Venture Capital's Role in Climate Action: Beyond Profit

Market Perspectives
September 24, 2020
Eric Tran
Investment Manager

Profit or Purpose?

Venture Capital Companies (VCs) are primarily financial investors. Their main objective? Delivering substantial returns to Limited Partners (LPs) by investing in high-growth companies. With the prevalent 10-year fund life models, VCs often favour startups that promise quick commercialisation and a high likelihood of profit. This approach might inadvertently sideline projects crucial for addressing global challenges like climate change. Such initiatives often demand significant initial investments and infrastructure, making them less appealing to traditional VCs.

However, the dichotomy between profit and purpose isn't set in stone. The venture industry is uniquely positioned within innovation clusters, providing them a vantage point to bridge financial returns with societal impact. By leveraging their insights, financial prowess, and connections with various economic stakeholders, VCs can steer the innovation ecosystem towards more globally beneficial entrepreneurial ventures.

The Looming Threat: Climate Change

While today's headlines are awash with the Covid19 pandemic, stock market trends, and political events, they often overshadow what many consider as “the most systemic threat of humankind”: climate change. Despite the increasing need for international collaboration, trends suggest a growing disconnect amongst people, a surge in early-stage private capital markets, and rising nationalist sentiments.

The alarming data speaks for itself: global temperatures have risen by over 1.0°C since pre-industrial times. If we continue at this rate, we'll surpass the Paris Agreement's target limits within a decade. Recent events like the 2019/20 Australian bushfires and the 2020 wilfires on the USA's West Coast might just be harbingers of the 'new normal' for our climate, potentially leading to biodiversity loss, food and water shortages, mass migrations, and economic downturns.

Cartoon by Graeme MacKay

Venture Capital's Green Shift

The Venture Capital Industry has the potential to be a pivotal force, guiding society towards sustainability without compromising on financial goals. A united front against climate change necessitates collaboration amongst climate-conscious individuals, firms, governments, and, importantly, VCs.

VCs, as connectors within innovation ecosystems, have extensive networks that span beyond their peers and Small and Medium Enterprises (SMEs). These connections extend to universities, research institutes, political entities, and government bodies. By redefining innovation with a climate-centric lens, VCs can champion companies dedicated to climate solutions.

The landscape of "Green" investing has evolved. It's no longer just about 'green tech'. While the potential climate impact is arguably greater with technologies intended to mitigate or reverse adverse environmental effects such as carbon sequestration (Soil Carbon Co) and alternate food sources (Vow), impactful solutions in the forms of better energy efficiency and better economic efficiency (Shippit, an Aura Ventures portfolio company), also play a pivotal role in fostering sustainable practices.

“Delivery Shouldn’t Cost the Planet” — Shippit

Climate Change: A Competitive Edge

Businesses that integrate climate change strategies can carve out a competitive advantage. Staying abreast of policy shifts, adapting to evolving customer preferences, and attracting top talent are essential. Conversely, companies that relegate climate change to a mere corporate social responsibility issue risk facing regulatory, transition, and reputational challenges. VCs can spearhead discussions on climate issues and back startups dedicated to this cause, benefiting both the environment and investors.

ESG Opportunities and Risks for Corporates

Our Commitment to ESG

We recognise the potential to drive positive change within our network. Sharing these insights is just the beginning. We're committed to championing socially responsible businesses and collaborating with our portfolio companies to address Environmental, Social, and Governance (ESG) opportunities and challenges. We invite you to join us in this dialogue and contribute to a sustainable future.