VCs Can Lead in the Response to Climate Change

VCs Can Lead in the Response to Climate Change

Today is Earth Day. Normally a day to evaluate and renew our individual and company contributions to the fight against climate change. Unfortunately, this year, the whole world is dealing with the COVID pandemic and resulting economic fall-out. And for many, the focus has to be on attending to immediate needs.


But while we shelter in place, pollution levels around the world have fallen. Satellites have detected a significant decrease in the concentration of the common air pollutant, nitrogen dioxide, coinciding with social distancing measures in China and Europe.1 In India, people are seeing blue skies for the first time in decades2. So today, we are asking ourselves, what can we do as a venture capital fund to ensure that the blue skies remain once the economy reboots. Chuck Templeton, Managing Director of S2G Ventures, gives us his perspective.


Our Opportunity for Climate Action

The question of who is responsible for combating climate change is a loaded question, and one that has generated decades of debate among scientists, government, NGOs and the private sector. But the time for debate – and passing blame – has come and gone. In light of record high temperatures, more extreme weather events, the emergence of widespread climate refugees, millions of international protesters demanding immediate climate action, we all need to step up and do our part.


That includes investors. We have a unique opportunity to serve as a change agent by backing big, innovative thinking around climate solutions.


The Rise of Impact Investing

I had a “green tint” as I grew up, thinking about environmentalism. But it wasn’t until after the birth of my first daughter, and when I’d done some research on what the world might be like when she got older, that I started to think about the opportunity to combine environmental and societal needs with entrepreneurship . While I was obviously not the first, over the past decade I’ve been thrilled to see impact-focused, ESG investing become mainstream. Sustainable investments surpassed $30 trillion in 2018 (a 34% increase over two years), with massive growth projected to continue well into the future.3


Within the broader investor community, VCs sit at a critical inflection point. We not only give sustainable businesses the early funding they need to scale – we also provide the experience, market insights and relationships that set them up for long-term success. We can be the accelerant that helps startups turn their world-changing ideas into a reality.


Start-ups Must Focus on Impact to Be Successful

It’s my belief that if start-ups launching today want to be competitive, they must build impact into the core of their business to be competitive in the market. If they don’t have either or both environmental or societal impact as a core outcome of their business model, the will struggle in the following areas:


Human Capital

The most talented people want to work for a company that has a mission they can believe in. A report by PwC found that 65% of people across China, Germany, India, the UK and the U.S. want to work for an organization with a strong social conscience4. In another study examining employee engagement inside Fortune 1000 companies, 57% of employees said that of employees surveyed feel that Corporate America needs to play a more active role in addressing important societal issues. “Clean air, water and open spaces” was cited as the top issue to be addressed5. Clearly top talent is looking for a broader purpose in their work and successful start-ups who are aligned to impact will be better positioned for recruiting and retaining high performing individuals and teams.


Natural Capital

We are running out of the “easy” natural resources to extract. According to the United Nations, “Should the global population reach 9.6 billion by 2050, the equivalent of almost three planets could be required to provide the natural resources needed to sustain current lifestyles.”6 Companies are paying increased prices for raw materials. If a company is not dematerializing their products or using recycled raw materials as inputs, their cost of goods will inevitably increase over time, making their products more expensive and less competitive.


Financial Capital

Increasingly, family offices, financial institutions, venture capitalists and corporations have become more focused on investing in businesses that not only perform negative screens, but also ones that have impact. Since 2018, Larry Fink, Chairman and CEO of Blackrock has been highlighting the growing importance of purpose in business in solving society's toughest challenges. In his 2020 Letter to CEOs he highlights the implications of climate change to modern finance saying, “Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors.”7 The risk adjusted calculation will increasingly look at negative societal and environmental impacts and a liability, reducing the expected returns of investments.


Regulatory

As consumers demand more transparency into how their products are made and we face diminishing natural resources, governments are imposing more regulations on how products are created, transported and sold. Entrepreneurs have an opportunity to take a lead on shaping how more transparency and verification is brought into the system and use their voice to take a positive advantage of the increasingly regulatory landscape.


Attracting Consumers

Consumer demand for ethically produced and sustainably made products and services continues to grow. NYU Stern’s Center for Sustainable Business researched U.S. consumer purchases of consumer packaged goods and found that 50% of CPG growth from 2013 to 2018 came from sustainability-marketed products.8 Start-ups that ignore this growing consumer trend will be at a structural disadvantage in the market.



Untapped Potential in Food and Agriculture

At S2G Ventures, that purpose is core to everything we do. We know our global food system has a significant impact on climate – which is why we invest in entrepreneurs that value human and environmental health just as much as taste and profit. ​Together, we’re harnessing the power of food innovation to create better outcomes for people and the planet. Food production has the ability to positively impact climate change, human health, farmer income, unemployment and community culture.


Imagine a world that prioritizes animal wellness while also providing a diverse set of meat and dairy products. We believe in balancing science and nature to provide more, healthy food choices for consumers that are also better for the environment. Those choices include sustainably raised and humanely treated animal products like Maple Hill Creamery and Egg Innovations as well as new plant-based and cultured alternatives, like those from our partners at Ripple, Lavva and Future Meat Technologies, that require significantly less water and energy to produce.


Imagine a world in which farmers can modify the weather and grow crops virtually anywhere. That world exists today, thanks to our friends at Intelligent Growth Solutions (IGS), who are developing indoor farming technology that will drastically reduce agricultural land use and Shenandoah Growers who are using indoor bioponic technology to grow affordable, nutritious, and delicious organic produce.


Imagine a world in which food waste is reduced through new technologies that also make food more nutritious. Both Hazel Technologies and Apeel Sciences have developed innovative technologies that increase the shelf life of produce. Since currently 30% of harvested produce is wasted, these technologies have potential to dramatically reduce environmental impacts of crop production. And because they increase shelf life, produce can be picked at the peak of ripeness delivering more nutrients to consumers.


I’ve never seen more innovation and optimism around food and ag investing. Entrepreneurs’ mindsets have fundamentally shifted. Instead of fighting against Mother Nature with chemical solutions, they’re embracing more eco-friendly biological solutions made available to them through working with mother nature and machine learning. Likewise, after witnessing a few early proofs of concept (Beyond Meat’s successful IPO, for example) and given widespread consumer demand, investors are more willing than ever to finance eco-friendly food startups. Success breeds success, and this is an incredibly exciting time for the industry.


As we like to say here at S2G, doing well and doing good isn’t just possible… it’s the only way to stay competitive in the future. In order to evolve alongside today’s consumers, recruit top talent, drive supply chain efficiencies and insulate against activist criticism – companies need to create products that prioritize healthy people and a healthy planet. And thankfully for us, that shift also results in healthier, more profitable businesses.


What Does the Future Hold?

Despite a recent uptick in investment, our industry is still undercapitalized. In 2019, AgriFood Tech startups raised $19.8 billion9 – roughly a third of the investments that went to software companies, for comparison. That should signal a huge opportunity for investors. I hope that in the coming years, we’ll continue to see interest from both AgriFood VCs and more mainstream, traditional funds.


After all – we eat three times a day.


Sources:

  1. The Atlantic, 2020

  2. New York Times, 2020

  3. Global Sustainable Investment Alliance, 2018

  4. PWC, 2020

  5. Povaddo, 2017

  6. United Nations, 2020

  7. Blackrock, 2020

  8. HBR, 2019

  9. Agfunder, 2019

ABOUT THE AUTHOR

Chuck Templeton

Managing Director

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