ESG for Venture-Capital-Backed Companies
What Should Climate Tech Startups Consider?
Written by Nasdaq in partnership with Daryl Kennedy from Piva Capital
Climate tech startups are proving very attractive to investors. Venture capital (“VC”) funds with an explicit decarbonization focus announced $10 billion of new capital raised in 2022, contributing to a total $63 billion of new dry powder for climate solutions across all private equity asset classes. [1] Despite tough market conditions in 2022, venture deals for climate-focused companies totaled over $26 billion in 2022 – more than double the average amount raised by any other vertical. [2] In addition, the largest IPO to date in 2023 happens to be climate-focused solar technology company Nextracker, which made its public market debut on February 9 with a $638 million IPO. [3]
Investors—especially VCs—are not only focusing on climate tech, but also adding responsible investing practices focused on environmental, social, and governance (“ESG”) considerations to their toolkit. Pitchbook’s annual Sustainable Investment Survey found that the percent of general partners (“GPs”) who have fully integrated sustainable investment principles throughout their portfolio rose from less than 40% in 2021 to over 45% in 2022. 45% of VC respondents said they were most focused on the positive environmental impacts of investments over other aspects of ESG, compared to 35% of their non-VC counterparts. This emphasis suggests VCs in particular see enabled emissions reductions of their portfolio companies as a key element of fund value creation and strategy.
The intersection of these two trends, climate tech startup investment and venture capital responsible investment focus, poses an interesting question: How can VC-backed climate tech companies work together with their investors to advance responsible business practices? Startups already addressing climate change through their core products and services should consider:
ESG integration: Understand how VCs incorporate non-financial considerations into their investment processes and address these considerations in your business early on.
Impact measurement: Quantify metrics—especially carbon impact—to powerfully tell your business story. Enabled emissions reduction often correlates directly with revenue generation.
IPO preparation: As early as practical, thoughtfully integrate sustainability information into operations to optimize exit valuation when going public.
Piva Capital and Nasdaq ESG Advisory are excited to dive into further detail through this joint paper on ESG and impact. Through the lens of climate and environmental innovation within the venture ecosystem, we share practitioner perspectives to help companies and investors navigate the ever-evolving landscape of responsible investment considerations from early stage to IPO. Our goal is to provide actionable ideas to responsibly scale businesses using ESG and impact assessment as value creation tools for growing startups, raising private capital, moving forward with IPOs, and beyond.
[1] Climate Tech VC newsletter: New dry powder for a new climate
[2] Data from PitchBook as of January 28, 2023
[3] Bloomberg: Nextracker jumps up to 29 after 638 million US IPO
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Piva Capital invests in founders and emerging companies whose ideas are transforming the trajectory of industry. Their innovative technologies are solving some of the world’s greatest problems, while improving the outlook of both people and planet. Our team of domain experts has a global network of partners and professionals in over 90 countries and six continents. As partners to humankind and nature, we invest in founders, and in our shared future.
Since Piva’s inception, responsible investment has been core to our culture, investment strategy, and partnership approach. In line with the rapidly evolving landscape of social and environmental issues, our role as corporate citizens and investors continues to grow and evolve, bringing forward a new set of responsibilities surrounding the management and consideration of environmental, social, and governance (ESG) issues. We are excited to share our learnings and continue to leverage our collective knowledge to develop best practice in this space.
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Sitting at the intersection of capital markets, Nasdaq strives to connect impactful businesses with patient capital. Nasdaq’s ESG Advisory business works with pre- and post-IPO corporates to maximize their success in the public markets. This includes our Listings, Equity Surveillance, Investor Targeting teams, and, more recently, our expanding suite of ESG Software and Advisory Solutions. ESG programs have proven an integral part of a public company’s success, and Nasdaq recognizes that responsible business practices have now become expectations for earlier stage companies as well.
