Achievable ESG reporting
It is important for investors and VC firms to have achievable objectives for the ESG performance of their portfolio companies. Clear channels of communication are highly important from the outset and will help to ensure that all parties are on the same page regarding ESG expectations. It is key to balance the value of ESG reporting versus the impact it will have on VC fund managers and their portfolio companies through the additional costs brought on by more enhanced reporting requirements.
(Reporting) expectations from VC fund managers should be appropriate and realistic and should concentrate on information that is relevant to the funds, their portfolio companies and investment structure. VC investors should focus on a set of specific metrics which make sense for them, can actually create a difference or change the way a company operates, and would allow for monitoring and enhancing the ESG profiles of the portfolio companies they invest in.
Establishing an effective due diligence programme
ESG oversight should be approached as more of a due diligence process, focusing on what truly matters to the firm and its investors and what can be reasonably expected from a smaller fund manager. In order to really be impactful and work with VCs to create the meaningful change they can make at this stage of the life cycle of the company, a thorough due diligence process, inclusive of the firm’s ESG focus, is beneficial. Understanding how a firm operates and conducts its day-to-day activities is not only a method for investors to ensure they are investing with a sound organisation, but it can be a way to better understand how the firm considers ESG factors.
Through a comprehensive and thoughtful due diligence review, investors can:
truly learn how the VC fund views its day-to-day operations, compliance, and business activities as well as the firm’s stance on ESG; and
explain their concerns and areas of focus and develop a rapport with the fund manager and hence produce more insightful reporting.
Often, a due diligence discussion will yield more results as it is an effectual process which displays thoughtful consideration and a move toward collaboration versus data collection.
Establishing an effective due diligence programme may take a bit of work initially but once the key areas of focus are identified and determined the data aggregation will become more focused and more meaningful.
A comprehensive due diligence review of a VC firm should focus on gaining a better understanding of how the firm is organised and staffed.
There should be a review of office locations, responsibilities, and reasons behind staffing.
Compensation and employee incentive programmes should be understood.
Identifying details of a VC firm’s client base and LP commitments will provide insight on the types of investors the firm might engage with and how much influence the investors may have over the day-to-day operations.
A thorough review of the firm’s operations and finances may provide insight on how the firm views best practices and identifies ways to improve upon its overall business.
Reviewing fund documentation, compliance manuals and marketing materials will provide good insight into the fund’s overall business and investment strategy and may easily answer questions relating to how the firm views governance and many social aspects.
Firms that may have client complaints, regulatory concerns or legal actions against themselves or their partners may not necessarily be a good investment partner and will most probably be less focused on ESG topics.
Asking the right questions
VC funds have the unique opportunity to invest money to make change at early-stage companies to help them grow and develop with the right practices from day one. It is instrumental for VC funds to focus on specific ESG factors that can truly foster change and establish good business practices within their portfolio companies.
Investor reporting should focus on questions and metrics that are applicable to smaller firms that have more limited resources and, perhaps more importantly, that are applicable to the VC firm and their investment focus (i.e., the investments they are making).
While not all ESG metrics will be equally important for all portfolio companies, a certain level of standardisation in the ESG indicators which are required from small companies would be helpful. VC firms can then use the information collected to build a roadmap for improvement for their portfolio companies – each of which will be unique depending on the needs and stage of the company.
Possible considerations and actions to be taken by VCs
Possible considerations and actions to be taken by investors
Possible considerations and actions to be taken by VCs
Possible considerations and actions to be taken by investors
- VC firms should work with their investors to identify and report on those ESG factors that affect their business as well as the activities of their investment portfolios and should incorporate those attainable standards into their ESG frameworks.
- VC firms can exhibit that they are serious about ESG factors, and their investor demands by taking small steps. These could include encouraging an early-stage company to consider employing more women or individuals of diverse cultures and skill sets; where applicable, investing in their local communities where they can make a difference; or considering and communicating the environmental outcomes and/or impacts of their investment companies.
- VC firms should help their investment companies to better understand the ESG data points that are asked of them, as part of a path to encouraging them to make more focused and sustainable decisions.
At the same time, VC investors should work closely with their investment companies to develop a more standardised approach toward ESG reporting, to make sure that companies can answer more effectively the growing number of questionnaires they receive from their investors.
- ESG expectations towards VCs should be realistic and practical, considering that many VC firms and investment companies will not have dedicated ESG professionals and teams are often small with limited resources.
Of course, understanding the mandatory regulatory requirements, LPs could use questionnaires for VCs that are appropriate and meaningful and speak to the asset class.
Queries should be tailored appropriately to the size and strategy of the VC firms and should take into consideration the stage of the investment companies. - Collaboration between VC firms and their investors is key to providing insightful data points. The core focus should be on fostering change and encouraging best practices.
- Meaningful and communicative due diligence reviews can help to gain a better understanding of the VC firms’ operations and capabilities, and what ESG or responsible investing means for the VC firms.
In this section of the guide
Explore all sections of the guide
Reporting template and tools
ESG reporting template ESG life cycle tool SFDR tools TCFD tools Timelines
Mapping of voluntary frameworks and standards
Definitions and distinctions Who is who Scope of information
Deep dive for VCs and investors
ESG reporting from a VC perspective ESG reporting from an investor perspective
