Innovative financing mechanisms are needed to facilitate sustainable development. In the past few years, socially responsible investments have emerged as a successful type of financing scheme but many eco-oriented start-up companies remain under-funded. Apparently, environmental innovations have only recently caught the attention of an important financial sector: venture capital (VC). The article describes the emerging phenomenon of environment-related VC (or green VC) and provides an overview of the current market for this type of investment. The paper delves into this industry, revealing its characteristics, processes and mechanisms. The study also uncovers the main problems faced by eco-entrepreneurs as well as venture capitalists interested in this type of venture. Finally, it analyses the drivers for green VC and attempts to identify the sources of innovation and the uniqueness of these emerging financial products. Based on the analysis, the paper also derives a definition of green VC. Copyright © 2003 John Wiley & Sons, Ltd and ERP Environment.