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European VC funds are building community around ESG initiatives

European VC funds are building community around ESG initiatives

Johannes Lenhard
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Dr. Johannes Lenhard is Centre Coordinator on the Max Planck Cambridge Centre for Ethics, Economy and Social Change.

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In common, ESG stands for “environment-social-governance” and contains a set of rules that touches on points from range and board buildings to labor relations, provide chain, knowledge ethics, environmental impression and authorized necessities.

Unlike impression investing, which is squarely centered on the (exterior) results of a enterprise, ESG issues principally inside practices and processes that would help each a fund and its portfolio firms to make them extra sustainable.

While different asset lessons from buyout funds to public equities have seen an enormous push towards ESG scores and initiatives, enterprise capital has been lagging behind. What has modified lately?

Over the final a number of months, fairly a couple of principally European funds have stepped ahead with initiatives to deal with ESG. Balderton, as an illustration, introduced its Sustainable Future Goals with a bang on the startup occasion Slush in early December 2020. Their efforts are centered each internally on the fund and externally on funding selections and portfolio help. I requested Colin Hanna, one of many leaders of the event internally and a principal on the agency, how this initiative happened:

While our efforts on this entrance preceded COVID, this yr we noticed that an actual impression was doable on climate-change-related targets […] we’ve turn into accustomed to doing digital board conferences, chopping down on journey; the problem will probably be to proceed these efforts going ahead and rolling them out to our portfolio firms even because the world returns to regular. Having a framework helps us try this.

This rationale additionally lately introduced a gaggle of about 25 VCs to type a group round ESG for VC for the primary time. The initiative is led by GMG Ventures and Houghton Street Venture, a brand new agency affiliated with the London School of Economics that met for the primary time in December with representatives from LocalGlobe and Latitude, Kindred Capital, Balderton, the Westly Group and Blisce. The group’s said aim is to share experience from the underside up and fill the hole the place current frameworks don’t fairly work.

This is direly wanted proper now, says Sophia Bendz, companion at Berlin-based agency Cherry Ventures:

Beginning with matters round DEI and local weather points, we’re actually eager on upping our ESG recreation. ESG includes such vital points and we’ve to dedicate the time to study extra to finally do extra on these fronts now. Yet, I additionally imagine that true impression doesn’t outcome from data silos. It’s nice that we’re studying from and supporting one another to have extra societal impacts in our day-to-day roles. I’m actually captivated with this.

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What are the primary drivers for this push? 

I requested Susan Winterberg, an ESG marketing consultant who lately completed a two-year fellowship at Harvard producing a groundbreaking report with regards to ESG for VCs particularly in regards to the “why now”:

There are broadly two units of explanation why traders and firm leaders undertake ESG. The first set pertains to elevated consciousness of how their actions impression exterior occasions taking place on this planet comparable to local weather change and social justice. The second pertains to elevated consciousness of how adopting ESG can advance particular enterprise targets they’ve comparable to rising gross sales, attracting high expertise, and decreasing working dangers.”

Obviously, 2020 was a watershed yr to drive change primarily based on each of those units of rationales. Social justice points — from Black Lives Matter and racial fairness, COVID-19 and healthcare to freedom of expression and democracy — have been prevalent throughout the spectrum. Startup leaders and traders have been influenced by these societal actions as a lot as by new analysis serving to them perceive how ESG may help advance enterprise targets in enterprise capital. The two reviews revealed by CDC/FMO and the Belfer Center are solely two examples of this proof.

What do VCs say, how has change occurred for them? Hana informed me that at Balderton a mixture of things talked about by Winterberg above, labored collectively to begin the method:

It was each a push and a pull inside Balderton. Our traders and the leaders on the high of our agency have been proponents of this variation however the efforts have been additionally pushed by the youthful era throughout the agency; they felt it was vital. Overall, we have been silent about local weather change and sustainability for a very long time, which was probably not an possibility anymore.

For Martin Weber, founding companion at HV Capital that’s working with the St. Gallen-based ESG initiative ROSE, the dialog actually began with Leaders for Climate Action. Weber admits: “We didn’t take into consideration ESG sufficient […] past our personal horizon actually […] generally you actually need a kick within the butt, that’s what Leaders for Climate Action did for us; a small change began our consciousness and dedication to ESG.”

ESG issues principally inside practices and processes that would help each a fund and its portfolio firms to make them extra sustainable.

