ESG in VC: A Deep Dive
In a special Deep Dive, BVCA Head of Sustainability, Harriet Assem, and Policy Executive, Neave Lloyd, sat down with Ben Robson (Molten Ventures) and Victoria Ferguson (MMC Ventures) from our Responsible Investment Advisory Group to discuss ESG in venture capital.
Why is ESG important to VC?
Ben Robson (BR) — “Within VC, there are a range of motives. The main drivers being the genuine desire to build better, sustainable, and more valuable businesses, as well as the mounting pressure from LPs around ESG-related investment selection and ongoing reporting, so it is a bit of is a carrot and stick approach. The carrot is the value add; do this well and you’re likely to build a successful business.”
Victoria Ferguson (VF) — “We think of ESG as simply being the best business practices having high customer satisfaction should deliver good results, retaining and promoting people should lead to better business outcomes and less time and money wasted trying to find people or hang on to staff, cyber security and data protection principles are a basic business necessity. When done consistently, ESG should yield good financial results.”
What are the barriers to VCs onboarding ESG? What have been the main stumbling blocks?
VF — “In portfolio companies, people are very keen to do something, but the universe of ESG is so enormous that people don’t know where to start. Unless you can deliver practical assistance or decide with them a mission- critical action for their business, people get lost. Now when we make an investment, I chat with whoever is appropriate at the company and we discuss what ESG might mean to them and identify what is critically important to the business right now, but also to help them take that first step on their ESG journey.”
BR — “Resourcing is a significant issue both at a VC and portfolio company level. Having the capacity on the VC side to work out a coherent strategy that can be delivered over time and can respond to changing LP expectations, is not easy as very few VCs currently have dedicated internal ESG resource. Similarly, it can be challenging to persuade founders and early-stage businesses that ESG should be an area of focus amongst their many other competing priorities, some of which might be mission critical. Another issue is surrounding reporting frameworks, as most VC investments will slip below the materiality thresholds, so we find we are often asked for things by LPs that we are unable deliver due to our position in the ecosystem.”
What are the opportunities/benefits you have noticed from integrating ESG into your portfolio?
VF — “It is unlocking the next step. You start talking with the companies about their workforce, but the conversation spills onto other topics. When you begin to explore and unlock, you find that the start-up companies are doing more than they think. Founders are willing and wanting to do the best they can. Many enterprises already have some form of ESG DD in their procurement process or ESG targets for themselves. Where our companies can assist those enterprises with their own ESG targets that should make them more attractive. For instance, a software company selling a product which is better than the existing options and also produces lower emissions because its infrastructure and operating capacity is better should help customers on both fronts. Where they can’t do that, at least having good and demonstrable governance and behaviours, like relevant ISOs or policies on key ESG issues will make procurement processes easier.”
BR — “Driving engagement around ESG has been a great benefit to us. Starting with an ESG question can lead to interesting places and allows us to build a deeper relationship with our portfolio whilst also adding value. Our activities in this area have generally been looked at very positively by our existing portfolio and the wider market. It has provided good PR for us and our portfolio companies, and we will be doing more to push their stories out… Governance is one of the most obvious areas that VCs can have early impact and add value, especially when sat on boards. By helping to put in place suitable structures that some first-time founders may not have adopted, we can quite quickly help to enhance the board environment into something much more robust and dynamic.”
Can you suggest any useful tools or initiatives you have you used to help onboard ESG into your organisation?
BR — “We have used ESG_VC and have engaged with Venture ESG… This will be different for different firms. The newly released UN PRI Due Diligence Questionnaires will also be helpful.”
VF — “We’re all very keen to establish industry benchmarks and industry standardisation for us and portfolio companies. Likewise, we started using the ESG_VC survey and feeding the results to the top-level survey coordinated by the BVCA, so we will get benchmarks shortly.”
What do you think the future looks like for VCs and ESG?
VF — “ ESG will be ever more important. Hopefully more standardisation of some things, such as questionnaires, both for us and for our portfolios, and the LPs down to us. Perversely, I think in some ways “ESG” as a phrase may also slightly disappear because it becomes business as usual and what will be required to run a decent business…Hopefully there will be a focus on the areas which are high impact in the VC sector — for instance responsible product design which is being thoughtful early on with a product to prevent unintended consequences later at scale. This is still quite a new idea but one which is material to many venture-backed companies.”
BR — “I think there’s still a way to go for VC, particularly as we see the trickle-down effect from later stage investors. I hope this evolves to express itself in a more thoughtful way so that we get asked the right questions that are appropriate to our part of the ecosystem… I expect we will begin to see consultants who are better equipped to serve a VC audience, rather than lumping venture together with later-stage PE, to help us navigate the future in this space… We will start to see the stories that emerge from the seeds sown over the last three to five years; some of those will be success stories which we can learn from you, but we will also see the inverse, where mistakes are made and things blow up, and we should learn from those too, with governance often being critical to this.”
What advice would you give to VC firms starting on their ESG journey?
BR — “I would beg, borrow, and steal as much as you can. There is a lot within our community already. Look at the organisations at the forefront of this space. Everyone’s pulling in the same direction, and there is a competitive advantage to be had, but there is a willingness to share learnings and different approaches because fundamentally we are all engaging with the pillars of ESG and trying to make the world a better place. I would say that you need an internal ESG champion at a suitably senior level who has access to external support to help drive the agenda from the top.”
VF — “I would say not to worry, you are likely doing quite a lot of ESG already. If you look at what ESG covers, you almost certainly have a data protection policy in place, are probably thoughtful in decreasing waste, your data security will be up to date. For portfolio companies I suggest looking at ESG_VC and Venture ESG, and Impact VC as your secondary reading. These groups run talks, training, they have information and playbooks, all of which effectively say, “don’t panic” and offer some simple, practical ways to get started. Pick one thing that appeals to you and your fund, try it, and take it one step at a time. It is not as scary as you think.”
This article was originally published on 23 March 2023 on the BVCA website.
