February 8, 2023

How can we keep the current ESG backlash from spilling over into climate tech?

Companies using impact as a marketing tactic can harm an industry's image — so how do we stop it from affecting climate tech?

Arne Morteani

5 min read

Credit: Unsplash

Driven by good intentions as well as — to put it bluntly — the need to raise capital, the climate tech VC community has developed a large range of methodologies attempting to quantify impact. 

While SaaS investors have annual recurring revenue (ARR) and customer acquisition cost (CAC), climate investors have championed new metrics like gigatonnes of carbon emissions saved, water consumption or energy conserved.  

But many of these metrics feel like marketing exercises, designed to reassure LPs rather than optimise capital allocation for climate impact. Using these fundamentally flawed metrics, the climate VC industry risks the same backlash currently being aimed at ESG — which will damage the industry’s credibility just when more investment is needed than ever. 


The problem with modern climate impact methodologies

These methodologies often have a fundamental flaw: they try to create a universal metric for environmental impact with the objective of quantifying and comparing the impact of different investment options. That cannot be done. 

A good example is carbon accounting software. We know it is useful to generate CO2 savings, but how much more useful is it than other investment options? How much more useful than something like a new battery technology? 

Or let’s take remote sensing using satellite cameras. They help quantify the CO2  absorption of forestry projects, but can also be used in oil and gas exploration. And even for forestry, how much of that new forest’s CO2 benefit can you assign to that satellite camera rather than all the other efforts involved in financing, planting and monitoring those trees? 

Misleading methodologies will inevitably lead to greenwashing, which will create distrust of the industry when discovered

In a nutshell, environmental impact like CO2 savings is always a result of many factors and unknowns. It is impossible to assign a precise fraction of a hypothetical future impact to one specific activity, technology or company. 

This is especially true when technologies are enablers, like remote sensing, cyber security or quantum computing, which then get falsely labelled as climate tech. But even for obvious environmental technologies like novel solar cells, it is impossible to quantify the future impact of one specific novel technology or startup. 

Misleading methodologies will inevitably lead to greenwashing, which will create distrust of the industry when discovered. 

Keep it simple is the solution

So, what can be done? As so often, “keep it simple” is the solution. There are two things we can know, with little analysis and using simple common sense:

  • Which technologies or business models clearly have a net positive impact, even though we cannot precisely quantify that impact
  • The degree to which those businesses have succeeded with market entry and roll-out since investment

Both are easy to assess and tell us what we need to know. 

What is ‘in’ and what is ‘out’

Let’s illustrate this. We know that startups in solar and car sharing are clearly a net positive. We may do some calculations to check, but common sense already tells us the answer.

We also know that cybersecurity or quantum computing are general platform technologies; they can be applied in many areas, even in the oil and gas industry. Here it is misleading to quantify any hypothetical environmental benefits as this ignores all the other ways they could be applied, such as in making oil and gas cheaper.

We also know that these technologies attract plenty of capital from generalist VCs and so do not need climate VC money. While solar and car sharing are "in", quantum and security are "out". These are simple categories, no quantification.

Overall, while still not perfect, we believe that these efforts are on the right track and we are encouraged by the direction the EU is taking

Once we established that solar and car sharing are "in", it may be tempting to compare their relative impacts. But we refrain from doing that, for the reasons stated above. Instead, we should monitor the progress towards market entry and roll-out that is made post-investment. Such progress can be quantified easily. How many of those new solar cells have been deployed, how many car rides have been shared? If those curves face upwards, we have succeeded as impact investors. 

Insiders will recognise a parallel. Both approaches suggested here have been promoted by the European Union. The recently launched European Sustainable Finance Taxonomy defines simple in/out categories as suggested by us, even though it immediately fell into disrepute by including natural gas as a sustainable technology (we can only speculate what drove that decision). It also still has too many "catch-all" categories. 

The European Investment Fund has been asking its investee funds to provide progress metrics similar to what we have suggested above. We believe it has overreached somewhat though, in encouraging carry payments to be linked to such progress metrics, which again implies comparability. Overall, while still not perfect, we believe that these efforts are on the right track and we are encouraged by the direction the EU is taking.  

Let’s abandon misleading metrics and use common sense

In summary, we should limit our efforts to simple in/out decisions on technologies and business models, combined with sensible, company-specific progress metrics that monitor the impact of a company as it grows. 

By focusing on these, we measure the measurable and meaningful and can free up time and resources to do the actual company-building work and to create that impact that we all aspire to make. 

Climate tech cannot afford a backlash right now, when the very survival of our way of life depends on it. So, let’s abandon misleading metrics and use common sense. 

Arne Morteani is a founding partner at Kiko Ventures and has been investing in climate tech startups since 2007