A Greater Purpose for Venture Capital: Climate Action
A perspective on the industry’s opportunity to fight against climate change
Profit or Purpose?
Venture Capital Companies (VC) are first and foremost financial investors. Their goal is to deliver large payoffs to limited partners by allocating capital to companies exhibiting high-growth potential.
With traditional 10-year fund life models (long for Limited Partners , short for innovators), VCs typically prioritise start-ups with a clear path to commercialisation and sufficient probability to make a profit. A possible consequence of the VC strategy is that funding is not being allocated to projects critical to solving some of society’s greatest challenges, such as climate change. These projects often require large upfront costs at the applied research stages and additional infrastructure to scale, meaning they are not attractive to VCs as investors.
In our opinion, profit and purpose do not need to be mutually exclusive. There is a greater purpose the venture industry can serve while continuing to achieve financial goals. VCs typically operate within innovation clusters. This access offers a unique position to bridge the gap between financial returns and social impact. Capitalising on insights, access to financial resources and interdependent economic agents, VCs can influence the dynamics of the innovation ecosystem towards driving more world-positive entrepreneurial endeavours.
Humankind’s Greatest Challenge
Today’s headlines are dominated by the current Covid19 pandemic, public market movements and the US Presidential Election. Media, catering to attention-grabbing content, serves only as a distraction to what is viewed by many as “the most systemic threat of humankind”. Recognising climate change as an issue to be managed, international collaboration is increasingly critical to the process, yet there is evidence to suggest that humans are living more disconnected lives (physically), early-stage private capital markets, and nationalist agendas are on the rise
We are faced with a confronting runway that has the world on track to exceed the carbon budget by the end of this decade. Global temperatures today are slightly over 1.0°C above pre-industrial levels and at today’s level of emissions, we are on course to exceed the target limits set under the Paris Agreement by the end of the decade. Australian bushfires through the summer of 2019/20, bushfires in the West Coast of the USA during the Northern Hemisphere summer of 2020, may be seen as previews of what the potential ‘new normal’ could be for our weather systems. The consequences could extend to biodiversity loss, food and water crises, increased migration and economic loss.
Climate Action in Venture Capital
I believe the Venture Capital Industry can be a critical catalyst for society to work towards sustainability targets, without jeopardising the goals of a financial investor.
The war against climate change requires a consolidated approach; climate-conscious people, firms and governments working together to achieve a positive outcome. The VC industry could help to drive change, given that one of our greatest assets is our role as connectors and boundary spanners within innovation ecosystems. Networking activities are not just restricted to our peers and SMEs, but also include connections to other agents within innovation ecosystems (e.g. universities, accelerators, research institutes, political parties, and government bodies). As such, VCs could seek to leverage their networks to redefine innovation and entrepreneurship, with climate impact in mind.
Adoption of more open investment aperture (in relation to climate impact) can enable VC firms to put capital to action in favour of companies that are focused on climate change solutions, while still investing within their areas of expertise/focus. “Green” investing has changed over the years and is no longer purely focused on ‘green tech’. While the potential climate impact is significantly greater with technologies intended to mitigate or reverse adverse environmental effects such as carbon sequestration (Soil Carbon Co) and alternate food sources (Vow), impactful solutions in the forms of better energy efficiency and better economic efficiency (Shippit, an Aura Ventures portfolio company) are also able to promote sustainable activities across their value chain.
The topic of climate change can be engaged by businesses as a source of competitive advantage. Climate-engaged businesses need to pay attention to shifts in policies, be able to adapt to customer preferences, and attract and retain talent. Companies that ignore climate change and consider it solely as a corporate social responsibility issue, may be faced with regulatory, transition, and reputational risks. VCs have an opportunity to promote discussions and activities on climate issues, as well as support those start-ups that are working in this space — for the benefit of both the environment and the investor.
Aura Ventures recognises the opportunity to make positive contributions to solving social challenges within our network. Sharing these thoughts are only part of the effort to continue this dialogue with our community and we continue to strive to contribute to a sustainable future. Our funds are committed to supporting socially responsible businesses in our community, as well as working alongside our portfolio companies in addressing ESG opportunities and risks.
Disclaimer
This article is for information purposes only and is only of a general nature. The views and opinions expressed in this article are those of author as of the date indicated and any such views are subject to change at any time without notice based upon market or other conditions. While every care has been exercised in compiling the information contained in this article, Aura Funds Management Pty Ltd accepts no responsibility for any errors or omissions within it.”
