Over six months have passed since business and government leaders came together in Scotland to accelerate the action towards the goals of the Paris Agreement and UN Framework Convention on Climate Change. Following a raft of bold policy announcements, world leaders acknowledged the need for immediate action with the end goal of reaching net zero emissions.
Making a public pledge to achieve net zero emissions is one thing but putting in place policies that can actively meet this target is another challenge entirely. Already, it seems as though media attention has now shifted to the Ukraine-Russia conflict and rising pressures around the cost of living. However, the reality is that both the private and public sectors are still focused on meeting environmental goals through a combination of legislation, initiatives and regulations.
Importantly, environmental concerns are at the heart of the public psyche. A survey by Deloitte revealed that 23% of consumers will switch to buying products from a business that shares their environmental issues. What’s more, over half (58%) of consumers want organisations to change their practices, while 55% want companies to create more awareness around challenges like climate change.
In response to shifting public demands, the UK Government has introduced new legislation on ESG reporting. From April 6, 2022, all large companies will have to report on their environmental impact as well as a description of what these entities are doing to identify, assess and manage climate-related risks and opportunities. This is part of a broader strategy to promote transparency and action ESG reporting, ensuring it is not viewed as a tick-box exercise.
Of all the sectors transitioning to an environmentally conscious model, the financial services industry demonstrates immense potential due to its value and ability to deploy large volumes of capital. Green finance has become a common term, used to refer to the flow of capital from public, private and non-profit sectors into sustainable development priorities.
Venture Capital (VC) has an important role to play here. According to the Business and Sustainable Development Commission, there will be $12 trillion of market opportunities linked to the UN’s Sustainable Development Goals. Rather than focusing on investment yields, VCs are now inclined to incorporate environmental outcomes into their investment decisions. It demonstrates a drastic change in thinking, showing the benefits of long-term investment into assets with a strong ESG proposition.
In the UK, impact investing into startups with a strong ESG is rising. There are estimated to be just under 1,000 impact startups with a combined value of £50 billion. Alongside this, there are 12 Unicorn companies that fall into the same category. This is positive news for the sector and hopefully the beginnings of a long-term trend.
VCs is not without its problems. Over the last decade, certain funds have been criticised for forcing companies to scale prematurely, more focused on the delivery of fast returns at the expense of sustainable, long-erm growth. In theory, a VC fund should be able to achieve a venture rate of approval, which typically equates to 3x. According to Money Talks, only 95% of VC funds can deliver this rate of return, meaning that many startups who receive VC funding are prone to fail.
Positively, VCs are now starting to change their venture capital model, acknowledging the need to look beyond rapid revenue growth. The reality is that as market sentiment towards environmental outcomes increases, so will the factors that ultimately determine whether an investment is able to deliver returns in the long-term.
At this point in time, it is important for VCs to ensure the public is aware of their moves to support ESG outcomes. Doing so will not only promote public trust, but it will also show the collective response society is taking to addressing pressing challenges linked to climate change.
If your VC firm would be interested in discussing how we could help promote your role addressing the Net Zero challenge why not get in touch today.
