Climate tech startups have exploded into the mainstream in recent years. According to Atomico, European climate tech investment grew from $1.2B in 2018 to $8.2B in 2022. Alongside this growth in climate tech investment has been a growth in climate focused funds, with Climate Tech VC now tracking over 180 funds with a climate focus. Many of these funds set fund-level goals around carbon reduction and investment criteria related to the carbon reduction potential of prospective investments. To make good on these goals, investors need to measure and manage impact across their investment processes, but it can be challenging to navigate the landscape of frameworks and tools that are available. As part of ImpactVC’s mission to share resources with the community on how to do impact well in venture, we recently hosted a session featuring two investors at the forefront of climate impact measurement: Lena Thiede, Founding Partner at Planet A Ventures, a Berlin-based green tech investor, and Margarita Skarkou, a Principal at 2150, a Copenhagen and London-based urban tech investor.
Fund | Focus | Size | Stage |
Planet A Ventures | European green tech | 160m euros | Pre-seed, Seed, Series A |
2150 | Urban stack | 268m euros | Series A, Series B |
Lena and Margarita showed us how they embed impact measurement into their strategies. Both funds have clear impact objectives. Planet A focuses on environmental impact through four areas: climate mitigation, waste reduction, resource savings, and biodiversity protection. 2150 has a set of impact principles on four themes: climate adaptation and mitigation, resource efficiency, profit and purpose, and social resilience and balance. Lena and Margarita highlighted the need for impact to be considered on par with typical investment considerations, and to support this, both have brought environmental science and engineering expertise in-house. 2150 has a Head of Sustainability with a climate science background, and Planet A has two senior scientists who conduct life cycle assessments.
2150 and Planet A have both integrated impact throughout their investment process, and below we highlight how they’ve done this.
Screening
Margarita shared that 2150 has “knock-out” criteria linked to the Paris Agreement and EU taxonomy, which the investment and sustainability teams go through in tandem. Part of this analysis looks at whether the founder is impact aligned, and the nature of their proposition. Similarly, Lena shared that at Planet A, they do a preliminary assessment of a company’s impact potential based on company data and scientific literature. The investment teams and science teams work together to evaluate propositions, and both need to be convinced by the solution for it to move forward in their process.
Initial review
Before proceeding to full due diligence, Planet A will challenge founders on numbers and may conduct expert interviews or more detailed scientific research. This can help them do a rough life cycle assessment (explained below), to get a better idea of a company’s potential. 2150 will seek to understand a company’s solution, and estimate both the scale of impact and the market opportunity to assess its attractiveness.
Due diligence
During due diligence, the analysis becomes much more rigorous. 2150 does a bottom-up impact analysis to understand unit impact, and also assesses the impact potential at scale. At this time, 2150 will also complete a full sustainability due diligence and develop improvement recommendations. Planet A Ventures does a full life cycle assessment (LCA) to measure the positive or negative impact of a given venture and how it compares to existing alternatives in the market. Planet A then posts these LCAs on their website, welcoming external feedback and sharing their work with others.
Life cycle assessments
What are they: a method for evaluating the environmental impacts of a product, process, or service throughout its life cycle. It includes all the stages from raw material extraction to production, distribution, use, and disposal or recycling. LCAs include resource use, emissions, waste, and other factors, like land use How to get started: save time and improve accuracy by using internationally approved databases like OpenLCA and EcoInvent – drawing on existing research data How to use them: understand the per unit impact, which can then be applied to commercial projections Read more about Planet A’s LCAs here
Closing
Planet A develops impact KPIs with founders, and then seeks to anchor impact into company governance by including sustainability clauses (drawn from Leaders for Climate Action), Diversity & Inclusion clauses, and ESG policy requirements. Similarly, 2150 seeks to embed sustainability commitments into their term sheets, including adopting a climate policy, impact measurement and reporting, and ESG & risk best practices. At this point, 2150 also finalises the impact score for the target company, which 2150 shares with their LPs alongside financial information.
Monitoring
While some companies 2150 invests in have already built impact measurement into their process and storytelling, others may not have had the time, money, or tools to do so at the time of 2150’s investment. In those cases, 2150 will work with them on what to measure, how to measure, and then how to build the results of that measurement into their go-to-market approach. Planet A tracks the impact KPIs that emerge from the LCA, and support founders in improving their impact. Whenever there’s a new process or product, Planet A will then update the LCA, which creates a valuable resource for the venture. Planet A sends out an annual ESG questionnaire to monitor for ESG risks.
Exit
Planet A ties 50% of their carried interest to reaching the impact objectives they set for their portfolio companies. 2150 looks for impact-aligned acquirers when exiting a company to ensure that the impact focus of its companies is preserved.
Benefits of impact measurement
There are obvious benefits for VCs to do a detailed impact assessment when looking at climate startups. In addition to maximising climate impact, the solutions that can make the biggest dent in emissions and resource use will likely attract more customers, more investment, and ultimately more commercial success. Having an in-house view of this potential means your fund doesn’t have to rely on founder claims – which are often overly optimistic. Beyond the benefits to VCs, impact measurement can also bring significant benefit to ventures themselves. Planet A and 2150 both found that their portfolio companies have used impact data and assessments to win customers and future investors.
Putting it all together
The main question of the session was what investors are measuring, but both Lena and Margarita said that what matters more is when and how you measure – being smart about measuring the right thing at the right time. Estimating emissions reduction potential is crucial for investing in an emissions-reducing technology, but measuring a startup’s Scope 1 emissions when it is still small may not be. Rigorous impact measurement can help sift through the noise of company claims, but it is also important to stick to basics, making sure that founders are building their companies with intent and a business model that links impact with commercial outcomes. Ultimately, impact is created when a transformative technology finds a market – and so it is important to have both parts of this equation working together.
Write-up by: Josh Smith
Josh is a Venture Investment Manager at Big Society Capital, where he helps source and analyse venture fund investments, manage existing investments, and contribute to the venture team’s strategy.