ESG is here to stay in VC
What is the state of ESG in Venture Capital? Hanna Leach, Partner, Houghton Street Venture, and Dr. Johannes Lenhard, Researcher and affiliated lecturer, University of Cambridge.
This year, Berlin welcomed us very warmly to SuperVenture and the weather turned out to be indicative of the spirit at the event when it comes to ESG (Environment, Social, Governance). We contributed to different pieces of the programme, involving both LPs and GPs, as well hosting a dinner, alongside LowerCarbon Capital. The message was clear: In the VC and startup ecosystem, ESG integration is only just starting and is absolutely not slowing down.
In our VC boardroom discussion, the room was packed - much more so than last year. The panel participants from Northzone, 2150, LowerCarbon were surely one draw. The learnings from the room’s conversation were multifaceted but two issues stood out in particular: (generalist) VCs are taking ESG seriously and climate funds see it as an important mitigating factor, too.
Even in a situation where talking about ESG (or impact) is made complicated (e.g. when dealing with certain US state funds which have banned such considerations from influencing investment decision making), VCs consider ESG factors to be a crucial part of their risk mitigation and playing into their fiduciary duty. Despite what is mostly an American political backlash, ESG is not considered to be about morals and ‘doing good’ but simply about building good businesses from the startup-level up.
Misunderstandings that were still very common twelve months ago - confusing impact and ESG, for instance - are very quickly being cleared up, though still prevail. Secondly, VCs are increasingly being asked about their ESG integration by LPs, forming another motivator to double down on it. LPs are demanding both reporting - often starting with DEI, but increasingly extending to comprehensive ESG metrics - and scrutiny of ESG responsibilities and processes. With LP pressure, the European SFDR regulation is being turned into living processes.
LPs are demanding both reporting - often starting with DEI, but increasingly extending to comprehensive ESG metrics - and scrutiny of ESG responsibilities and processes. With LP pressure, the European SFDR regulation is being turned into living processes.
This takes us to the second set of conversations we led at SuperVenture, with asset owners and LPs. While last year European LPs were already starting to be stricter around GP’s ESG requirements, more and more international LPs are now moving in the same direction. From big Fund-of-Funds to UK LPs, our observations point in a clear direction: across Europe, raising VCs funds from institutional LPs going forward will require increasingly strong ESG credentials and practices. While certain (continental) European LPs already required policies, responsibilities, internal expertise and reporting, many others are swiftly moving towards the same standard.
Unification of requirements - especially around reporting, also given the dynamic regulatory landscape between SFDR, SDR, TCFD and CSRD among others - was seen as a major challenge. The American LP landscape is more challenging, especially hindered by Republican politically motivated pushbacks across a variety of states. The strong business case for ESG integration, however, is seen as a major driving factor for convincing more people that more ESG integration - including in VC - is actually good for business.
At VentureESG, we are doing our best to bring our community of 450+ VC funds and 100+ LPs from around the world together to enable this push with the right knowledge, tools and resources. We will be back next year at SuperVenture in Berlin to hopefully host a couple of conversations that are similarly hopeful about our outlook.
About the authors:
Hannah Leach is a Partner at Houghton Street Ventures, a new venture firm backing companies founded by alumni of the London School of Economics, globally at seed and alongside that, co-founder and director of the global industry-wide non-profit initiative, VentureESG.
Dr Johannes Lenhard is a researcher and affiliated lecturer at the University of Cambridge and co-founder and co-director of VentureESG. He has recently published a book in diversity in Venture Capital, Better Venture.
The American LP landscape is more challenging, especially hindered by Republican politically motivated pushbacks across a variety of states.
