Crowdfunding platforms can serve to connect (individual) private investors with projects and entrepreneurs that need (upfront) capital to start or scale their impact-driven venture. Crowdfunding and the investment platforms described here refer to the financing of profitable projects that are able to pay back borrowed capital with interest (as opposed to fundraising donations for non-profits).
The value of crowdfunding platforms lies in their function to aggregate capital from multiple investors (small private investors, investment funds, donors—each of whom provides a relatively small amount of money) and channel the capital into multiple projects and businesses seeking investment. Project selection (eligible borrowers), risk assessment, and due diligence are done by the crowdfunding platform provider or a partner company. These platforms typically operate as an Internet-based platform and often function without standard financial intermediaries. The platform presents information about the projects to be funded, such as their credit risk rating, financing needs, return on investment, and positive environmental or social impacts.
The platform operator enters into a loan agreement under commercial terms with the selected borrower and allocates raised funds to these borrowers. The borrower is usually required to pay an administration fee for setting up the funding scheme and interest payments, depending on the risk profile and financing period. However, fees and interest payments are usually lower than conditions at commercial banks. The crowdfunding provider will pay out the principal and return on investment to investors according to the terms of projects they decided to finance via the platform.
Sustainability-oriented crowdfunding platforms have used various models including loans, rewards, donations, and a hybrid combining the various approaches. All types of platforms could support adaptation projects, with the reward and donation platforms tending to support small, community-oriented projects.
Current or potential adaptation-relevant sector applications:
- crop and food production – including agroforestry; livestock production; fisheries (marine, freshwater, and aquaculture); irrigation;
- water supply (infrastructure) – water storage; water harvesting; water management;
- coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
- other built environment and infrastructure – urban development; and
- social infrastructure – education; health facilities.
Additional insights:
- This is an emerging instrument. Crowdfunding is beginning to be used to scale up finance for climate adaptation.
- The term “crowdfunding” first appeared in 2006.
Considerations for using crowdfunding and investment platforms:
- Crowdfunding typically helps entrepreneurs of new technologies fund their projects before getting a loan or supports small-scale community or local initiatives.
- It has been used mostly for small-scale interventions.
- The newness of the technology may not be appealing to all investors and may be open to increasing regulation.
- Crowdfunding requires a large number of donors/funders.
- Attracting the attention of potential donors/funders to an initiative among the many on these platforms can be challenging.
- Projects funding public goods such as adaptation benefits may benefit from financial and non-financial government support to ensure success.
Adapted from the following sources:
Maehle, N., Otte, P. P., & Drozdova, N. (2020). Crowdfunding sustainability. In R. Shneor, L. Zhao, & B.-T. Flåten (Eds.), Advances in crowdfunding: Research and practice (pp. 393–422). https://link.springer.com/chapter/10.1007/978-3-030-46309-0_17
von Ritter, K., & Black-Layne, D. (2013). Crowdfunding for climate change: A new source of finance for climate action at the local level? European Capacity Building Initiative. https://unfccc.int/files/cooperation_and_support/financial_mechanism/standing_committee/application/pdf/paper_-_microfinancing_.pdf