The biggest opportunity of our times: Improving environmental sustainability through venture capital

9-minute read

Canada has made important international commitments to advance sustainable development and address climate change. In 2015, Canada joined all United Nations (UN) Member States in adopting 17 Sustainable Development Goals (SDGs). Canada also adopted the goals of the Paris Agreement to mitigate climate change—committing it to reducing its greenhouse gas emissions by 40-45% compared to 2005 levels by 2030—and to achieve net zero by 2050.

Yet Canada has had mixed results when it comes to turning its sustainability commitments into action. According to the UN Sustainable Development Report published in June 2022, Canada ranks 29th out of 163 member states in its progress toward achieving the SDGs.

Meanwhile, the trajectory to net zero is particularly ambitious given our historical emissions. Emissions have largely stabilized since the early 2000s partly due to technological improvements and because growth has slowed in some industries over the last decade. However, reducing emissions has so far proven difficult across the board. Reaching Canada’s goals will require substantial technological advancements and investments to garner the step change required.

At BDC, we believe we have an important role to play in helping Canada meet its environmental sustainability objectives. We are committed to helping entrepreneurs build more sustainable businesses and have set the goal of being net zero in our operations by 2025.

We also have a critical part to play in helping bring new technologies to market and ensuring the businesses developing these technologies can find financial success. Our future depends on it: the path to net zero by 2050 depends in large part on opportunities driven by technological innovations.

We hope to be the catalyst that can bring in more capital and help the sector flourish in the global transformation that’s now taking place.

Canadian sustainability companies are underfunded compared to their peers

BDC has a long history of investing in the cleantech space. Our first cleantech fund was created in 2001. It has since been followed up by two other funds.

In 2018, recognizing that more needed to be done, we launched the Cleantech Practice, a specialized, dedicated cleantech investment team that manages the $600-million Cleantech Fund I and invested in 50 impactful cleantech companies. That team now manages the $400-million Climate Tech Fund II launched in November 2022. This fund is committed to addressing a chronic lack of private risk capital for the commercialization and scale-up of Canada’s climate tech industry. This brings the Fund’s total commitment to $1 billion since 2018 making it one of the largest, most active investors of its kind in Canada. The Climate Tech Fund II has a heightened focus on technologies that can materially mitigate greenhouse gas (GHG) emissions.

Yet, despite these investments and the vibrancy of the Canadian venture capital (VC) ecosystem, there remains a funding gap for companies driving the transition to a more sustainable economy.

Only 5% of Canadian VC investments went into environmental sustainability companies, compared to 14% globally in 2021.
U.S. cleantech firms raised on average three times more VC investment than Canadian firms on an adjusted GDP-basis1.
The Canadian government estimates that the scale of investments required to reach net zero by 2050 is significant, ranging from $60 billion to $140 billion per year on average.

A new fund to focus on asset-light, innovative technologies to help Canada meet its sustainability goals

This is why we are now launching a new Sustainability Venture Fund. The $150-million fund will focus on software, hardware-enabled software, and other highly scalable businesses with capital- and asset-light business models that are developing sustainability-enhancing technology with the potential to deliver indirect GHG emission reductions.

The Sustainability Venture Fund complements the Climate Tech Fund II. The clearest differentiators between the two are the business models of the companies they invest in, and the capital they require. Whereas the Sustainability Venture Fund targets capital-light software businesses, the Climate Tech Fund II focuses on companies that are capital intensive and asset heavy.

The Sustainability Venture Fund complements the Climate Tech Fund II

The Sustainability Venture Fund will invest in opportunities that align with four UN Sustainable Development Goals, detailed below. The sectors and investment themes represented by these SDGs constitute a substantial opportunity to advance Canada’s sustainability ambitions. Furthermore, more than half (53%) of Canada’s current greenhouse gas emissions are produced by sectors closely related to those SDGs:

Transportation (25%)
Buildings (12%)
Electricity (9%)
Waste (7%)

We therefore believe that investing across these themes presents the opportunity to, in tandem, advance Canada’s sustainable development objectives and GHG emissions reduction targets.

BDC’s Sustainability Venture Fund: 4 areas of focus

SDG 7 Ensure access to affordable, reliable, sustainable and modern energy for all	SDG 11 Make cities and human settlements inclusive, safe, resilient and sustainable
Investment themes Energy storage: Increase energy density and storage capacity and improve battery systems Energy efficiency: Improve energy utilization and efficiency of existing systems Renewable: Enable smart grids and efficient deployment of renewable energy Clean energy: Promote the adoption of low-carbon energy systems	Investment themes Responsible construction: Use more sustainable materials and construction methods in the built environment Sustainable buildings: Improve how the built environment is managed, enable more economical retrofitting and adaptation of existing buildings. Mobility: Enable the movement of people more efficiently and economically Logistics: Improve the efficiency and economics of goods and services movement
SDG 12 Ensure sustainable consumptionand production patterns	SDG 13 Take urgent action to combat climate change and its impacts
Investment themes Efficient use of natural resources: Reduce the environmental impact of natural resources and reimagine how our natural resources are used Waste management and reuse: Drive waste reduction and reutilization across industries, and improve the use of raw materials Sustainable materials: Enable the use of low-carbon, low-waste, sustainable materials	Investment themes Natural disaster monitoring and prevention: Detect and track climate events to prevent them or reduce their impact Emissions reductions: Reduce greenhouse gas emissions, and improve measurement and monitoring of GHGs Sustainable infrastructure: Enable climate-resilient infrastructure, and the materials and systems to build them

The fund will invest at the early stage, mostly in Series A and Series B, with some seed investments as well. We will invest $1M to $8M per round and be active across Canada.

The winds of change are blowing in the sustainability space

Consumers are increasingly thinking about sustainability when making a purchase. Governments are taking action to meet their sustainability commitments. Businesses are pledging to achieve net-zero emissions and building sustainability into their core business. VC investors like us, as well as institutional investors, pension funds and university endowments are starting to allocate more capital to the sector and beginning to require sustainability reporting as part of their disclosure requirements.

These trends are accelerating and will benefit sustainability-driven businesses and investors in the years to come.

We believe that companies that make a meaningful contribution to sustainability in their business will thrive in the coming years. They will have access to more funding, talented employees are going to want to work for them and clients will be more open to working with them. And it just so happens that Canada has a growing ecosystem of cleantech businesses that can benefit from these tailwinds—and that are ready to meet the challenge.

We see a huge opportunity for investing in these companies and hope to be the catalyst that can bring in more capital and help the sector flourish in the global transformation that’s now taking place.