Sustainability provisions – driving environmental responsibility in venture capital

read time: 6 mins

16.01.25

Sam Brown

As sustainability becomes an increasingly prominent focus in the global business landscape, sustainability provisions are emerging as a key component in venture capital term sheets.

Sustainability provisions formalise a company’s commitment to environmentally responsible practices, aligning operations with investor and societal expectations around environmental, social, and governance (ESG) principles.

For founders, sustainability provisions present an opportunity to build eco-conscious businesses that resonate with customers, employees, and future investors. For venture capitalists, these provisions ensure their portfolio companies contribute to sustainable growth, mitigating environmental risks while enhancing long-term value.

This article in our ‘Anatomy of a term sheet’ series explores the role of sustainability provisions in venture capital transactions, their practical application, and how founders and investors can align on shared environmental priorities.

What are sustainability provisions?

Sustainability provisions are contractual commitments incorporated into venture capital documentation, requiring the company to adopt environmentally responsible practices. These provisions may include:

Operational commitments: reducing the company’s carbon footprint or adopting energy-efficient processes.
Supply chain standards: ensuring ethical sourcing and minimising environmental impact throughout the supply chain.
Governance and reporting: establishing internal sustainability policies and providing regular updates to investors on progress.
Target-based objectives: setting specific goals such as achieving net-zero emissions or adhering to recognised sustainability frameworks like the science-based targets initiative (SBTI) or iso 14001.

Key features of sustainability provisions

Environmental targets

Commitments to measurable environmental goals, such as reducing greenhouse gas (GHG) emissions, adopting renewable energy sources, or minimising waste.
Targets may include achieving net-zero emissions by a specified date or reducing energy consumption by a percentage within a given timeframe.

Example:

"the company shall achieve a 50% reduction in its GHG emissions by 2030, measured against its 2023 baseline, and commit to becoming carbon neutral by 2040."

Sustainable supply chain practices

Requiring the company to work with suppliers that adhere to sustainable practices, such as minimising deforestation, reducing packaging waste, or eliminating single-use plastics.

Example:

"the company agrees to implement a supplier code of conduct within 12 months, ensuring all suppliers meet ethical and environmental standards."

Sustainability governance

Establishing a sustainability officer or committee to oversee implementation and progress.
Requiring board-level accountability for environmental initiatives.

Example:

"the company shall appoint a sustainability officer to monitor compliance with environmental commitments and report quarterly to the board."

Reporting obligations

Requiring companies to provide periodic updates on sustainability progress, often as part of annual ESG reporting.
Investors may request metrics aligned with frameworks like the task force on climate-related financial disclosures (TCFD) or global reporting initiative (GRI).

Example:

"the company shall provide an annual sustainability report, including emissions data, resource usage metrics, and progress against environmental targets."

Why include sustainability provisions?

For investors

Reputation and risk management: aligning with ESG principles enhances investors’ reputations while mitigating environmental risks that could impact portfolio performance.
Value creation: research suggests that companies with strong sustainability practices are more resilient and attract higher valuations.
Stakeholder expectations: institutional investors and limited partners increasingly demand that venture capital funds integrate sustainability into their investment strategies.

For founders

Competitive advantage: sustainability-focused businesses often appeal to environmentally conscious customers and partners.
Futureproofing: embedding sustainability practices early positions the company for long-term compliance with evolving regulations and market expectations.
Talent attraction: employees, particularly younger generations, are increasingly drawn to companies with strong environmental commitments.

Practical considerations for structuring sustainability provisions

Tailored to business model

Provisions should reflect the company’s industry, stage, and resources. For example:
- A clean-tech start-up may commit to ambitious environmental targets from the outset.
- A SaaS company may focus on indirect impacts, such as optimising energy use in data centres.

Realistic and achievable goals

Sustainability provisions must set feasible targets, particularly for early-stage companies with limited resources. Unrealistic commitments can strain operations or erode trust.

Alignment with industry standards

Aligning targets with recognised frameworks, such as B Corp certification, ensures credibility and clarity for all stakeholders.

Incentivising compliance

Investors may link sustainability performance to funding milestones or management incentives, encouraging progress without punitive measures.

Example of a sustainability clause in a term sheet

Clause example:

"the company agrees to:

Implement a sustainability strategy within 12 months of investment, setting measurable targets for reducing its carbon footprint and energy consumption.
Report annually to the board and investors on progress against these targets, including metrics aligned with TCFD recommendations.
Ensure all suppliers comply with the company’s sustainability standards by the end of 2025."

Challenges in implementing sustainability provisions

Resource constraints

Early-stage companies may lack the infrastructure or expertise to implement comprehensive sustainability measures immediately.

Data availability and measurement

Tracking progress against environmental targets requires robust data collection and reporting systems, which can be challenging for small companies.

Balancing priorities

Founders must balance sustainability commitments with other operational and financial objectives, particularly during rapid growth phases.

Analysis: founders’ perspective vs investors’ perspective

	Founders' perspective	Investors' perspective
Motivations	Founders view sustainability provisions as an opportunity to differentiate their business and align with market trends. However, they may seek flexibility to avoid overburdening the company during its early stages.	Investors see sustainability provisions as a way to protect long-term value, align with ESG mandates, and meet stakeholder expectations. They prioritise measurable, transparent progress to ensure accountability.
Preferred position	Commit to achievable sustainability goals tailored to the company’s size and sector. Phase in reporting and compliance requirements to reflect resource constraints. Avoid overly prescriptive clauses that limit operational agility.	Include clear, measurable targets with defined reporting obligations. Align provisions with established frameworks to ensure credibility. Balance accountability with operational flexibility for early-stage companies.
Risks	Unrealistic or rigid provisions could create operational strain or conflict with other growth priorities.	Weak or vague sustainability clauses may fail to deliver meaningful environmental impact, exposing investors to reputational risks.
Where they align	Both founders and investors benefit from sustainability provisions that balance ambition with practicality. Clear objectives, phased implementation, and transparent reporting foster alignment and trust.

In summary

Sustainability provisions are becoming a cornerstone of venture capital term sheets, reflecting the growing emphasis on ESG principles across industries. By embedding environmental commitments early, founders can build resilient, future-ready businesses, while investors ensure alignment with their broader ESG priorities.

Thoughtfully structured sustainability provisions not only drive positive environmental outcomes but also create long-term value for all stakeholders.

Read the next article in our ‘Anatomy of a term sheet’ series, where we’ll explore insurance requirements and examine how these provisions mitigate risk and protect venture-backed companies.

If you're navigating the complexities of venture capital term sheets or preparing your business for investment, our experienced team is here to help. Get in touch to discuss how we can support you in securing the right deal for your business.

Our anatomy of a term sheet series

Our 'Anatomy of a term sheet' series breaks down each critical section of a venture capital term sheet, offering technical insights and practical real-world examples to help founders with their fundraising journey.

Our aim is to demystify term sheets and empower founders and their advisors to navigate negotiations with clarity and confidence.