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ESG refers to the environmental, social, and governance factors used to evaluate a company’s worth. These metrics were historically used alongside financial analysis with larger, publicly traded companies since they have significantly more data and bandwidth. However, as more LPs are requesting ESG in VC reports, funds are seeing the value in implementing best practices with their portfolio companies from the ground up. Recently we’ve seen VC funds incorporate an ESG framework into due diligence as well as in post-investment support.
While these engagement plans should be tailored to each portfolio company, some factors are increasingly important for both LPs, VCs, and consumers to see in emerging companies.
With that being said, there are several ESG frameworks available including both third-party frameworks and guidance frameworks. The Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TFCD), and The Sustainability Accounting Standards Board (SASB) are a few commonly implemented. In other cases, individual VC funds will set their benchmarks and build a framework that is fund specific.
With the growing pressure of ESG reporting brings along the risk of misreporting and fraud. Especially with early-stage companies, ESG reporting can not only be time-consuming and expensive but may fall onto a team member with minimal experience. Not to mention, the fact that VC funds are still trying to establish a standardized system of incorporating ESG policies across the industry. The focus now is to build and adopt practices that can be systemically in place and ensure transparency when it comes to reporting to different audience members (e.g. employees, consumers, LPs) - until an industry-wide standard is set.
Moody Analytics, a financial intelligence firm, said that “Companies with a weak record in managing environmental, social and governance (ESG) risks are more likely to be hit with scandals or controversies linked to their business conduct, which, in turn, leads to stock market losses.”
"ESG performance matters strongly for firms' value, with ESG events leading to large, negative, abnormal returns. This finding remains robust for firms of all sizes, and holds particularly for firms in the energy and natural resources, consumer products, finance, and construction sectors.”
There are several companies building products and services specifically around ESG reporting, check them out:
For startups, the major risk with ESG reporting is that it may pose a distraction. As mentioned, reporting can take up both time and money, which are limited resources for companies just beginning. As a VC fund, there are ways to help:
At Kindred, we invest in mission-driven pre-seed and seed founders. We invest early and work with our community of founders and advisers to help founders get further, and faster from the very beginning.
Mundi Ventures is a global venture capital firm that invests in early and growth-stage technology ventures. We focus on insurtech/insurance-adjacent technology, fintech, enterprise tech, and new ventures built by (and serving) the global Spanish-speaking diaspora.
Balderton is Europe’s leading venture capital investor, focused exclusively on European-founded technology companies. We support companies from Seed to Exit with one of the largest and most experienced venture teams in Europe.
500 Global is a venture capital firm that invests early in founders building fast-growing technology companies. We focus on markets where technology, innovation, and capital can unlock long-term value and drive economic growth.
Index Ventures is a venture capital firm based in London, San Francisco, and Geneva, helping entrepreneurs turn bold ideas into transformative international businesses. We cover every investment stage, from the earliest seed through to explosive growth.
SFC Capital is a leading early-stage investment firm providing capital and support to British startups. SFC has invested in over 300 disruptive businesses across different sectors including consumer goods, fintech, and hardware and robotics.