Nasdaq also fully embraces ESG in its own operations and internal strategy. We remain committed to our purpose of Advancing Economic Progress for All by aligning our business activities to this mission. This includes building a home for impact-driven companies through our Entrepreneurial Center, Foundation and Purpose Initiative, Nasdaq Ventures, and Advisory & Listings services. We are thrilled to combine our experiences with that of Piva Capital to better understand how private investors are now integrating ESG into their investment process so that we can help all Nasdaq clients, present and future, thrive.
ESG Integration
ESG integration refers to the inclusion of ESG considerations into a firm’s investment process. While widely adopted, investors vary in their specific approach to ESG integration. From the perspective of climate tech startups, understanding how venture capital investors integrate ESG into their investment processes can help companies hone their messaging when raising private capital.
Piva’s Approach to ESG Integration
Some investors see ESG integration as a “tick-the-box” exercise to ensure risk management. At Piva we believe this kind of strategy does not fully reap the benefits and value that ESG can offer. We are intentional in including ESG considerations into our sourcing, due diligence, and post-investment engagement processes. To make this more tangible, we will explain part of our early assessment process and the ESG aspects we expect to be more relevant to specific types of startups.
Piva invests across three verticals: the Future of Work & Industry, the Future of Materials & Production, and the Future of Energy & Mobility. Various climate tech sectors fall within these verticals.
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Future of Work & Industry |
Future of Materials & Production |
Future of Energy & Mobility |
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Piva assessed the 26 Sustainability Accounting Standards Board (“SASB”) topics we typically find most relevant to companies building products or services in our industry verticals. The result is a heat map, shown below, that guides our engagement with startups.
For example, a significant consideration for companies integrating machine learning into industrial applications is likely to be high standards surrounding customer privacy and data security. Companies creating innovative materials will likely focus resources on protecting employee health and safety. Companies trying to disrupt the energy industry usually operate in a business environment that requires high legal and regulatory understanding.
Of course, any one specific company may be more or less exposed to the same sustainability issues as other companies in the same vertical. We recommend companies work with their investors and/or advisory services to help understand their unique risks and opportunities.
As investors and board members, we know that ESG becomes increasingly important as companies grow. We have found that companies that are intentional in selecting highly relevant sustainability themes can integrate ESG into their businesses without overburdening their operations—and in fact create an advantage explaining their value propositions to customers and investors.
So, if thoughtfully selecting the relevant sustainability themes is where to start, then quantifying those topics is the next step.
Impact Measurement
Warren Buffet has said “You have to understand accounting and you have to understand the nuances of accounting. It's the language of business…” While the language of impact measurement is still evolving, the need to quantify climate impact metrics has become increasingly important. In 2022, 83% of limited partners (“LPs”) surveyed said it was important that GPs measure the environmental and social impact of their portfolio companies. [4] In public markets, one of the ESG rating agencies most used by investors – MSCI – assesses several sectors on their ability to capture opportunities in climate tech through R&D spend on climate-tech-related endeavors and targets to increase R&D investment over time.
Several industry groups and service providers have emerged in the impact measurement space that provide useful measurement tools:
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Global Impact Investing Network IRIS + framework: Industry standard leveraged by some VCs
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Project Frame: Brings together experts in private markets to converge on best practices
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Impact VC: This community shares insights and thought leadership on impact within Venture Capital
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Boundless Impact Research & Analytics: Rapid Life Cycle Assessments (“LCAs”) for energy, materials, batteries, and agriculture
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GHG Protocol: Product Lifecycle Accounting and Reporting Standard
However, because impact measure is still a work in progress, many companies leverage a framework to create fit-for-purpose bespoke measurement approaches.
Piva’s View on Impact Measurement
Just as startups must understand their unit economics, Piva suggests startups understand the unit-level GHG impact of their processes and services. (GHG impact is just one suggestion, however many other impact metrics are applicable.) Keep this calculation conservative, simple, documented, and linked to revenue or key growth drivers. Explaining GHG impact then becomes a natural extension of telling a business story.
