Venture capital under the climate spotlight

How concerned should venture capitalists be about ESG scores and net zero goals when deciding which startups to bet on?

Not much, according to Michael Liebreich, who founded Bloomberg’s New Energy financial research service and is an angel investor in more than a dozen clean-tech startups. These include low-carbon fertilizer company CCm Technologies and ChargePoint, which develops electric charging infrastructure in the US and Europe.

“What startups should do is look for pain points” such as technological failures, the expense of electrifying heating systems or the need for reliable nuclear reactors, Liebreich told Moral Money.

Tesla is an example of a successful idea that doesn’t necessarily translate easily into an ESG score. The electric car maker has an unofficial goal of selling 20 million vehicles a year by 2030, but an erratic record on social issues and high exposure to the mining sector. Era REMOVED by the S&P 500 ESG index last year after facing allegations of racial discrimination and concerns about the safety of self-driving cars.

“I don’t know if Elon Musk buys compensation when he travels, and in my view he’s not a respectful employer,” Liebreich said. “But clearly Tesla has advanced the electrification of cars by decades. No accounting system will take this into account.”

Today, Ivan Levingston, European affairs reporter for the FT, writes about the latest VC to earn B-corp certification. And in a world with higher interest rates, I wonder what role venture capital can play in ensuring that climate start-ups have a reasonable chance to take off. (Kenza Bryan)

Venture capital ventures into the B Corp movement

The B Corp movement has been examined recently, with critics arguing the certification initiative has let its standards slip as it looks to enroll new celebrity members.

But it’s still seeing new demand for its responsible business label from the venture capital industry.

Felix Capital is the latest venture firm to become a B Corp as funds push to differentiate themselves amid a growing emphasis on sustainability across the tech ecosystem.

Founded in 2015, the London-based Felix manages $1.2 billion in assets and has backed major start-ups including food delivery service Deliveroo and oatmeal drink company Oatly.

It reaches approximately 6,400 companies worldwide with B Corp certification, which requires them to pass an assessment of their sustainability credentials. They must also make a legally binding commitment to pursue positive social and environmental impact.

Felix’s founder and managing partner, Frederic Court, sees the program as a way to promote his company’s values ​​even as performance remains the priority.

“It’s the right way to do business,” Court told me. “It is not a religion; we don’t have to be dogmatic about it, but it does mean that everything we do, we have to think about how it affects our B Corp status.

Felix has changed the way he operates, from altering his partnership agreement to changing the term sheets he offers entrepreneurs when offering investments, which now come with language that speaks of diversity and sustainability.

These changes have been welcomed by entrepreneurs. “There was no pushback from the founders. They totally embrace it,” Court said.

Felix donated 1% of the interest brought in – profits generated by investment companies – from his third fund to a water charity. He’s also investing in companies like Effy, a French company that helps people renovate their homes to be more energy efficient.

Felix chose to pursue B Corp certification over other options such as rebranding itself as an impact fund, even though that might have made fundraising easier, Court said. “We don’t want to take money from investors by ticking boxes,” she said.

Other VCs who have become B Corps include Obvious Ventures, MMC Ventures and real estate tech investor Fifth Wall, according to the website of B Lab, the nonprofit group that runs the certificate program.

“It’s easy to criticize,” Court said, dismissing the notion that B Corp status is easy to achieve. “It’s already more difficult. . . especially for smaller companies”. (Ivan Leviston).

Climate group mushrooms to welcome VCs

The decision by the world’s largest climate finance group to launch a venture capital arm is the latest sign of the pressure VCs face to protect their investors from the risks associated with the energy transition.

Smaller energy-focused funds like Energy Impact Partners joined Mark Carney’s Glasgow Financial Alliance for Net Zero last month, as did larger investors with a broad technology focus like New York-based Tiger Global.

But the launch came on the heels of a mass exodus of big insurers like Munich Re from Gfanz in recent weeks, prompted by fears of a possible backlash against climate cooperation by competition authorities (a risk that has been ventured by anti-ESG Republican politicians in the US).

It’s worth keeping in mind the recent headwinds for Gfanz when considering his baby-step approach to his 23 new VC members. They must “encourage and assist” portfolio companies to set zero carbon targets, but can continue to invest in potential high emitters while remaining part of the group.

Unlike banking, insurance and asset management, venture capital does not yet have an established framework for measuring carbon emissions. One of the dilemmas is whether to look at a start-up’s potential emissions over its entire life, rather than its early years of growth. As Michael Liebreich has pointed out, carbon is not necessarily the best metric for assessing a start-up’s potential to change the world.

Rather than setting a rigid decarbonisation target, the goal of the new Gfanz group is to develop ESG tools appropriate for early-stage investing. “Our goal is to bridge the gap between what is happening in public markets. . . and early-stage innovation,” said Alexandra Harbour, founder and president of the new group and principal of San Francisco-based Prelude Ventures.

Market forces are already pushing more VCs into climate-friendly investments, particularly as the US Inflation Reduction Act and the EU’s Green Deal business plan are bringing more and more tailwinds into the space.

Investments in climate technology have been resilient to largest market downturn in VC dealmaking between January and March, according to data provider PitchBook.

Climate-focused Congruent Ventures closed a $300 million fund last month on the back of what it said was growing interest from institutional investors in late-stage climate start-ups. One of his investments, protein start-up Meati, makes vegetarian steaks from mycelium, a network of underground mushroom roots. It’s hard to predict exactly how it will reshape space: Its founders originally sought to use mushrooms as a replacement for energy-intensive graphite in lithium-ion batteries. (Kenza Bryan)

Smart reading

Goldman Sachs has settled a longstanding gender discrimination lawsuit that was scheduled to go to trial in New York next month. Thousands of employees are ready to receive payment.

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