ESG reporting from a VC perspective

VC firms are uniquely positioned to boost ESG integration with their investee companies and to adopt best practices to comply with ESG-related data requests, given the advisory role that is customary with early-stage investors. By engaging in early-stage investments, VC investors can encourage and work with budding companies to integrate sustainability from day one, grow with the right practices in place and perhaps lead the charge by example. Concretely, VCs can support their portfolio companies in thinking about their approach to ESG and developing an ESG framework, as well as incorporating processes to track and report on ESG metrics.

However, today there is a mounting challenge for fund managers to respond to the ESG data requests from investors and regulators, and this impacts everyone in the industry, irrespective of size. New ESG (reporting) regulations have the right ambition, though are often developed with larger players in mind, creating unrealistic expectations and leaving some difficulties for smaller firms (e.g., from a resource perspective). The private fund space is further challenged by insufficiently robust ESG data at portfolio company level. The dearth of private company data has left some PE/VC fund managers behind in ESG implementation, measurement, and reporting.

As ESG reporting in general is still being developed, naturally it will be an imperfect solution until it has been well tested. For the VC sector, which is one of the most capable industries of making a positive impact on the companies they invest in, there is a need for further finetuning when it comes to ESG reporting. That said, integrating ESG into a firm’s investment decision-making and reporting processes should not be considered a burden. There are some considerations and steps that investors, VC fund managers and their investment companies can adopt, to facilitate the ESG reporting process and to address what more investors are demanding of their business partners or investment targets.

In this chapter we will expand on how the VC community deals with ESG reporting and will outline concrete steps that VCs and investors can consider taking, both together and individually, to achieve feasible ESG reporting.