Why VCs should consider the impact of their investments on the planet and society

In recent years, business activities have started aligning to the comparatively novel and extremely critical principle of planet-centric operations. Whether it is manufacturing, food production, power generation, fashion or mobility, the carbon footprint of every industry is being keenly monitored. With the United Nations leading the charge in the battle against climate change, countries like India have set highly ambitious goals towards achieving carbon neutrality within the next 40-50 years.

As the force that drives the future market leaders, VCs should consider the impact of their investments on the planet and the society. This includes supporting the growth of the businesses they fund, and guiding them to scale sustainably. Laying down ‘green’ practices as a part of the term-sheet or keeping a portfolio aside for businesses that are sustainable environmentally will be key in the times ahead.

Conventionally, ROI has been the key determinant of investment choices for VCs. While VCs will continue to bank on startups to turn profitable and deliver desired returns in the future too, the influence area has become much bigger. Today VCs need to take into consideration stakeholders such as employees, authorities, civil society, ‘end-users’, and the future generations as well as flora and fauna. The traditional due diligence process has to expand and assess an organization’s impact on these stakeholders before making a funding commitment.

Here is how VCs are transforming their approach to encompass an all-round investment strategy.

Screening investments from the ESG perspective – VCs are adept at evaluating businesses and markets they operate in. Analysing market, product, team composition, demand potential and terms of the deal are critical. Now they are adding another filter to the process by assessing the environmental impact of the product or service they are funding.

Valuation – You might be wondering whether it is possible to ascertain the value of an environment-friendly startup? With all the tools, databases and analytical capabilities of AI, it is not difficult to achieve that goal. For instance, the electric mobility sector in India which is very nascent at the moment, is pegged to be worth over $200 billion if right investments are made. Valuation tools and practices which help in predicting financial outcomes along with the social and environmental impact in an integrated manner are now being built.

Providing funding support for ESG – It is not enough to simply direct a startup to go green as a part of the funding deal. In most cases, energy efficient, emission free and other kinds of sustainable technologies or even bio-degradable packaging integration would need additional investments on the part of the startups. That’s where setting aside a clean-tech fund or being ready to increase the ticket size for a green investment are some of the things that the VCs are working on.

Conclusion

Institutional investors or venture capital firms, whether they are late-stage VCs or early-stage, are all required to focus more on sustainable investments. High-potential startups that effectively meet market demand in a greener way, are bound to scale faster and wider. This has already been proven by the rapid growth of several clean-tech brands globally. These brands also generate a lot of customer goodwill and appreciation as they are seen as warriors against climate change. It is important for VCs to be a part of the change from the inside and be proud contributors to the sustainable and inclusive future for humanity and the planet.

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