We acknowledge there are still several challenges in the field of impact measurement. Some difficulties that you might be familiar with include:
[4] Sustainable Investment Survey, Pitchbook, 2022
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Assessing GHG impact years or even decades into the future involves conceptually challenging modeling decisions with uncertainty. To develop forward-looking GHG impact assessments, determining reasonable sector- and region-specific baselines for future emissions and estimating the rate at which new solutions may penetrate the market is crucial. This is especially challenging given the uncertainty and risk surrounding market adoption. Many investors and startups are conducting these assessments with considerable thoughtfulness, and the industry would benefit from sharing methodological best practices.
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Detailed GHG impact assessment can be resource and time intensive to conduct. For early-stage companies, this type of assessment may require expertise that is not readily available in-house, making it difficult for impact assessments to be actionable at the time of investment and throughout the investment cycle. In addition, robust assessments are sometimes challenged by the lack of relevant and high-quality data repositories.
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Investors often find it challenging to credibility communicate their efforts at GHG impact assessment given the uncertainty inherent in the exercise and the need to reconcile large-scale future impact with more limited near-term impact. There are limited third-party verifiers that are cost effective for startups.
Although these concerns are valid, they can be mitigated by focusing on simple, well-documented assessments. The more companies use relevant, understandable (even if modest) metrics to quantify impact, the more easily wholistic company value can be explained to investors. We fully expect the language of impact to evolve, but applying your best efforts will allow your impact to be articulated meaningfully.
We believe the magnitude of impact for climate tech startups correlates with potential for outsized economic returns. We, and many of our peers, are thoughtful about evaluating a startup’s impact. Investor questions typically asked of a climate tech startup include:
- What major challenge is this company trying to solve?
- What order of magnitude is the company’s potential impact?
- How does the business model incentivize impact? Does it scale?
- What are the revenue drivers?
- Where do the company’s emissions come from?
- How material is this company’s impact?
- What can we do as investors to accelerate this?
We acknowledge that all of this is not easy, as we have done it ourselves, but encourage companies to start. One practical step that Piva has found to be helpful is using a platform called Metric ESG. Metric specializes in private market ESG data collection specifically for startups. The platform is helping us gather targeted information from our portfolio companies.
IPO Preparation & ESG Considerations
The role of ESG and impact become even more critical the closer a startup gets to its major liquidity events —acquisition or, as many founders hope, going public. Going public is the exciting moment when companies may see their early efforts to advance ESG showcased and pay off. [5]
Nasdaq’s Perspective
We are proud to be the home of 116 U.S. climate-focused companies, from industry giants like Tesla and Enphase to recent joiners like and Origin Materials and Iris Energy. Perhaps unsurprisingly, most of these names fall into the clean energy and electric mobility subsectors. These sectors have been around the longest and their technology has been proven. Companies in newer climate sectors like charging infrastructure and materials have started to emerge in the public markets over the last couple years, but the number of companies in each of these categories remains in single digits.
On February 9, 2023, Nasdaq was thrilled to welcome Nextracker (NXT) to the Nasdaq family with its raise of $638M – making it the largest IPO to date this year, and the first climate-focused company to make the jump against a frigid economic backdrop. J.P. Morgan, BofA Securities, Citigroup and Barclays acted as joint underwriters for the offering. Nextracker posted impressive revenue growth since 2020 and tells a compelling impact story both through its website and S-1 materials, highlighting enabled avoided emissions, carbon offset purchases, responsible procurement, low carbon materials, ISO environmental management certifications, EcoVadis participation, and commitment to diversity, equity & inclusion. When viewed at the same time as financial metrics, all these non-financial data points simply help investors gain more conviction and confidence in the long-term success of the business.
Following in Nextracker’s footsteps, late-stage VC-backed companies preparing for an IPO could consider the following when leveraging ESG as a competitive advantage:
- S-1 Impact Narrative: What story do you want to tell in your S-1 drafting?
- Investor IPO Participation: Do you know the investors to target for your roadshow that put a premium on climate impact and responsible business models?
