Sustainability and VC in 2026: is “I'm building an impact startup” still enough?

In 2026, sustainability has not disappeared from the venture capital agenda, and it never will, although it has dialed down a bit from the previous years. But the way investors talk about it has changed dramatically. The market has moved from the 2020-2022 narrative of impact & ESG just being hot topics for VCs, towards a tougher question for the founders: can a sustainability startup produce measurable impact and become a commercially viable, scalable business?

Ok, you may say that investors in startups are suited for financing that period of technological and commercial uncertainty. That's their entire thesis. But what has changed is what they expect in return.

Are ESG and impact the same thing?

It is very important that we separate impact and ESG, or responsible business practices. Because the two concepts seem to sound the same to people not familiar with the subject and maybe even with some non-specialized investors.

The difference between ESG/responsibility and impact is pretty simple: ESG concerns how responsibly a company operates, while impact concerns the positive environmental/social outcome generated by the product itself.

Danish venture capital firm byFounders makes this distinction in its ESG and Impact investment framework. The firm defines impact as the direct effect a company's product has on people or the planet, its "product footprint", while ESG or responsibility describes how responsibly the company conducts its operations, in other words, its “operational footprint.”

That means a startup can operate responsibly without necessarily being an impact startup.

At the same time, a company whose product generates positive environmental or social impact is not automatically a responsibly managed company.

For venture investors, the distinction matters because VCs invest when companies are still being built.

But venture capital is not philanthropy. The fundamental VC question remains: has an investment the potential to generate sufficiently large financial returns?

Impact, a sizeable investment category

 Impact investing is no longer taking just a small piece of the pie in the startup ecosystem.

According to Dealroom's State of Impact 2025, impact startups reached a combined enterprise value of $3.6 trillion in 2025, 28 times their $126.6 billion value in 2015.

Investment, however, has decreased significantly from the hype of 2021. Dealroom projected global impact VC funding at approximately $33 billion in 2025, which is three times its 2015 level, but 24% below 2024 and considerably below the $89 billion invested at the market’s peak in 2021.

Europe stands out. Impact companies represented approximately 15% of all European VC investment in 2025, compared with 7% in North America and 4% in Asia.

We need to look at this from a positive angle, meaning capital hasn't disappeared from sustainability, but investors have become much more selective about where they deploy it.

A step back from growth at all costs. We need proof that the business works

This might be the most important change in the relationship between sustainability and venture capital.

During the hype years, being positioned in a market with huge potential for the future, such as carbon removal, alternative food, batteries, green hydrogen, sustainable materials, seemed to be an important part of an investment narrative and could land you a lot of money.

But in 2026, just being in one of these verticals is not enough anymore. The State of Climate Tech 2025 report found that pre-seed and seed activity has fallen to a 5-year low.

It also identified a new valley of death for climate tech startups and that is commercialisation, actually getting enough paying customers. Many technologies have moved beyond the experimental phase but teams still struggle to transform the startups into profitable businesses.

 More than half of the hard-tech companies analysed in the report remained at a demo stage rather than reaching full commercial readiness.

And the problem just becomes more pressing when those founders attempt to raise the next rounds for their startups. In the report, Net Zero Insights found a significant deterioration in the progression of companies through the funding pipeline compared to the 2021–2022 boom years.

The pattern has continued into 2026. According to the data in the State of Climate Tech 2025, in Q1 alone, the number of seed climate-tech deals fell from 229 to 163 year on year, while series A deals declined from 121 to 114.

In other words, nowadays investors are asking for more proof that the business is viable earlier on in the development of the startup rather than splurging on an MVP.

And sustainability startups often face additional difficulties that software startups bypass more quickly. Just to name a few, hardware requires manufacturing, industrial customers can have long procurement cycles, regulatory approval may take years. At the same time, factories and infrastructure need large amounts of capital and new supply chains may need to be created before a technology can reach scale.

So, nowadays, for a VC, just the idea that a technology could help solve climate change is not an investment thesis in itself anymore.

Besides the motivation behind the startup, other questions are on the investors’ mind: who will buy it, how quickly, at what margin, how much capital does the startup need before it scales up, what happens if regulation changes?

And maybe the most important one: can these founders and startups generate high returns for us and the LPs?

Europe has a sustainability advantage. And a scaleup problem

Europe occupies an unusual position in this market. According to Dealroom's Climate Tech data, climate tech represented approximately 15.6% of European VC investment in 2026, compared with a global average of 3.8% and just 2.2% in the US.

But where that money is going matters just as much. Dealroom calculates that, up until Q2 2026, 61% of climate-tech venture capital went into scale-up rounds of $100 million or more, while only 10% went to startup rounds below $15 million.

That concentration helps explain why headline investment figures can remain relatively strong even while younger companies experience a much more difficult fundraising environment.

Europe also has another problem and that is transforming its technological capabilities into globally scaled businesses.

An European Investment Fund study from 2025 on the topic of European cleantech is showing that Europe's problem is not invention, but deployment at scale. The research found that 74% of the cleantech companies surveyed reported high technology-readiness levels.

VC financing appears to help. According to the EIF analysis, venture-backed cleantech firms grow faster than comparable non-VC-backed companies.

 But financing gaps remain as companies move toward growth, market entry and infrastructure deployment.

So Europe is living in a paradox. We’re very good at generating sustainability innovation, but not equally good at financing the companies that commercialise it globally.

That being said, the increasingly important question for European VCs is not “how do we create more climate startups”, because we’re doing that part. It’s “how do we finance the best ones all the way to scale”.

In 2026, sustainability is becoming less of a label attached to an investment strategy and more of a lens through which investors can identify where technological, industrial and economic transitions are creating new markets.

The winners will not necessarily be the startups that talk most convincingly about impact. Or not anymore. They will be the ones that have the ability to also turn impact into a product customers are willing to pay for and into a business investors are willing to keep financing.