The challenges in ESG reporting for venture capital
VC fund managers are facing quite a few challenges when it comes to ESG reporting. Some are specific to VC; others are more general and also apply to PE firms.
VC-specific challenges
General challenges
VC-specific challenges
General challenges
Insufficient tailoring / Lack of differentiation
- There are questions that are asked of alternative investment fund managers that often have nothing to do with their day-to-day operations but are rather an aggregation of readily available industry questions. It has been estimated that there are currently over 600 ESG reporting provisions globally. Hence, some of the areas of focus or ESG-type questions may not be related or applicable to the VC fund and/or the current operations of the early-stage investment companies.
In addition, VC investing covers a number of sub-strategies like seed, early stage, mid stage and late stage, and the various stages of the investment life cycle will bear different general business practices, let alone ESG considerations. As a result, there is a difference in the types of ESG responses and data that allocators will receive from a VC manager focused on seed investment versus a VC manager that focuses on Series A investing or one that focuses on Series B investing. For example, a seed investment company with three founders who happen to be male will have very limited data points on gender diversity and employment practices in its workplace. - There is an unrealistic ESG expectation from allocators and institutional investors that assume all firms, including smaller start-up entities that consist of a handful of employees, operate the same and hence must consider ESG and sustainability in the same way. Similarly, many large institutions are using the same types of ESG questionnaires for VC funds as they would for larger, established private equity funds and even hedge funds. Expecting VCs to meet the obligations imposed on more established fund managers will inevitably lead to an insurmountable task for VC funds to manage.
- Most of the frameworks, tools and standards available are best suited for large asset management firms that have the staff and resources to collect and report on the data. In addition, regulations such as SFDR impose standardised questions and metrics on fund managers, without much room for flexibility or tailoring.
Multitude of questionnaires
One of the greatest challenges in measuring and reporting on ESG for VC fund managers and their underlying investment companies is the variety of questions/formats and ESG concerns that come from different institutional investors and industry standards.
Limited resources
Portfolio company level
Many of the smaller, start-up companies are fully focused on building their businesses and are not yet keeping track of the data points asked in the queries, such as calculations of greenhouse gas emissions, or they simply do not have the manpower to collect the data to support the demands since they employ few individuals and may not have a formalised governance structure.
GP level
VC firms typically run leaner teams and are focused on identifying investment opportunities within early-stage companies and working with those companies to maximise value. Responding to the numerous ESG requests from (prospective) investors would require additional staff or technical resources to collect, aggregate and report the data.
Level of control
There tends to be a primary focus on data collection and key performance indicators (“KPIs”) as it relates to monitoring ESG. Most VC funds maintain minority positions in companies and do not have the level of control to influence or force the portfolio companies to adhere to ESG data collection.
Due to the operating realities of VC fund managers, traditional reporting obligations can end up showing a skewed view of the VC industry, as often the obligations for reporting are difficult to meet for smaller stage funds. Ideally, there would be a more tailored way of measuring how VC firms, and their portfolio companies, perform when it comes to ESG.
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
