are VCs the next ESG influencers?
published 3.16.23
Today’s startups are building the technologies, products and services that will shape our future on this planet, and these companies are leveraging the power of venture capital to grow and scale their operations. VC firms are uniquely positioned to determine which companies receive the necessary funding to grow and impact our world. In this role, private equity investors have the opportunity to guide companies towards ESG practices and principles that not only strengthen the bottom line, but also benefit people and the planet, ensuring more resilient, long-term success.
Whether it’s internal pressure from employees, or external pressure from investors, partners, or peers, many of these startups and companies with young ESG programs are finding themselves at a tipping point. Although some ESG efforts may have started reactively, there is a strong case for investors to take a proactive approach in guiding their founders and portfolio companies toward implementing ESG practices and principles into their organizations.
Companies that apply ESG-driven principles, policies, and procedures achieve valuation multiples as high as 19% greater than median performers (source). With a focus on ESG leadership, VC firms can differentiate themselves in an increasingly competitive landscape and gain the support of LPs that are more frequently calling for funds to incorporate ESG valuations into their investment processes. An ESG-focused approach to investments also helps firms to proactively assess risk and mitigate material issues - instead of reactively dealing with incoming regulations and unforeseen industry shifts.
So why are VC firms so far behind the curve in implementing ESG programming?
Quite often, firms cite the lack of standardization as the greatest barrier to implementation. But this applies a false perception to the fundamentals of ESG leadership.
Refocusing attention, decision-making, and management towards an ESG-driven approach always begins with thoughtful conversations amongst stakeholders. A sustainable approach to ESG implementation requires buy-in and support amongst the key stakeholders that will be responsible for nurturing and growing the organization’s ESG-focused initiatives, policies, and culture. In order to assess organizational interest and readiness to begin a shift, both internal and external stakeholders need to be included in conversations about where the organization stands, and where it wants to go with an ESG-focused approach.
Having an internal ESG policy fully ironed out is not a requirement for initiating conversations with investees about ESG principles. Nor is having a robust and thorough framework for assessing potential investments and current portfolio companies necessary for VC firms to begin implementing ESG principles in their due diligence process. As defined by the CFA, “ESG Investing” stands for the environmental, social and governance criteria that investors are increasingly applying as part of their analysis process to identify material risks and growth opportunities.
Here are some common themes to begin assessing amongst your portfolio companies:
Environmental: Greenhouse gas emissions, waste, water usage, and product packaging and transportation.
Social: Human rights, employee and supplier social impact, DEI (Diversity, Equity, and Inclusion), and community involvement.
Governance: Board and leadership diversity, data privacy, regulatory compliance, and risk assessment.
And here are a few ways to get started:
Have a conversation both internally and with LPs about the ESG principles outlined above and how your firm might incorporate an exploration of them with companies in the due diligence process.
Check in with internal stakeholders to understand what is most material to your organization, and hear their thoughts and concerns about what is most material to your portfolio companies.
Then, sit down with your portfolio companies and let them know you are starting your ESG journey with curiosity, non-judgement, and the intention to learn and grow together. Hear what is most important to them and how you can play a key role in partnering with them on their ESG journey.
Inaction is the greatest risk.
Need a dedicated, experienced team to guide you in your exploration of ESG? We are qb., a small women-owned ESG strategy and communications firm building resilient organizations that put people first. Reach out to us here.
by Rebecca Blake Thompson
Senior Consultant
