4 ways VCs can influence the sustainability agenda

May 11, 2021
Article

And influence companies that don’t already have a strong ESG track record.

4 simple ways VCs can influence the sustainability agenda

Venture capital firms have the opportunity to influence an entire generation of early-stage companies—from hiring practices to sustainable operating models. If VCs first recognize their influence and ability to challenge the status quo, then get a whole new generation of companies to act, the far-reaching knock-on effects could make the difference in the battle against climate change.

Across the financial world, it’s becoming more and more common for investors to connect sustainability with material business benefits. In fact, a notable HBR study finds that more sustainable companies “significantly outperform their counterparts over the long-term, both in terms of [the] stock market as well as accounting performance.”  

VCs already have the power to affect change by influencing a startup’s operating model—and, today, that has to include its environmental impact.

With the financial benefits of sustainability quickly coming into focus, the hunt for compelling companies that take the environment and social issues into account has intensified. Just look at the soaring, $10B+ valuations of companies like Beyond Meat and Impossible Foods.  

Yet to realize an environmental impact and potential return, venture capital firms need to consider how to exert influence on companies that don’t already have a strong ESG track record. VCs already have the power to affect change by influencing a startup’s operating model—and, today, that has to include its environmental impact.  

How it’s being done today

Some progressive VC firms already benefit from the advancement of sustainability—both for their portfolio companies and for the broader investment world. Beyond capital contribution, what follows are four examples of tactics VCs have appropriated to push sustainability forward.    

1. Incorporate values into term sheets

For Obvious Ventures, establishing a strong sustainability foundation and values starts with the term sheet.

“While the typical venture capital term sheet outlines fundamental business rules that set the stage for legally binding investor documents, they remain silent on the founders’ intentions for the company’s culture and values,” writes James Joaquin, co-founder of Obvious Ventures.  

For example, it’s not enough for a company to state that it plans to approach plastic waste and diverse hiring. But to codify and quantify these values on the term sheet, founders and VCs get on the same page and hold each other accountable.  

2. Tie compensation to sustainability

Tying partner compensation to sustainable investments is a tactic some VC firms have already put into practice to help ensure sustainability permeates a VC firm’s culture. If a portfolio company fails to live up to its sustainability goals, there’s an incentive to help that business get on track. Take Norrsken VC as an example. The firm bases its carried interest on how well an investment meets impact targets, like reduced CO2 emissions. If the firm’s portfolio companies don’t meet impact targets, the carried interest gets donated to charity.

3. Measure impact

While a startup might have built a highly innovative, environmentally friendly solution, that doesn’t necessarily mean it has the in-house expertise to measure its impact across multiple categories. For example, a clean energy company that understands its emissions impact doesn’t necessarily have a good handle on how it affects its local community.  

Calling on experience working with different types of portfolio companies, VCs have an opportunity to share best practices to educate portfolio companies about how to measure impact thoroughly. Given the resources and roles many firms have in-house, they can often create a more precise impact calculation than a portfolio company could manage on its own.  

For example, in its annual impact report, SJF Ventures explains how it has helped portfolio companies calculate carbon mitigation using its Carbon Impact Model.  

4. Create content

Outside of helping portfolio companies act more sustainably, VC firms that focus on content creation generate ripple effects across the entrepreneurial landscape. One such example is the Mission Driven Podcast from Better Ventures, which includes interviews and ideas that ultimately help make sustainability the norm across the VC world and beyond.  

The opportunity ahead

For the world to push back the effects of climate change, we need more VCs to use their reputation and resources. We’re hopeful that we’ll see more VC firms—not just the ones focused on impact investments—rising to the occasion to support portfolio companies in ways that advance sustainability and other social initiatives.  

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Author:
Jake Safane
Tags:
Investing
Business strategy
Culture
Software & IT
Values
Sustainability
Key takeaways

1. Incorporate values into term sheets

2. Tie compensation to sustainability

3. Measure impact

4. Create content