ImpactAlpha, Oct. 6 – Red state politicians are fanning the flames of an anti-ESG backlash. Venture capitalists are embracing environmental, social and governance practices to strengthen their portfolios.
More than three-quarters of VCs claim to have fully or partly adopted sustainable principles, according to PitchBook’s “Sustainable Investment Survey.”
Driving the adoption: an influx of capital to climate tech and new disclosure regulations in Europe and the U.S., says Tracy Barba, the founder of ESG4VC, which helps venture firms fast-track their ESG policies and practices. VCs from HarbourVest, Softbank, Bay Bridge Partners and Sapphire Ventures last month turned out to “ESG Meets Silicon Valley VC,” an event co-hosted by ESG4VC.
“Funding technologies without consideration of unintended consequences on society or the environment, backing founders that are accountable to no one, and their poor performance when it comes to diversity needs to change,” says Barba. “The time is now.”
What to measure… and when
A key issue, especially for early-stage investors, remains what ESG metrics to track at each stage of growth. “The language of Venture ESG is still being written,” said James Joaquin of Obvious Ventures, which has introduced an “ESG term sheet.”
Obvious works with portfolio companies to develop appropriate ESG goals and policies. New York-based Energy Impact Partners uses ten-year forecasts of sales to estimate long-term emissions savings in its early-stage companies, which don’t yet have sales data.
Series A-stage companies are typically in hiring mode and should track diversity.
“We see a major opportunity for the investor community to lead the way by setting standards to measure and quantify sustainable impact,” says Lauren Densham of Energize Ventures, which released the firm’s first ESG and impact report in August.
Investment case
The business reasoning behind each ESG pillar is hard to refute: don’t harm the environment, treat your employees well and champion corporate transparency. “Good businesses – and good VCs – are increasingly aware of both the monetary benefits and the intangible optics of paying attention to ESG,” writes Mike Packer of QED Investors, a $4.8 billion fintech venture firm that has embraced the practice.
Packer spotlights sustainability leaders from QED’s portfolio, including Solfácil, a Brazilian fintech company building a solar energy ecosystem, and Resolve and Summer, two B Corp-certified ventures helping consumers control their debt.
