Read the Climate Clauses in VC Term Sheets to Startups

On Nov 17, 2021

Dozens of venture capital firms have introduced sustainability clauses in their term sheets.
The clauses ask startups to implement a climate policy and measure their carbon footprint.
We got an exclusive look at the clauses created by Leaders for Climate Action and used by Earlybird.

Entrepreneurs seeking deals with European venture capitalists are increasingly being asked to implement a climate policy as part of their term sheets.

Early Spotify and Klarna backer Northzone, Depop investors HV Capital, and Global Founders Capital, whose portfolio includes Revolut and

Slack

, are among those that have introduced a so-called sustainability clause within term sheets and shareholder agreements.

One of the main drivers for this shift is Leaders for Climate Action, a non-profit that promises to turn business leaders into climate leaders. The organization, which has 1,550 members from the startup ecosystem, aims to make the tech sector climate neutral.

The non-profit has developed a sustainability clause that investors can plug into their deal sheets to help make their portfolios greener. Other venture firms have followed suit and created their own, including heavy-hitter and listed company Molten Ventures, previously Draper Esprit, which has a publicly available ESG clause on its website.

The Leaders for Climate Action clause requires climate policies to be introduced “as soon as feasible but no later than within 12 months” of the deal being made.

Leaders for Climate Action term sheet sustainability clause — Leaders for Climate Action’s term sheet sustainability clause.

It also urges companies to consider energy efficiency, travel, food and drink, waste, and the use of technology. Founders could work out the emissions for each of its team members’ work devices or try to switch from plastic to glass bottles when stocking the kitchen, but Leaders for Climate Action managing director and cofounder Philippe Singer told Insider it’s more important for them to build a sustainable business model.

For example, an e-scooter company should ask itself how to double-down on battery technology or incentivize end-users to drive more carefully instead of trying to understand a laptop’s emissions, Singer said.

Leaders for Climate Action's sustainability clause for share holder agreements. — Leaders for Climate Action’s sustainability clause for shareholder agreements.

“This company is not going to go through the next 12 months unless they make a climate policy and ESG policy and they live up to the things we agreed,” said Christian Jolck, partner and cofounder of 2150 Ventures, which uses the clause. “That’s simply how it is.”

Leaders for Climate Action's sustainability clause for VC rules of engagement. — Leaders for Climate Action’s sustainability clause for VC’s rules of engagement.

Earlybird, a Europe-focused VC firm, deploys its own clause that states that carbon reduction should form an “integral part” of the startup’s strategy. This is based on Leaders for Climate Actions’ but has several tweaks, including the implementation of a climate policy within a shorter time frame of six months.

It also outlines guidelines including training and educating teams on their environmental footprint.

Paul Klemm, a principal at the firm, told Insider that startups nominate a chief climate officer to spearhead such efforts. “It’s a bit of work, to actually get your arms around the footprint of your company because data isn’t always available,” he said.

Earlybird Venture Capital's sustainability clause for term sheets. — Earlybird Venture Capital’s sustainability clause for term sheets.

Climate policy is “actually part of everything,” from finance and risk to company culture and values, he added.

Klemm, however, stressed the clause included examples of how startups can reduce their footprint rather than outlining mandatory elements.

“It’s just a small start to get companies thinking,” he said.

When investing at an early stage, “the impact is so little” but it means startups try and build environmentally-friendly business models from day one.

It starts with measuring the CO2 footprint of, say, mobility, Klemm said, but requires founders to ask whether their business model has a “viable positive impact on the world of tomorrow.”

Earlybird Venture Capital's sustainability clause for shareholder agreements. — Earlybird Venture Capital’s sustainability clause for shareholder agreements.

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