How VCs are tackling ESG internally: 3 Years On...
Authors: Siyu Chen and Johannes Lenhard
Since the beginning of VentureESG in 2021, we have always believed that ‘cleaning up your own house’ was key when it comes to ESG integration in venture capital. We call this part - applying ESG principles to you as a VC fund - internal fund management and surveyed our small but growing community for the first time three years ago.
Today, after 100 VC funds answered our short survey, it is heartening to witness the progress made by firms in adopting ESG policies and initiatives. As we delve deeper into the findings, we uncover both areas of strength - policies and carbon accounting are now done by the majority of firms - and opportunities for improvement.
We received responses across the spectrum from early to late-stage investors. Most respondents are focused geographically on investing in Europe and the UK. The US is also well-represented with 40% of respondents investing in this region.
Figure 1: What is your total AUM in GBP? (Source: VentureESG survey)
What is going well?
Company Policies: An overwhelming majority of firms continued to demonstrate their commitments by implementing ESG policies (94%). Additionally, a significant proportion of companies (89%) have established a code of conduct. 81% of firms have established parental leave policies, and 89% have established whistleblowing mechanisms.
Exclusion List: A significant majority (94%) utilize exclusion lists to guide their investment decisions. Although only 56% have actually enforced exclusions in investment decisions.
Influence of LPs: LPs are playing a role in shaping investment strategies by incorporating responsible investing principles into their mandates. Over half of firms (56%) implement exclusion lists and 29% implement ESG policies to comply with the requirements set by their LPs.
Carbon Tracking: The latest results show that carbon footprint tracking has increased, with 72% of firms now monitoring their emissions. Larger firms with an AUM exceeding £1B are leading the way, with 81% tracking their carbon footprint. Only 38% of smaller firms with an AUM under £250M are currently measuring their carbon emissions.
Where is room for improvement?
Doing D-E-I all the way: A majority of firms (72%) implement DEI policies or establish dedicated working groups at the fund level. 74% of firms are actively tracking diversity during their hiring process. However, the integration of DEI considerations into investment decision-making remains less prevalent. Only 33% of firms have set specific diversity targets for their deal flow process. Additionally, the lack of DEI training within firms (55%) highlights a need for greater emphasis on educating employees.
Carbon Offsetting: While more and more companies are tracking their carbon emissions, approximately half still need to develop effective strategies to reduce or offset their carbon footprint. Currently, only 52% of companies have initiatives to reduce carbon emissions, and 53% offset at least some of their emissions. Additionally, only 13% of companies have implemented an internal carbon pricing mechanism.
Inadequate ESG Training: Less than half (46%) of respondents have conducted an ESG-focused workshop at the fund level. Among the firms that do offer ESG training, popular topics include ESG integration in investment decisions, regulatory compliance, climate & environmental impact, and ESG as a value driver.
Figure 2: Questions on carbon footprint (Source: VentureESG survey)
Some ideas to go the next step:
Enhance your VC team: as our friends at Allraise, DiversityVC and Unlock VC are arguing continuously: doing DEI well (all three parts of it) makes sense for a VC fund. Diversifying your deal flow leads to diversified investments (simple portfolio theory in finance) and bringing people with (intersectionally - beyond ‘skin deep’) different backgrounds into VC funds both bolsters both dealflow and decision making. The key is to go beyond ‘diversifying your website’ and bringing people into positions of decision making power.
Go beyond measuring your footprint: It is great news that the majority of VCs have started to measure their (and often their portfolio’s) carbon footprint. The world will not get healthier if we don't do anything about it, though. Implement effective strategies to reduce carbon footprints (see some high level guidance from us here or consult the VCA). And carbon is just the first step where we need to think beyond measuring and start acting!
Don’t save on training and workshops: Obviously, we are biased - but VC training on all things responsible investing helps tremendously (see our own version here). But you can also start with a simple internal workshop; ask the question: what does ESG mean for us? Use our ESG policy template to overhaul what you have (or start from scratch). We also have a (new) ESG Game you can use to get your whole team thinking about responsible investing - in a gamefied way. Reach out if you need help!