For HV Capital but in addition some funds within the U.S. such because the Westly Group a particular ESG vector began the journey — that might be the E as in atmosphere but in addition DEI as a part of the S and G of ESG.

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I additionally spoke to a number of LPs lately amongst others moderating a panel on the U.Ok.-based Allocate convention; the ambiance appears to be shifting extra drastically towards “doing enterprise higher” among the many asset house owners, too. Particularly household workplaces managing their very own cash are outspoken already, however large asset house owners have gotten conscious (and lively) as effectively.

Michael Cappucci, managing director of Compliance and Sustainable Investing on the Harvard Management Company — Harvard’s endowment — thinks that “we’re long gone the time to ‘wait and see’ if ESG integration is a worthwhile endeavor for traders” (see the UNPRI report for extra context).

The motion right here appears to be coming even stronger from Europe once more, nonetheless. As a outcome, the identical group round Houghton Street Ventures and GMG Ventures pushing ESG for VCs can also be within the course of to get extra LPs on board with a particular workshop in February, as I realized. The tempo on the LP entrance is rising as we communicate.

What remains to be lacking?

While numerous progress has been made on the extent of particular person funds, particular person LPs and in child steps towards a extra common industry-wide push, there are nonetheless some core parts that aren’t in place. I imagine the 5 key gaps concern a transparent differentiation of ESG from impression, discovering the precise language, establishing a standard framework, agreeing on metrics and actual LP dedication.

  1. Know what ESG is: Many traders (and LPs) I communicate with nonetheless don’t actually know the distinction between impression and ESG. In quite simple phrases, ESG rules are in regards to the (inside) processes (of a fund, portfolio firm, and many others.) whereas impression investing is about outcomes (generally operationalized by means of the Sustainable Development Goals (SDGs)). While impression will seemingly stay a distinct segment asset class for the foreseeable future, ESG rules ought to inform the practices of all traders in come what may.
  2. Find the precise language: On a associated word, discovering the precise language to speak about what ESG (versus impression) is, may assist us to distinguish higher. As Sarah Drinkwater of Omidyar Network made very clear in her put up from September final yr, we merely don’t have an excellent phrase to explain (and personal) what ESG expresses on this planet of enterprise capital and know-how — principled, progressive, equitable? Possibly, “setting an ordinary” may help with this difficulty, too.
  3. Somebody, set an ordinary: ESG (and impression) frameworks developed and deployed slowly within the enterprise {industry} are nonetheless far and wide; they’re influenced by all types of different frameworks (from different asset lessons and associated actions, comparable to impression) and principally made up by particular person funds themselves. There is actually a threat of inexperienced washing if it stays that approach; (self-proclaimed and reported) advertising and marketing is one factor but when we actually wish to change the {industry}, an authoritative physique should step ahead. What the most important European anchor investor — the European Investment Fund — has completed on that entrance thus far with a really high-level questionnaire isn’t sufficient. How about, as an illustration, the UNPRI descends from the aircraft of excessive stage all the way down to particular person {industry} rules?
  4. What isn’t measured: One a part of what may actually result in an {industry} normal is a set of extensively accepted and benchmarkable metrics; what are crucial measurements throughout early-stage and late-stage VC portfolio firms? The group of funds in London has for good cause introduced that this significantly query will probably be one of many focus factors they’re engaged on subsequent. But how will this once more be adopted and unfold industrywide? Another set of gamers may become involved in that once more: LPs. If they make their GPs report on ESG on an annual foundation, this may certainly shift the {industry} as a complete and make the subsequent era of startups extra equitable, accountable and stakeholder-focused.
  5. LPs really want to chunk: So far, we’re nonetheless lacking actual LP commitments in terms of ESG. On the one hand, many GPs I spoke with which have lately been fundraising reported that LPs basically nonetheless don’t ask about ESG. In reality, some LPs significantly within the U.S. imagine ESG could be a distraction from producing returns. In any case, ESG nonetheless has not turn into vital however is merely regarded a nice-to-do. The ESG questionnaires that do exist — just like the EIF framework — are thus far actually excessive stage and unspecific. When large anchor LPs just like the EIF and BBB in Europe or large foundations and college endowments ask about it of their due diligence conferences, GPs should comply — all of them. Their affect as agenda setters may within the medium time period be the most important driving issue towards making ESG for VC the traditional approach of doing enterprise. Given that there’s state-money, all of our cash, concerned right here, it appears an absolute no-brainer to take that step.
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