In recent years, commercial activities have begun to conform to the relatively new and very critical principle of planet-centric operations. Whether it’s manufacturing, food production, energy generation, fashion or mobility, each industry’s carbon footprint is carefully monitored. With the United Nations leading the fight against climate change, countries like India have set very ambitious goals towards achieving carbon neutrality within the next 40-50 years.
As the driving force for future market leaders, venture capitalists must consider the impact of their investments on the planet and society. This includes supporting the growth of the businesses they finance, and directing them to expand sustainably. Putting “green” practices as part of a term sheet or keeping a portfolio aside for environmentally sustainable businesses will be key in times ahead.
Traditionally, return on investment has been the main determinant of venture capital investment options. While venture capital will continue to rely on startups to generate profits and generate desired returns in the future as well, the area of impact is becoming much larger. Venture capital today needs to consider stakeholders such as employees, authorities, civil society, ‘end users’ and future generations as well as plants and animals. The traditional due diligence process must expand and assess the organization’s impact on these stakeholders before committing to funding.
Here’s how daring investors are transforming their approach to include a comprehensive investment strategy.
Examining investments from an ESG perspective Venture capital is adept at evaluating the businesses and markets in which it operates. Analysis of the market, product, team composition, potential demand and terms of the deal is critical. Now they are adding another candidate to the process by assessing the environmental impact of the product or service they are funding.
Evaluation – You may be wondering if it is possible to ascertain the value of an eco-friendly startup? With all the tools, databases, and analytical capabilities of AI, it is not difficult to achieve this goal. For example, the electric mobility sector in India which is very young at the moment, is linked to a value of more than $200 billion if the right investments are made. Valuation tools and practices that help predict financial outcomes along with social and environmental impact are now being built in an integrated manner.
Provide funding support for environmental, social and institutional governance It is not enough to simply direct a startup to become green as part of the financing deal. In most cases, energy-efficient, emission-free startups and other types of sustainable technologies or even biodegradable packaging integration may need additional investment on the part of the startups. This is where setting up a clean tech fund or being prepared to scale up the ticket for a green investment are some of the things that venture capitalists are working on.
Institutional investors or venture capital firms, whether they are late stage or early stage venture capital firms, should focus more on sustainable investments. Startups with high potential that effectively meet market demand in a greener way are bound to expand faster and wider. This has already been proven by the rapid growth of many clean technology 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 Venture Capital to be part of change from within and to be a proud contributor to the sustainable and inclusive future of humanity and the planet.
The opinions expressed above are those of the author.
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