Overview and external initiatives

What is ESG?

Impact through operations or how a venture operates is a second dimension of impact that's important to consider. This dimension refers to an approach to running a business, and so is applicable to all businesses regardless of their business model.

This is largely referred to as Environmental, Social and Governance (ESG). ESG assessment can (and we believe should) be applied to VCs and their portfolio companies alike. It describes a set of criteria for assessing responsible investment and business practices, regardless of whether a VC or startup is explicitly trying to tackle a social or environmental problem. Typical considerations include:

Environmental: Factors that relate to the natural world. Examples include carbon footprint, pollution, waste, deforestation.

Social: Factors that affect the lives of humans where categories include management of human resources, local communities and clients. Examples include working environment, human rights (including modern slavery and child labour), data and privacy.

Governance: Factors that involve issues inherent to the governance of the business and the interest of wider stakeholder groups (eg workers, customers). Examples include bribery and corruption, compensation, board diversity and structure.

Why is this important?

It's worth noting that for most early-stage ventures, the opportunity here is limited, given small team size, environmental footprint and uncertainty over survival. However, as the large corporates of tomorrow, it's important to embed the right values and discipline around operational impact early on.

This is a relatively nascent and evolving field in venture which, largely driven by regulatory pressure, LPs and other stakeholders are expecting VCs to get quickly up the curve. Incoming regulatory frameworks include:

Pertinent for VCs and startups with an eye on exits, later-stage investors are pushing these considerations down the value chain, with public market asset managers choosing not to invest in companies who don’t meet their ESG standards. The Deliveroo IPO case, for instance, saw various big asset managers refuse to buy into the company based on ‘ESG concerns’ highlighting the importance of robust ESG.

How to manage ESG

Rather than reinvent the wheel here, we refer you to two ongoing initiatives in the space, that have a comprehensive set of resources and strong community, to help venture managers and startups navigate ESG questions in early stage venture.

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