Why venture capital firms need to integrate ESG
Environmental, social and governance investments, also called ESG, have swept the entire finance world and grown exponentially over the past decade. Studies from as early as 2010 show that companies with high ESG performance outperform their competitors financially, and ESG-focused exchange-traded funds have been among the world’s hottest investment areas for more than two years now.
While it is clear that ESG is no longer a “nice to have” exercise, but intelligent business, Venture Capital firms (VCs) are still hesitant in the adaptation of ESG practices. As more investors and Limited Partners (LPs) are increasing their expectations on VC funds when it comes to ESG integration – there’s a great opportunity for venture capital firms to unlock the potential of ESG and stand out from their peers.
Why does it matter?
The entire financial sector has become much more socially and environmentally conscious over the past few years. Combined with new legislation such as the EU Taxonomy, companies have no other choice but to adapt to the new demands.
However, while the movement of responsible investment matures and grows stronger, VCs have been significantly lacking behind in the transition. A recent study from Amnesty found that almost none of the world’s largest VC firms have adequate human rights due diligence policies in place. Similarly, Stanford Social Innovation Review found in 2021 that only five of the top 50 largest venture capital funds mentioned ESG or a sustainability commitment in their communications.
This isn't a coincidence. Historically, ESG demands have mainly been applied to large, traded companies, creating a big gap for SMEs to overcome as they scale up in the future. Preparing companies for upcoming ESG demands and getting them ready from an early stage is logical, yet, investors are not giving this enough focus.
Integrate ESG to drive more value
Venture capitalists working with companies at an early stage have a rare opportunity to help them get ESG ready and maximize long-term financial value already from the start. By considering a more mature approach to guide companies into integrating ESG factors already in their formative years will prepare them to meet the ESG expectations that later-stage investors will be looking for.
After all, tomorrow’s largest companies are today’s smartest start-ups – so walking that extra mile to help put star-ups on the right ESG path in their early days is worth the effort.
How venture capital firms can start integrating ESG
So, what can you do to start to integrate ESG for an enhanced risk management process and find opportunities for value creation? While there is no one-size-fits-all ESG approach – as the focus differs for each company depending on their industry, activity, and region – some considerations are holistically applicable to all VCs:
Make ESG an essential component of your risk management
By implementing a systemized ESG Due Diligence process will help you mitigate risks and seize opportunities. Additionally, structuring it according to leading frameworks, such as SFDR and the GHG Protocol, will help you to easily communicate your progress with stakeholders and in your sustainability reporting.
Use ESG for value creation
Guide your portfolio companies to integrate ESG into their business to drive more value and future success, such as becoming more attractive for later-stage investors like private equity firms and ensuring a lucrative exit.
Monitor your portfolio companies’ ESG performance
A strong ESG management can safeguard a company’s long-term success.
In order to make them aware of potential risks and create impact, integrate material ESG issues throughout your entire investment lifecycle and monitor your portfolio companies’ ESG performance on a regular basis.
Report and communicate with stakeholders
Transparently communicating your findings, progress and goals is key to promoting your work publicly. Create your own, free account in Worldfavor Transparency to easily communicate your ESG efforts with others in a standardized and comparable manner – just like your stakeholders want it!
Boost the ESG performance of your portfolio companies in Worldfavor
We know that causing your portfolio companies a hefty reporting burden is the last thing on your list. That is why our mission is to lower your portfolio companies’ threshold for getting started with their ESG reporting. Worldfavor’s Sustainable Investments solution is developed to meet your companies where they are in their sustainability journey – and scale as their needs grow. Guide your companies in what's to be expected in the future and allow them to answer what they can now, without everything being mandatory to report. Give your companies a competitive advantage and help them get ESG ready before their exit. Sounds interesting? Don’t hesitate to reach out for a free demo on how your organization can benefit from using Worldfavor!
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