Going beyond ESG investing to save the planet

The solution to our climate crisis relies not just on state actions, but also requires superhuman efforts by startups and the venture capital community

The siren call from COP26, the UN Climate Change Conference in Glasgow, to rapidly and significantly reduce carbon emissions in order to slow down climate change, rang alarms around the world.

A small nation like Israel, with its population of less than 10 million and almost no heavy industry, would seem to have minimal ability to influence global emissions.

But despite Israel’s insignificant carbon footprint, Israeli Prime Minister Naftali Bennett was right to suggest that the Startup Nation could make a “mighty” contribution toward mitigating the climate crisis by focusing its entrepreneurial smarts on the problem.

“As the country with the most startups per capita in the world, we must channel our efforts to saving the world,” Bennett told the conference. “Behavioral change alone will only take us so far. We’re going to need new inventions and new technologies that have not yet been even imagined.”

“I call upon our entrepreneurs, our innovators, in Israel and across the world: You can be the game changers. You can help save our planet. You see, instead of building yet another hyped-up internet app, why don't you launch startups that will help solve this global threat?”

COP26 focused on the role of governments in reducing emissions, but Bennett hit the nail on the head by suggesting that the solution to our climate crisis relies not just on state actions, but also requires superhuman efforts by startups and the venture capital community. The reward awaiting such risk takers is the “double bottom line” identified by impact investing guru Sir Ronald Cohen: doing well, while doing good.

As the IMF notes in its recent Global Financial Stability Report, the transition to net-zero greenhouse emissions will require “unprecedented change by companies and governments, as well as additional investment of as much as $20 trillion over the next two decades… The world’s $50 trillion investment fund industry, especially funds with a sustainability focus, can play an important role financing the transition to a greener economy and helping to avoid some of the most perilous effects of climate change.”

In recent years, there has been a significant shift toward environmental, social, and governance (ESG) investing. However, the ESG label does not necessarily mean that those investments are directly contributing to the preservation of the planet, since it also includes such important issues as boardroom gender equality and transparency in governance as well as action on sustainability.

As the IMF report reveals, the proportion of investment funds actually targeted at “sustainable” investment by the end of 2020 totaled “about $3.6 trillion, representing only 7 percent of the overall investment fund sector. Funds with a specific climate focus accounted for a meager $130 billion of that total.”

That’s less than three-tenths of one percent of total investment. No wonder it is so hard to see the green line in the IMF graph shown here.

Not provided

So despite the shift toward ESG investing, it has not provided sufficient funding for deep-tech startups solving climate problems.

Traditionally, most venture funds have been reluctant to make climate technology bets that often require complex hardware which takes years to develop and whose purchasers, in the main, are governments. Many of those who have tried have been burned. There have been periods when venture fell in love with climate-focused companies or water tech, but it rarely worked out.

But one lesson from the Covid crisis may help to settle nerves. For decades, major pharma companies avoided developing vaccines for much the same reasons: long and expensive development, with governments as the main customers. One of the many business lessons from the past two years is that a winning vaccine development can deliver a triple bottom line: doing good business, while doing good for people, and also doing enormous good for a company’s brand as the savior of humanity.

It’s time to take “green” investing beyond ESG.

It is not enough to invest in companies that are environmentally aware, reducing pollution, working toward zero carbon and have diversity on their boards. Investors must focus their dollars on the technologies necessary to make the climate revolution a reality.

This is where Israeli entrepreneurs, the venture funds that empower them, and the individual investors who fund them, have a duty and a responsibility to play an outsized role to develop the technology the planet so urgently requires.

“The survival of this country will be dictated by its expertise in technology,” Albert Einstein told the founders?of?the Haifa Technion nearly 100 years ago. Listening to Einstein that day were the scientific leaders who helped transform this largely barren country into a green and fertile land. A century later, the Technion-Israel Institute of Technology is one of the engines of the Startup Nation ecosystem, which needs to extend its green expertise to the entire planet.