Towards a standard new environmental term sheet clause

The VentureESG Team
10 min readMar 23, 2023


This post has been co-authored by Melina Sánchez Montañés, Investment Principal & VP Impact at AENU and Shaun Chaudhuri, Principle at Westly Group and Steering Committee member at VentureESG.

Much is always being talked about how words have to be followed by action. At VentureESG, we teamed up with Leaders for Climate Action to put commitments into (legal) language, starting with an environmental term sheet clause. In this blog post, the leader of the effort from our side, Shaun Chaudhuri, shares his thoughts on the process and obviously the overall tool and Melina Sánchez Montañés shares some early learnings from implementing such a clause at a fund which is well-known for its commitments on the impact and environment side, AENU. Taken together, the two pieces of this blog will give you a good start for implementing an E-term sheet clause at your fund.

I The Clause: history, reasons and tool

Shaun Chaudhuri, Westly Group

History of Term Sheet Clauses & Growth of Non-Financial (ESG) Data

Since the early days of Venture Capital in the 1940s, the components of a term sheet have included standard financial investment terms such as valuation, liquidation preference, decision making rights and protective provisions. While financial metrics will always be a key fabric of term sheets, the inclusion of non-financial data serves as an opportunity to deliver long-term value and help startups build long term sustainable business models.

Harvard Business School has conducted research examining how ESG data affects profitability and the market for ESG data has continued to increase with the global ESG reporting software market expected to reach $1.5B by 2027, representing a 15.9% CAGR (source: Markets and Markets Analysis). Responsible and effective management of environmental factors is becoming an important driver of corporate value especially as they face greater scrutiny from both investors and customers alike.

Why was the Environmental (“E”) Term Sheet Clause Created?

The Environmental factor within ESG focuses on how a company performs as a steward of nature by looking at how their operations and supply chains impact the environment. In 2018, the Intergovernmental Panel on Climate Change (IPCC) warned that global warming must not exceed 1.5°C above pre-industrial temperatures to avoid the catastrophic impacts of climate change. To achieve this, greenhouse gas (GHG) emissions must halve by 2030 — and drop to net zero by 2050. Due to the rising effects of climate change, the Environmental “E” term sheet was created to help investors work with portfolio companies to set goals to manage their environmental footprint.

Venture Capital funding often represents a startups first access to institutional funding and that comes with a responsibility from the investor to help identify materiality for each company. The goal here was to create a non-binding starting point and resources for VC/PE firms and startups specific to climate action.

One Size Does Not Fit All

This term sheet clause was intentionally split into two versions by stage given the different needs for startups that are in early stage versus late stage. In this case, early stages is defined as Pre Seed to Series B and the recommendation is to adopt a climate policy as a first action pillar to put a process in place to assess materiality, measure GHG emissions and getting stakeholder alignment. Late Stage is defined as Series C and Beyond and the recommendation would be to measure and reduce a company’s overall GHG footprint:

What’s Next?

Climate change disproportionately affects minority and indigenous communities and as a result, it is important to look at the intersectionality of Environmental, Social and Governance in order to create equitable solutions for climate change. VentureESG is actively working on a Diversity Term Sheet Clause that will focus on gender and race/ethnicity representation for new hires at startups post a financing round. It will also focus on commitment to equal opportunity in the search process and selection for new board roles.

II Lessons from the community:

5 lessons learnt from implementing an ‘E’ clause with portfolio companies

Melina Sánchez Montañés, AENU

Signing an impact & ESG clause with our portfolio companies is a no brainer for AENU. As an impact tech VC fund, we want to be as aligned as possible with our founders both on commercial and impact matters. Given the type of companies we want to partner with — we look for intentional founders who are building impact interlocked businesses — I never thought anyone would say ‘no’ to signing such a clause. Naive me.

Initially, our ‘E’ clause consisted of 4 key points: (1) committing to achieving net zero by 2030, (2) designing an emissions reduction strategy, (3) measuring scope 1, 2 and 3, and (4) compensating residual emissions with high-quality carbon removal and / or avoidance offsets. At face value, we considered these 4 points as the minimum common denominator for climate-aligned businesses. After all, who doesn’t want to reach net zero? Yet, we quickly realized that our assumptions were wrong. Below are the top 5 bottlenecks we had to navigate.

1. Lack of internal accountability

Accountability can make or break progress in impact & ESG commitments. Successful accountability starts with ensuring that all parties are on the same page about the goal, and ends when decision-makers have marked it as complete. Given resource and time constraints, some of the early-stage startups we were in negotiations with didn’t feel they had enough internal resources or capabilities to deliver on the ‘E’ clause. After several feedback loops, we identified the following best practices:

  • Include the ‘E’ clause in the legal documentation (e.g., shareholders’ agreement), and not just in the term sheet (bonus: show a united front with other cap table investors!)
  • Assign roles & responsibilities in sustainability. Even if an early-stage startup doesn’t have the resources to hire a dedicated FTE, it might opt to assign an FTE fraction to a current employee or to an internal sustainability committee.
  • Ensure that the ‘E’ goals are agreed and regularly reviewed by the board of directors on an annual basis, at minimum.

2. Avoid ‘one-fits-all’

Venture capital and entrepreneurship is an efficiency and execution game. But as an impact tech VC, we are adding more complexity to every process, even if the outcome is necessarily better. When we drafted our first impact & ESG clause, and given the breadth of companies we partner with — from social to climate impact, early to growth stage –, we took the approach of being true to our impact mission, and therefore, exhaustive. The ‘E’ clause was 2 full pages long, and a mix of conceptual and prescriptive commitments.

