Internal Fund Management Survey results: promising start but lots to do cleaning up our own houses
Authors: Sarah Kiden, Johannes Lenhard and Ginny Watsham
A couple of months ago, we conducted a small pilot of our ‘Internal Fund Management Survey’. The goal: to set a baseline of where Venture Capital (VC) funds themselves are when it comes to Environmental, Social and Governance (ESG) integration in their own operations and processes. We strongly believe that funds need to ‘clean up their own house’ before imposing conditions and restrictions on portfolio companies; the results are promising but also reveal many gaps we need to fill.
The specific survey questions were based on VentureESG’s recommendations for funds of ‘internal fund metrics’, informed by members of the VentureESG community and industry experts. We received a very encouraging 40 responses for the survey, and are grateful to the respondents for taking the time.
We received responses across the spectrum from early to late-stage investors and across sector-foci, from cleantech, SaaS to sustainability and deep tech. Most respondents are focused geographically on investing in Europe and the UK.
What is already going well?
Company Policies: The majority of the firms have a variety of policies in place, including ESG policies (93%), code of conduct (88%) and family leave policies (75%).
Exclusion list: 90% of the firms highlighted that they adhere to exclusion lists, as proposed by the United Nations Global Compact (UNGC), International Finance Corporation (IFC) or the European Investment Fund (EIF). They mostly include sectors like gambling, defence, weapons, pornography, tobacco, illegal products and services.
Commitments: The majority of funds are signatories/members of VentureESG, United Nations Principles for Responsible Investment (UNPRI), Diversity.VC or even a certified B-Corp.
Diversity, Equity and Inclusion (DEI) in deal flow pipeline: Half of the respondents collect statistics about the diversity of their deal flow pipeline, but 85% do not set targets. For those who do set targets, a common goal is to have at least 30% diversity (gender, ethnicity) at the top of the funnel/screening stage.
Assigned responsibility: Most firms (85%) have a designated role to oversee ESG strategy and integration. However, the functional focus and seniority level of such a role ranges from very junior (associate) to partner-level.
Where are the gaps?
Lack of training: 60% of the firms do not offer training to employees addressing topics such as inclusive leadership, systemic racism, bias, harassment or ESG integration generally. This is in stark contrast to the demand for training expressed in our community (almost 80% of VentureESG members are interested in ESG training).
Little transparency of DEI progress: Most funds struggle to measure percentages of underrepresented founders that they funded. One reason mentioned are issues with data collection (i.e. how to ‘count’ people of colour, first generation to go to university, disabilities, etc). This information is either unknown due to restrictions of collecting this data (see article on collecting DEI data under GDPR and France Data Protection Overview) or has to rely on voluntary submission. In cases where this data is collected, smaller funds were more likely to fund more underrepresented founders.
Inadequate focus on environmental impact: Only about half of the firms track their own annual carbon footprint, and the majority (92.5%) do not set a target for their firm’s footprint. This has a rollover effect of VCs not encouraging portfolio companies to track or report their carbon footprint.
Room for improvement with reporting: There is little reporting on carbon footprint on portfolio company level, with a small number reporting annually (2.5%), some stating that it is not applicable (30%) (a common misbelief especially among software startups). Additionally, about half of the companies (52.5%) report annually on ESG issues and only a small number (10%) do not report at all. However, some Limited Partners (LPs) (52%) ask for ESG reporting and others (65%) request portfolio companies to report, creating pressure from the top down.
Some suggestions to improve and move forward
Insights like the above help shape what we want to focus on at VentureESG when it comes to the development of resources and tools. Some of the gaps are already pointing in directions that are clear priorities.
Do your carbon accounting: We have put together a list of possible tools (some of them with discounts for VentureESG members). Find out more about the VentureESG membership and community here. We propose you do the accounting first before imposing it on your portfolio. It will help you understand the problems they might face and be better prepared to support them.
Sign up for training: After the initial pilot of the ‘Leading in ESG’ training with KfW Capital and the BMW Foundation Herbert Quandt in October 2022, we are in the process of planning the rollout of the training. Do get in touch if you want to participate in one of the next cohorts.
Finally get your DEI agenda sorted: We are aware that the DEI data collection is not trivial; with our own project (together with the Nasdaq Entrepreneurial Center, to begin in January 2023), we will soon provide guidance of what you should and can ask where. However, have a look at what the Institutional Limited Partners Association (ILPA) have already put together when it comes to DEI integration — they provide a variety of widely used tools (including a diversity metrics template).
Next steps for the survey
Based on the insights from the pilot, we are currently in conversation with several potential partners to roll out the survey globally within the next 6–12 months. We are looking forward to pushing this agenda forward together with you and will appreciate all your continued engagement, especially when it comes to responding to the survey. Thank you again!