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Twenty-three venture capital firms, including Tiger Global, have committed to reducing carbon emissions to net-zero by 2030 and achieving portfolio-wide net-zero emissions by 2050.

This Venture Climate Alliance is among the most significant efforts to reduce emissions among early-stage companies. Still, some investors felt the bar should have been set higher.

The founding members of the alliance, predominantly climate- and impact-focused VC firms, are Prelude Ventures, Capricorn Investment Group, DCVC, Energy Impact Partners, Tiger Global, Galvanize Climate Solutions, S2G Ventures, Union Square Ventures, World Fund and 2150.

Several prominent climate-focused venture firms are missing from the list of signatories, including Breakthrough Energy Ventures, Lowercarbon Capital, Climate Capital and Khosla Ventures.

Five of the founding members hold $3 billion or more in AUM, according to PitchBook data. Tiger Global is the largest manager by far: It reported over $58 billion in AUM in a March regulatory filing.

The members' first commitment—net-zero emissions for each firm's internal operations by 2030—will be fairly straightforward.

The second commitment—achieving a net-zero portfolio by 2050—will require a more substantial investment of time and resources in predominantly very early-stage companies. Startups at this stage tend to have an unwavering focus on growth and survival, often sidelining ESG concerns until they mature.

"The types of companies that we're working with are very early stage. Maybe they actually didn't exist a year ago," said Alexandra Harbour, a principal at Prelude Ventures and founder of the alliance. "As you're growing a business, you necessarily have to increase your emissions over time."

But a net-zero portfolio is much more achievable for a VC firm than asset managers with greater exposure to traditional industries. As Harbour pointed out, the portfolio companies of most VC firms are in verticals like AI, quantum computing and SaaS, rather than industries with heavy emissions.

Large asset managers including BlackRock and Harvard Management Company have the same goal of net-zero by 2050.

Frustrated ambitions

"There were some members who said 'Why are we waiting until 2050? Let's do it earlier. Why are we waiting until 2030? Let's do it earlier,'" Harbour said. In the end, the alliance settled on a 2050 target, with the idea that some members can shoot for earlier milestones if conditions allow.

The longer timeline will likely make joining the alliance more doable for a wider range of VC investors, such as corporate venture arms.

"This is not the club for the holier-than-thou climate-tech VCs," according to Daniel Firger, a co-founder of the alliance and managing director at Great Circle Capital Advisors, a climate finance advisory firm.

By the early 2030s, global average temperatures will exceed the Paris Agreement's target of no more than 1.5 degrees Celsius (2.7 F) in warming, according to a recent report by UN scientists which urged "deep, rapid and immediate action."

Committing to a net-zero goal at the earliest stages of a company has some advantages.

"Building in climate-related considerations will, in theory, result in lower emissions overall, and it's easier to build in sustainability than to attempt to retrofit or pull back on an already hefty footprint," PitchBook analyst Anikka Villegas said.

But for startups that have few resources, carbon accounting and offset costs might be out of reach. "VC portfolio companies tend to be resource-constrained, so they may have to walk a line between prioritizing sustainability and profitability," Villegas added.

At the end of the day, VC firms still have to answer to their limited partners. For the industry to be ambitious on climate, LPs need to be on board.

"We need more commitments from more investors, ideally from the asset owners (LPs) that invest in venture capital," said Johannes Lenhard, co-founder of VenturesESG, a nonprofit promoting ESG adoption in the VC industry.

That can be a tricky proposition, given that some US states, such as Texas and Indiana, have proposed or passed laws banning public funds from investing in climate-conscious asset managers.

"The higher and the more well-known commitments to climate and ESG are being anchored across the world, the more movement we're going to see," Lenhard added.

 

Related read: Are private markets up to tackling the climate crisis?

Correction: An earlier version of this article inaccurately listed VC firm Kleiner Perkins as one of VCA's founding members. The article was also corrected to reflect that the VCA has 23 members, not 24.(April 25, 2023).

Featured image by Nicole Glass Photography/Shutterstock