• Sunday, May 19, 2024
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The role of venture capital firms in pioneering sustainable development in technology sector

The role of venture capital firms in pioneering sustainable development in technology sector

Technology has played an interesting role throughout history concerning climate change. The first major impact of technology on climate change was during the second industrial revolution, the Technological Revolution, when coal was first used to generate electricity for homes and industries. This early technological advancement that helped power homes and businesses in the 1800s saw significant adoption, and its continued usage led to more carbon emissions.

As our lives revolve increasingly around digital technology, concerns about the environmental impact of digitalisation have grown. Advancements within the tech industry continue to revolutionise how we live, work, and communicate, but they come at a cost. Digitalisation has significantly increased greenhouse gas emissions through energy-intensive operations, including data centres, manufacturing processes, and electronic waste generation, contributing to climate change and global warming.

According to the UN, the tech industry currently accounts for 2-3 percent of global emissions and is thought to increase rapidly as digitalisation takes over. The tech industry’s contribution to greenhouse gas emissions is set to continue increasing if not addressed, with enterprise technology responsible for emitting 350 to 400 megatons of carbon dioxide alone.

Why is Venture Capital Pivotal in Addressing this Problem?

Venture Capital (VC) firms are pivotal to the technology sector’s growth and are instrumental in fostering a sustainable technology sector. VC is a key source of financing for early-stage start-ups. It plays a vital role in driving the development of innovative technologies to address the challenges posed by climate change.

ESG, which stands for environmental, social, and governance, has been around for decades, but it has emerged as one of the significant trends shaping the VC landscape over the past few years. Driven by regulations, external pressure from investors to report CSR efforts and the emergence of sustainable investing as a mainstream investment class for institutional and retail investors, ESG became a compliance and statutory issue in many developed countries.

“With the global shift towards sustainable business practices and increased public awareness of ESG factors, it’s time for ESG adaptation for venture capital funds and their portfolio companies,” says Ewa Chronowska, the CEO of Vestbee & General Partner, Next Road Ventures.

Venture capital is not just a piece of the sustainability puzzle, it’s a cornerstone. By investing in innovation, venture capitalists are fueling the green technology revolution. They scour the landscape for the best ideas to create clean, efficient, sustainable energy and technology solutions. The impact of their investments goes far beyond financial returns, they are transforming the infrastructure of our energy and technology systems and making our world a better place to live in. When VCs fund startups focused on renewable technologies and those adopting green technology in their operations, they are betting on a future powered by wind, solar, and other sustainable resources.

With venture capitalists increasingly recognizing the importance of investing in sustainable technologies, startups working on renewable energy, clean transportation, waste management, and sustainable agriculture will likely attract significant investments in the coming years. This shift towards sustainability aligns with the growing demand for environmentally friendly solutions and presents immense opportunities for venture capitalists to drive positive change.

How VCs Can Contribute to Fostering a Sustainable Tech Sector.

Given the world’s urgent environmental and social challenges, VC firms are at a unique intersection of opportunity and responsibility. By integrating ESG objectives into their processes, VCs can become crucial drivers of sustainability. They can integrate sustainability in the tech sector by creating specific ESG integration and evaluation mechanisms tailored to startups, rethinking valuation to reflect ESG impacts, and innovating term sheets to include ESG factors. Given the unique characteristics of each startup sector, a uniform approach won’t work; however, embracing ESG objectives could redefine the VC industry’s role and purpose, aligning it more closely with global sustainability and inclusion goals.

In addition, VCs can encourage founders in their network and portfolio companies to create a substitution by replacing the use of a physical resource with a digital alternative that emits fewer Greenhouse Gases (GHGs), going for optimisation that reduces the use of another resource (e.g., less energy is used for heating a smart home), supporting the transition towards more sustainable patterns of production and consumption (e.g., when it empowers behavioural change like renting products instead of buying them), and prioritising sustainable web design (the design that creates a more environmentally friendly product and reduces each product’s impact on the environment).

Conclusion

There have been limitations on how far venture capitalists can invest in sustainability-driven startups. This constraint is due to the interest of the stakeholder group and the VCs’ obligations to them. That is the pension funds, university endowments, insurance companies, private companies, and individuals that back VCs expect accountability. To this end, there is a need for more eco-friendly/eco-conscious investors. The limited partners (LPs) must be informed that they are not mere spectators in the ESG evolution; they’re potent catalysts. By integrating ESG into their investment principles, they’re not just signalling the market but actively shaping the future of VC investments. A robust ESG approach can attract quality portfolio firms, increase funding opportunities, and amplify successful exits.

Mercy Ajiboye models as a contemporary Program and Product Manager. She has trained over 200 entry-level software developers in agile leadership, helped to onboard over 10,000 women in the Web3/Blockchain space, and has built several software products. She is currently exploring the private equity and investment management sector.