as building energy-efficient homes) or to a particular target (such as reducing carbon emissions or making the company’s operations paperless). These loans and bonds may come with incentives for reaching a particular goal or penalties for failing to reach a target.
3. Philanthropic Funding
Private individuals, foundations, and non-profit organizations can also provide sustainable financing for ESG causes, either as grants or other types of financing. This group tends to be more concerned about the social and environmental impact of the projects they fund than with profitability, which is beneficial to businesses looking to start projects that are good for the environment but may not be inherently profitable, or that will take some time before they become profitable.
4. Impact Investing
Venture capitalists and angel investors that fund sustainable businesses and projects are known as impact investors or ESG investors, as they invest their money with the intent of making an important environmental or social impact. They can be a source of long-term funding and may offer not only money but advice and connections as well. This funding is usually provided in exchange for equity in the company, so it’s important for businesses to consider how much control they are comfortable parting with in order to obtain it.
This option isn’t inherently aimed at sustainable companies, but ESG causes can do well here. Crowdfunding involves raising money from a large number of people, often customers, family and friends, and individual investors. There are many crowdfunding platforms available, with Kickstarter and Indiegogo being among the most well-known. There are also few barriers to entry.
Crowdfunding can be a useful tool for SMEs and has the advantage of being a donation rather than a loan — while crowdfunding projects may choose to offer rewards to their backers, such as a product they’re raising money to manufacture, they are not required to pay back the money or offer anything in exchange. While this gives it an advantage over loans and sales of equity, success can vary wildly from company to company and project to project. It can appeal to environmentally-conscious individuals who want to make a difference, but the amount of support a project receives will depend on many factors, including how well-known the company is and how well it publicizes the project, as well as a significant amount of luck in terms of how much attention it gains through channels like social media and news.
The Importance of Being Informed
There are many different opportunities when it comes to sustainable financing, but all of them come with their own unique challenges and risks. Even discovering these opportunities in the first place can require research, networking, and luck. It’s also important to be well-informed about any person or organization your company decides to partner with, in order to ensure you trust who you’re working with and to find the best deal possible. That’s why Bizvibe’s B2B platform provides detailed insights on close to 200,000 finance companies along with tools for comparing and connecting with potential business partners, all available to try for free.