Accessing capital has always been challenging for smaller and innovative early-stage companies providing climate and nature-based solutions in LAC. In many countries, the perception of financial and technological risks continues to impede innovative green activities and acts as a barrier for first movers in the market. Investments often exceed most investors’ risk appetites and generally do not meet local banks’ credit conditions. Also, clean tech and conservation finance require more flexibility, responsiveness, agility, ease of doing business, and value-added services, such as networking, advice, or monitoring of impacts. Equity is a key requirement for these investments as it enables those companies to operate until they can attain other forms of financing, paired with mentoring and specialized advice to thrive and innovate.
IDB Lab and GEF as Enablers of the Green Start-up Ecosystem
IDB Lab, as the innovation and venture capital arm of the Inter-American Development Bank, has a long-standing track record in working with the startup and venture capital ecosystems in Latin America and the Caribbean while driving social inclusion and positive environmental impact. With its equity investments in impact and venture capital funds, IDB Lab has supported successful first-movers in the marketplace through capital and mentoring, encouraging new entrants, and generating impact for low-income populations, women, and Indigenous people. The Global Environment Facility (GEF) has been a crucial partner for IDB Lab in this journey, driving impact and generating global environmental benefits. Together, IDB Lab and the GEF have invested over US$81 million in equity over the past 12 years, supporting the Agtech startup sector, renewable energy, energy efficiency projects, and small innovative companies focused on nature-based solutions. These investments are contributing to 48 million tons of CO2-equivalents avoided, 229 MW of new renewable energy capacity, 328,000 MWh of renewable energy generated annually by portfolio companies, and 47 million hectares of the area of landscapes under sustainable land management in production systems. Additionally, they are supporting the elimination, reduction, or avoidance of 34,000 tons of chemicals of global concern through improved disposal, destruction, phase-out, and sustainable practices. Overall, the investments are benefitting over 900,000 people.
The IDB-GEF Green Impact Portfolio
This year, the GEF committed US$6 million in equity alongside IDB Lab to The Yield Lab Latam (YLL), a leading venture capital firm specializing in high-impact Agtech startups, supporting the transition to decarbonized and sustainable food systems through the systematic acceleration and scaling-up of catalyst tech-based solutions with equity investments. These investments will reduce 15,000 tons of chemicals, avoid and mitigate 30 million tons of CO2 emissions, and contribute to 11 million ha under improved sustainable practices while benefitting around 200,000 people. GEF’s investment, paired with IDB Lab’s capital, has triggered additional investments needed for the full launch of YLL, amounting to US$40 million. The Fund’s current portfolio companies, such as Ucropit or Kilimo, show that agtech companies can play a pivotal role in generating global environmental benefits by enabling sustainable land management and reduction of carbon emissions while bringing a myriad of benefits to people.
Like YLL, Agventures, the first Agtech-specific VC fund in Latin America with a regional scope, finances start-ups with disruptive ideas and high potential of growth. The 2019 GEF-endorsed project has already committed US$ 58M in 17 startups. Among those are highly innovative companies like Punabio, a biologicals startup that uses extremophiles – microorganisms 3.5 billion years old that grow where others can’t- from the world’s driest desert to repair soil health, increase crop yields and reduce carbon emissions or Decoy Smart Control, a startup in Ribeirão Preto, Brazil that develops biological controls to kill pests such as ticks that affect farm animals.
An example in the energy efficiency and renewable energy sector is the IDB-GEF Sustainable Caribbean Basin Energy Fund, which was approved in 2016 with the aim to strengthen private participation in equity investment funds in the sector in Caribbean Basin countries, as most of these have heavily relied on development bank and/or government support with some of them being entirely public. This project contributes to developing the ecosystem for private investment in SMEs with clean energy solutions throughout the region.
The IDB-GEF Eco Enterprises III project, with a US$15M IDB-GEF investment, is another great example of how a portfolio of innovative companies can drive positive impact by investing in innovative nature-based growing businesses. The Fund invests in the scaling of sustainable small businesses that operate in biodiversity hotspots in Latin America and contributes to the conservation of critical natural resources and ecosystems, the mitigation of climate risks, and the generation of long-term sustainable income opportunities for communities. The Fund influenced the conservation of over 6 million acres and has helped protect or sustainably manage over 18 million acres, indicating a significant contribution to the conservation and sustainable management of land and impacting over 304,365 people from local communities through its investments as of 2022.
The IDB-PPP MIF Public-Private Partnership Program, approved in 2012, facilitated private investments in renewable energy and energy efficiency projects and in small, innovative companies with business models that support natural resources sustainably. The $15 million GEF resources leveraged co-financing of approximately $115 million in reimbursable resources. The project expanded market-driven investment in these areas and delivered benefits to a range of stakeholders, including women and the indigenous. Since its start, the platform reported 2.192 million CO2 emissions reductions, invested in 42 sustainable energy and energy efficiency projects, and 15 eco enterprises.
What have we Learned from these Investments?
There are valuable lessons that can be drawn from the earlier investments derived from independent mid-term evaluation reports commissioned by IDB to Prissma. Overall, the majority of the program targets in the IDB-PPP Public Partnership Platform and Ecoenterprises III have been achieved with a rating of “highly satisfactory,” with most exceeding the initially proposed targets.
The evaluations further captured critical conclusions, lessons learned, and recommendations.
Here are five important lessons from Ecoenterprises III and IDB-PPP Public Partnership Platform.
- Sustainable Business Models are Viable
The evaluations indicate that business models focusing on environmental protection can be feasible. For instance, companies in the EcoEnterprises portfolio demonstrate that profitability and conservation can coexist, disrupting traditional business norms. These models utilize local biodiversity as a crucial asset, transforming sustainable practices into competitive advantages. Additionally, they benefit low-income households and local communities, including marginalized indigenous groups.
2. Focus on Impact Outcomes and Rigorous Measurement is Key
It is essential for Funds to assess not only financial returns but also broader impacts, thereby contributing positively to biodiversity and environmental protection. EcoEnterprises’ experience highlights the significance of stringent outcome measurement. Quantifying environmental and social impacts can enable better decision-making and can illustrate the concrete benefits of such investments. A data-based method aids in refining strategies and effectively communicating the value of biodiversity investments to a wider audience.
3. Success of Investments Hinges on Technical Expertise
A Fund’s technical knowledge and expertise significantly enable successful investments in sectors like clean technologies and biodiversity. This technical acumen is crucial for effectively sourcing opportunities, conducting due diligence, and identifying risks, particularly in the fast-evolving clean technology and biodiversity space.
4. Stakeholder Engagement is Crucial
Engaging stakeholders effectively is vital for overcoming challenges and gaining the necessary support for successful venture projects. This process includes fostering strong relationships with investors, governments, and enterprises.
- Long-term Vision and Holistic Approach are Key
Funds must adopt a long-term vision to unlock the full potential of investments, ensuring alignment through a clear theory of change that synchronizes investment verticals with long-term environmental and social objectives. This approach will ensure that investments achieve the intended outcomes and impact.
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