Europe’s VCs Debate What Effective Startup Climate Policy Looks Like Business InsiderEurope’s VCs Debate What Effective Startup Climate Policy Looks Like Business InsiderEurope’s booming startup ecosystem wants to be more climate-conscious.
Some venture capitalists are inserting new sustainability clauses into term sheets.
Some players don’t want the extra admin while others say requirements aren’t stringent enough.
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Four-time founder Philippe Singer spent years in the startup ecosystem before turning his eye to one of the most pressing issues of our time: climate change.
“Everyone was talking and no one was acting,” he told Insider.
After a meeting with other European entrepreneurs in 2019, Singer set about making the tech ecosystem climate-neutral. The result was Leaders for Climate Action (LCA), a non-profit community with the goal of making the “biggest possible contribution” against climate change.
The organization has over 1,550 members, including entrepreneurs and investors such as SoundCloud founder Eric Wahlforss and Spotify-backer Northzone. It claims to have reduced or compensated for 908,419 tons of carbon through various resources and campaigns. One contributing factor is its sustainability clause, an addition to term sheets and shareholder agreements requiring startups to implement climate policies.
The business case for sustainability has long been made: firms with good ESG ratings significantly outperform firms with poor ratings, according to 2016 research from Harvard Business School.
Singer, however, said that some venture firms first rejected the sustainability clause due to its additional reporting requirements. LCA has attempted to solve this by offering companies and investors a free reporting platform and other resources to keep track of a businesses’ performance.
Most founders accept the clause, Singer said.
“We have not met one entrepreneur who has said, ‘We don’t want to do this,'” added Christian Jolck, partner and cofounder 2150 Ventures, which used the clause in a recent deal.
“We need everything we can in terms of scalability. If you can scale to something like this, which starts the movement, I think it’s great.”
Michelle You, CEO of carbon accounting software startup Supercritical, said clauses are “encouraging” but don’t go far enough.
Investors should give startups more hands-on help, she added. “Part of that should be helping to set a strong climate strategy, and part should be guidance on how they can turn ambition into reality by using technologies which actually work — such as carbon removal — rather than ineffective traditional carbon offsets,” she said.
For Hannah Leach, a partner at Houghton Ventures and cofounder of Venture ESG, issues can also arise from a lack of understanding.
“Putting together an ESG policy is pretty hard because people don’t necessarily know where to start,” she said, stating that term sheet clauses can be “quite loose.”
Despite this, some suggest that the signing of the clause at least demonstrates a VC’s commitment to ESG.
“It’s a signaling thing in most instances, and also an attempt to gauge whether the founder is actually okay with it,” said Johannes Lenhard, a Cambridge academic who cofounded VentureESG.
Lenhard and Leach are teaming up with LCA on a new ESG and sustainability clause. Lenhard hopes for a tighter clause that will force action but acknowledges that the necessary rounds of industry consultation may dilute the end product.
“You start with something and then you make it better, and then you make it better again, and hopefully in that process, it actually becomes stricter and more enforceable,” he said.
7percent Ventures hopes to incorporate the new clause once it’s agreed.
“But with very different views in the industry to what extent one should be prescriptive or even what ESG should mean, it’s going to be interesting to see where the collective bar ends up,” founding partner Andrew Scott told Insider. “After all, if a clause has no teeth you might as well not include it at all.”