In general, ESG stands for “environmental-social-governance” and includes a set of principles that address issues ranging from diversity and board structures to labor relations, supply chains, data ethics, environmental impact, and legal requirements. Touches
Unlike the impact of investment, which focuses on the external (external) effects of business, ESG mostly concerns internal practices and processes that can support both a fund and its portfolio companies to make them more sustainable.
Over the past several months, most European funds have stepped in with initiatives to tackle ESG. For example, Balderton announced Sustainable future goals with a bang On startup event slush In early December 2020. His efforts focus internally on funds and externally on investment decisions and portfolio support. I asked Colin Hanna, one of the development leaders and a principal at the firm, how the initiative went:
While our efforts on this front preceded COVID, this year we saw that a real impact on climate-change-change targets was possible […] We have grown accustomed to having virtual board meetings, cutting travel; This challenge will be to continue those efforts which will bring our portfolio companies to normalcy as well as the world. Having a framework helps us to do this.
This argument recently brought together a group of around 25 VCs to create a community around ESG for the first time VC. The initiative is spearheaded by GMG Ventures and Houghton Street Venture, a new London School of Economics firm that met representatives for the first time in December. Localglobe And latitude, Kind of capital, Balderton, The Westley Group And Bled. Where is the groupoal is to share expertise from below and fill the gap where existing frameworks do not quite work.
Sophia Bendz, partner at the Berlin-based firm, says it is very much needed Cherry Ventures:
Beginning with topics around DEI and climate issues, we are really looking forward to crafting our ESG game. ESG includes such important issues and we must now devote time to learning more to do more on these fronts. Nevertheless, I also believe that true impact does not result from knowledge silos. It is great that we are learning from and supporting each other to make a greater social impact in our day to day roles. I am really passionate about this.
What are the main drivers for this push?
I asked Susan Winterberg, an ESG consultant, who recently prepared a two-year fellowship at Harvard Groundbreaking report Specifically on the subject of ESG for VC “Now Why”:
Broadly, investors and company leaders have set two reasons for adopting ESG. The first set relates to the increasing awareness of how their activities affect external events in the world such as climate change and social justice. The second relates to increasing awareness of how the adoption of ESG can advance specific business goals such as increasing sales, attracting top talent and reducing operational risk. “
Clearly, 2020 was a watershed year for change based on both these sets of rationalizations. Issues of social justice – from Black Lives Matter and racial equity, COVID-19 and healthcare to freedom of expression and democracy – were prevalent across the spectrum. Startup leaders and investors were influenced by these social movements as much as new research helped them to understand how ESGs could advance business objectives in venture capital. Two reports published by CDC / FMO And this Belfer Center There are only two examples of this evidence.
What has the Chancellor said, how has it changed for him? Hana told me that in combination with the factors stated by Winterberg from above, worked together to start the process:
It was a push and a push within Baldton. Our investors and top leaders in our firm were proponents of this change, but this effort was also driven by the younger generation; They felt it was important. Overall, we were silent about climate change and stability for a long time, which was really no longer an option.
For Martin Weber, founding partner of HV Capital, who is working with the St.Gallen-based ESG initiative RoseThe conversation really started with Leader for Climate Action. Weber admits: “We didn’t think enough about ESG […] Really beyond our own horizon […] Sometimes you really need a kick in the butt, which is why Leaders for Climate Action did it for us; A small change marked the beginning of our awareness and commitment to ESG. “
ESG mostly concerns internal practices and processes that can support both the fund and its portfolio companies to be more sustainable.
For HV Capital but some funds in the US such as Westley Group A specific ESG vector started the journey – which could be E as environment but also DEI as part of ES and S of G.
I recently spoke to several LPs, among others operating a panel based in the UK Allocate conference; It seems that the environment is changing a lot in the direction of “doing business better” among asset owners. Family offices, especially those managing their own funds, are already outspoken, but large property owners are also becoming aware (and active).
Michael Kappucci, managing director of Compliance and Sustainable Investigation at Harvard Management Company – Harvard’s endowment – thinks “to wait and see if we are meaningful to ESG integration investors”. UNPRI Report for more reference).
However, this movement seems to be strengthening again from Europe. As a result, the same group around Houghton Street Ventures and GMG Ventures advancing ESG for VCs are in the process of getting more LPs on board with a special workshop in February, as I learned. As we speak the momentum is increasing on the LP front.
What is still missing?
While much progress has been made at the level of personal wealth, individual LP and a more general industry-wide push in baby steps, there are still some core elements that are not in place. I believe the apparent difference of ESG from the impact of the five major gaps is a matter of concern, finding the right language, establishing a common framework, metrics and agreeing on the actual LP commitment.
- Know what is ESG: Many investors (and LPs) I still don’t really know the difference between Impact and ESG. In very simple terms, ESG principles are about (internal) processes (a fund, portfolio company, etc.), while investment is about investment outcomes (sometimes driven through Sustainable Development Goals (SDGs) ). Although the impact will likely remain a niche asset class for the future, ESG principles should inform practices All Investor in one way or another.
- Find the correct language: On related note, find the right one Language: Hindi To talk about ESG (vs. effect), can help us differentiate better. As was evident in Omidyar Network’s entire drinkwater His post from september Last year, we don’t have a good word to describe (and ourselves) what the ESG expresses in the world of venture capital and technology – majestic, progressive, equitable? Presumably, “setting a standard” may also help with this issue.
- Set a standard: ESG (and Impact) frameworks are developed and gradually deployed in the enterprise industry, still everywhere; They are influenced by all types of other structures (from other asset classes and related activities, such as influence) and are mostly created by individual funds themselves. If it stays this way there is definitely a danger of green washing; (Self-proclaimed and reported) Marketing is one thing but if we really want to change the industry, then an official institution has to move forward. What the European Investment Fund’s largest European anchor investor has done on this front is not yet accompanied by a very high-level questionnaire. For example, how does UNPRI get down from a higher level of aircraft for individual industry principles?
- What is not measured: Part of what can actually happen for an industry standard is a set of widely accepted and benchmarkable metrics; What are the most important measurements in early-stage and late-stage VC portfolio companies? The group of funds in London have announced for good reason that this particular question will be one of the points they are working on further. But how will it be adopted again and the industry spread? Another set of players may rejoin that: LP. If they create their GP reports on ESG on an annual basis, it will certainly move the industry as a whole and make the next generation of startups more equitable, responsible and stakeholder-centric.
- The LP really needs to be cut: So far, we are still missing the actual LP commitments when it comes to ESG. On the one hand, many GPs with whom I have spoken recently have reported that LPs in general still do not ask about ESG. In fact, some LPs, especially in the US, believe that generating ESG returns can be a distraction. In any case, ESG is still not a must, but is only considered a good doer. ESG questionnaires that exist – such as the EIF framework – have so far been really high level and unspecified. When big anchor LPs like EIF and BBB in Europe or big foundations and university endowments ask about it in their due diligence meetings, GPs have to follow all of this. Their influence as agenda setters may be the biggest driving factor towards making ESG a normal way of doing business for VC in the medium term. Considering that the state is money, all our money is included here, it takes a complete no-brainer to take this step.