The earlier the startup, the more difficult the conversation on the ‘E’ clause was. Lack of resources for carbon accounting or lack of time to create a climate strategy were some of the top reservations. In the end, an entrepreneur has to regularly make trade-offs. Why would a founder invest in a climate strategy when investors are expecting her to find product-market fit as soon as possible.

Our initial long clause was slowly transformed into two clauses that reflected more closely our ESG maturity assessment. We asked ourselves: what are we realistically expecting of early-stage startups vs. growth stage startups? What are the top material factors for a hardware vs software company? Although there will always be founders who will question the length or content of the clause, we believe we have found an ‘E’ clause-founder fit.

3. Tailor measurement expectations to stage

Alongside having a shorter ‘E’ term sheet for early-stage startups, we also had to think about what’s a feasible and appropriate emissions measurement system. By now, there are a myriad of options in the market: from hands-on consultants to sophisticated carbon accounting software tools. Early-stage especially startups struggle with where to start.

Hardware cases aside — as an impact tech VC we prefer life-cycle assessments that prove a technology is climate positive — we recommend early-stage startups to start small. For example, Leaders for Climate Action (LFCA) has a free online emissions calculator tool that is a perfect starting point for understanding a company’s emissions breakdown as well as biggest change levers. As the company grows, and its internal capabilities and resources grow alongside it, we expect growth-stage startups to use full carbon accounting tools, such as Minimum or Normative, or specialized consultants. Some VCs opt to provide free carbon accounting licenses — usually for one or two years — to their portfolio companies.

4. Implementation support is key

Beyond deciding on a measurement system, creating a thought-through climate strategy is critical. Without creating a climate strategy roadmap — the why, what, who and when — a startup might fail to fulfill its commitments. AENU is in the lucky position to have an impact team that startups can rely on for value-add. More and more generalist funds are also adding sustainability team members.

When working with our portfolio companies, we realized there are a few impactful ways we can support them in their climate journey:

  • Share our own climate roadmap, in the form of a strategy template
  • Provide examples of climate policies and initiatives carried out by us or by other portfolio companies
  • Connect them with other portfolio companies or startups in the ecosystem that are going through the same process to share insights and learnings
  • Have a contact person within the fund that can provide tips and feedback, and can act as the ‘go-to’ person for sustainability topics

5. Follow up on progress

The last step in the accountability process is making sure that the right information is flowing from founder to investor. What information is reported on, in which format, and how it is analyzed and acted upon is as important as all the above points.

In Europe, SFDR does most of the work for us. The regulation asks investors to collect and report on specific ESG metrics from portfolio companies on a regular basis, many of which are climate-focused. Although the regulation is a vast piece of work, with many exceptions and caveats, it is a minimum common denominator for venture funds — impact or generalists.

At AENU, we use Apiday to collect quarterly ESG and impact data from our core portfolio, as per SFDR. For us, reporting is a tool for action. We use the collected data to understand strengths and gaps in our companies’ sustainability strategies, and to tailor value-add support. As our companies grow in size, they will face stricter regulatory requirements. Setting them up for success is our priority #1.


Although AENU has gone a long way since its first impact & ESG term sheet, we keep getting feedback and iterating on our processes. As new challenges arise, we strive to be constructive with our founders and keep sharing our learnings with the ecosystem.

One of the ‘unsolved’ challenges we have faced in the past is how to implement an ‘E’ clause when one is not the lead investor and your stakeholders (syndicate, founders) don’t prioritize ESG. This happens quite often in the United States. If you have tips or best practices to share, I would love to hear from you! Feel free to reach out to

III Appendix

Our Process to Create the Term Sheet Clause

This was a cross collaboration effort across two organizations: VentureESG, a nonprofit community based organization to drive greater adoption of ESG frameworks & Leaders for Climate Action (LFCA), a nonprofit that helps enable organizations to adopt and implement action to help fight climate change. Our process included:

  1. Research: VentureESG & LFCA conducted research on what term sheet clauses already exist. From this effort we saw a variety of term sheet clauses that had a focus on ESG, Impact, and Diversity, Equity and Inclusion. Two notable term sheet clauses included:
  • In 2017, Obvious Ventures released the World Positive Term Sheet Clause to make sure investors and founders are aligned early on key values
  • In 2020, Act One released the Diversity Rider term sheet clause focused on increasing underrepresented investors on a company’s cap table

VentureESG & LFCA saw an opportunity to create a term sheet that specifically focused on measuring and reducing a company’s environmental footprint.

2. Drafting: VentureESG and LfCA drafted the initial term sheet clause using public research from IPCC and GHG protocol to outline the intent and the actions the company management can take to help fight climate change.

3. Feedback from larger VC Community: After drafting, VentureESG and LFCA collected feedback from 9 venture firms from both the United States and Europe. Key feedback from this group led us to create two versions of the term sheet clauses by stage: (1) Pre-Seed through Series B Stage (2) Series B and beyond (through IPO). It also included a robust set of resources to help both VC firms and startups start on their climate journey (outlined in the appendix)

VC Firms that Participated in the Feedback Process

  • 500 Startups
  • 2150
  • Clean Energy Ventures
  • Contrarian Ventures
  • Kinnevik
  • Lowercarbon Capital
  • Obvious Ventures
  • Pale Blue Dot
  • The Westly Group

Sample Environmental Metrics that May be included in a Side Letter



The VentureESG Team

Creating a community around ESG in venture, and helping VC firms integrate ESG practices into their end-to-end processes