A new alliance to “build net zero businesses from day zero” intends to bridge the gap between public and private markets on climate-related disclosures.
The recently-launched Venture Climate Alliance (VCA) aims to develop tools and guidance to help align early-stage investments with net zero goals, contributing to “deep decarbonisation” by 2050, Daniel Firger, Co-founder and Lead Advisor, told ESG Investor.
“A discussion of bending the curve to 2050 or staying below the line on 1.5°C with the existing capital markets activity that is financing today’s emissions and large corporates is missing the fundamental driver of transformation in the economy,” said Firger, also Managing Director of Great Circle Capital Advisors.
“This driver is venture-backed and early-stage technological innovation, which will drive disruption in the markets and sell products to incumbent industries to enable their transition to happen more quickly and effectively.”
Unveiled last week, the VCA consists of 23 venture capital (VC) firms across the US and Europe, committed to supporting the global transition to net zero by 2050 by actively engaging with portfolio companies to achieve this goal.
Currently, the VC industry lacks a common framework to measure climate impact, with the VCA working with Prime Coalition’s Project Frame to identify a common methodology, according to Amy Duffuor, a Co-founder and General Partner at Azolla Ventures, and a founding member of the VCA.
“This is the first time that venture capital firms, regardless of sector focus, are coming together to say we collectively need to address our emissions from portfolio companies and firm operations,” Duffuor told ESG Investor.
“The VCA’s aim is to actively support our portfolio companies along their net zero transition pathways and provide a common methodology that lays the foundation for standardisation across the climate tech investing landscape.”
Danijel Višević, Founding Partner at World Fund and one of the VCA’s founding members, said that the VC industry needs a comprehensive understanding of climate-related risks and opportunities to allow investors to make better-informed decisions and bridge the gap between public and private markets on climate-related disclosure.
“Standardised climate-related disclosures across markets allow investors to compare companies more easily and make informed decisions, enabling capital to be allocated more effectively to companies that are managing climate risks and pursuing sustainable opportunities,” he told ESG Investor.
“Bridging the gap can help create a consistent regulatory environment, which can simplify compliance and foster better collaboration between public and private entities in addressing climate-related risks and opportunities.”
Private markets’ race to zero
As an approved alliance under the UN Race to Zero, and a new-sector specific alliance under the Glasgow Financial Alliance for Net Zero (GFANZ), the VCA requires members to publish a net zero transition plan within one year of joining.
VCA members will establish a working group this month to begin working on the methodology for developing transition plan guidance for the VC industry. The working group aims to complete its work by the end of the year, according to Firger.
The VCA aims to build on existing frameworks like the Net Zero Asset Owner Alliance (NZAOA) and the Science-based Targets initiative’s guidance for small and medium enterprises, he said.
“The venture community is fast-moving and eager to get started,” Firger said, noting that the goal of the VCA is to develop a methodology that “makes sense for early-stage investing” while being careful not to simply “copy and paste” existing frameworks.
“Tomorrow’s Fortune 500 companies and major drivers of economic growth and decarbonisation are predominantly tiny companies of today,” he added.
“Therefore, it is not acceptable to only focus on transitioning to net zero in the public markets, where existing emitters, supply chains, and corporate governance practices are more difficult to displace.”
More than 90% of the world’s emissions are now under some type of net zero commitment, and more than 40% of the world’s largest 2000 companies have also explicitly committed to net zero targets. For many of these actors, corporate venturing and the adoption of new technology is critical to achieving these ambitious goals, Julia Brady, Partner and Chief Sustainability Officer at Valo Ventures and one of the VCA’s founding members, told ESG Investor.
“Startups that build in low-carbon principles and processes for their own operations from the outset are better positioned as they grow,” she said.
“Being united across the venture capital and private equity community from the earliest stages of an investment can also accelerate the deployment and scaling of new solutions to drive the transition to net zero.”
The VCA is launched at a time of difficulty for collaborative finance sector initiatives to support the net zero transition.
GFANZ, the umbrella organisation for the seven net zero initiatives for financial institutions, has seen two pension funds – Australia’s Cbus and Austria’s Bundespensionskasse – leave the alliance in October last year, with several major US financial institutions threatening to leave over toughened targets and anti-trust concerns.
Further, major insurers including, Munich Re, Zurich and Hannover Re announced their exit from the Net Zero Insurance Alliance between March and April of this year.
Earlier this week, Florida Governor Ron DeSantis signed into law a bill barring state officials from investing public money to promote ESG goals, and the prohibition of ESG bond sales, further fuelling anti-ESG sentiment in the US.
However, as a new sector-specific alliance under GFANZ, the VCA is an “indicator of the bullishness” with which VC investors view climate-related risks and opportunities, said Firger.
“Any particular blip in the political narrative around net zero or ESG pales in comparison to the long-term driver of economic transformation, which is climate change,” he said, noting that the VC community is the “most forward and future-oriented piece” in global capital markets.
“Climate-aligned investing and net zero as a framework for how to think about responsible fiduciary duty and thoughtful investment over longer time horizons are going to be with us for quite some time,” he added.