- 2023 SEC Sustainability Regulations: How can you prepare ahead of time for upcoming SEC sustainability disclosure requirements?
S-1 Impact Narrative
Several studies have found connections between company sustainability efforts pre-IPO and their IPO valuation. One such study, ESG and the Pricing of IPOs: Does Sustainability Matter?, found that ESG information disclosed ahead of IPO was significantly correlated to less underpricing - meaning higher IPO valuations. Several ESG ratings have even started offering ESG assessments to companies ahead of their IPO as another means to demonstrate credibility to investors during the IPO process.
In 2022, despite the tough market conditions, Nasdaq was thrilled to welcome five climate tech companies to the public markets and Nasdaq family. Four of these were in the Electric Transportation space and one in the Indoor Farming industry. For companies like these whose core business addresses climate change, the impact story naturally shines through the business description.
For example, Atlis Motor Vehicles only discusses its impact through its Business, Market Opportunity, and Industry descriptions: “According to Wood Mackenzie, by 2030 the 2.3 TWh global need for electric vehicle batteries is 77% higher than the forecasted supply of 1.3 GWh. Atlis intends to supply battery cells and packs to help fill this gap in supply.” Another 2022 IPO, Edible Garden, included a shorter Sustainability section in their S-1 that also ties in with their core business: “In vertical greenhouses, we are able to grow more herbs and lettuce per square foot than legacy farms,” in addition to more detail on employee engagement and diversity initiatives at the leadership level.
Investor IPO Participation
Nasdaq works closely with banking partners to help our IPO clients build IPO participation rosters. Once companies have decided to communicate their ESG and Impact narrative in IPO marketing materials, the next step is considering how they can leverage that in investor communications, and potentially even targeting capital that might be less interested otherwise. Most IPO rosters consist of a mix of institutional investors and hedge funds. For the institutional investors that might hold on to a stock past the first day of trading, ESG messaging enhances an already strong stock story.
2023 SEC Sustainability Regulations
We have seen unique developments in the regulatory landscape over the last couple years that impact public issuers and those preparing for an IPO. More specifically, the SEC has proposed mandatory reporting on topics including climate change, corporate board diversity, human capital management, and cybersecurity. All of this underscores the need for pre-IPO companies to understand the impact of these issues on their business and have a plan for communicating this in their regulatory filings once they go public.
Conclusion
Record venture capital flows into climate technology and the rise of ESG integration into private investing have intersected to create a new paradigm where more is expected from pre-IPO companies — to be profitable businesses that contribute positively to our planet and deliver products and services through responsible operations. While this may seem daunting, we believe this also presents an incredible opportunity for founders and CEOs to frame, track, and tell impact stories early on and capture dividends in the long run. Our advice to founders on ESG is start early, keep it simple and impactful, and remember this is one of many steps on the journey to a successful exit.
Given our collective experience engaging with startups and portfolio companies at Piva Capital and working with pre-IPO companies to establish ESG programs at Nasdaq, we recommend following these steps when considering where to start with ESG:
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Although obvious, and not addressed in this paper, start with sound corporate governance practices. These are fundamental, regardless of sector, and include establishing a strong culture of ethical behavior, aligning long-term incentives for leadership, and ensuring the necessary variety of skill sets and perspectives on the Board and founding team. Setting these up at the early stages of a business will save time and energy later.
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Prioritize efforts by tackling the ESG topics that are most material to your specific business and, as much as possible, link to your revenue and business model.
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Once you have established the ESG basics, start thinking about how you will measure your impact and leverage that as an indicator of financial success. Use this as an anchor for the rest of your ESG strategy as you continue to optimize operational efficiency.
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Finally, start the process of monetizing all your hard work by integrating your efforts into your S-1 and investor outreach strategy.
If you are building a company that solves an aspect of climate change, Piva Capital wants to hear about you and Nasdaq’s ESG Advisory practice can help you. Together, we can ensure that patient capital that rewards impactful companies as we all work to build a sustainable economy.
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