1. WHY SUSTAINABLE (ESG) IS COMPATIBLE WITH VENTURE
CAPITAL INVESTING
According to an August 2021 article published in the Stanford Social Innovation Review, more
than $100 million in assets under management (AUM) operate using environment, social, and
governance principles (ESG). However, venture capital only is one area that has been left
behind. The same article reports that of the world's top 50 venture capital funds, only five have
implemented ESG principles into their platform, and only a few dozen more have publicly
committed to supporting ESG. Venture capital and ESG platforms are compatible. ESG investing
refers to criteria that address sustainable goals, and it is often described as impact investing,
socially conscious investing, sustainable investing, and socially responsible investing. Data
support that venture capital funds have lagged behind the entire market in the last few years. A
Forum for Sustainable and Responsible Investment Biennial Trends Report, published in a Goby
April 2021 article, stated that US-based AUM that used sustainable investing strategies totaled
$12 trillion in 2018 and grew to $17.1 trillion beginning in 2020. However, only an estimated 11
percent of the firms in the US invest based on ESG. Further, the largest venture capital funds in
the world have not included human rights as a consideration in their investment process.
Diversity and inclusion are the only considerations most venture capital funds have adopted
mostly across the board. Alternatively, some experts predict an increase in ESG integration in
venture capital funding to happen in the next few years. In June 2020, a Morningstar Passive
Sustainable Funds report stated there were 534 sustainable funds globally totaling $250 billion.
The environment is ripe for venture capital funding to incorporate ESG principles into its
investing process. In the last few years, natural disasters combined with climate change have
been one of the reasons socially responsible investing has become a priority in the last few years.
Additionally, racial and gender issues have become important considerations in venture capital
funding. For venture capital funding, ESG has a few benefits. For example, these funds usually
have a long lock-in term, which meets the needs of projects that require a long time secure
capital. Another reason venture capital funding goes well with ESG platforms is that fund
investors can sometimes contribute to the start-up or the product being created in terms of
technical knowledge, management skills, and industry connections. This works well for start-ups
in providing them the tools to innovate and commercialize the product using ESG. Incorporating
ESG into a venture capital fund also provides the platform with some protections. Of all the
different investment types, venture capital is probably the riskiest. These risks relate to
regulatory uncertainty, the performance of new technologies, and drafting fair terms for
customers, among other issues. ESG frameworks mitigate risk and address societal impacts
because they provide risk management tools to address the myriad of issues the project/fund
faces. The ESG platform works in terms of generating data on venture capital funds. While
consumers can find ESG information on public companies, it is not found in the general venture
capital market. This is important in the decision-making process because the data often generates
information regarding environmental efforts and outcomes, and it gives information on industry-
wide practices. This information could help fund managers create risk-mitigating filters that lead
to positive financial outcomes. Finally, integrating ESG would create a diverse venture capital
sector. The Goby article attributed a Harvard Business Review report that stated only 2.3 percent
of women comprise the venture capital market in 2020. An ESG platform would support these
goals.
