ESG Materiality matters, also in venture capital — new VentureESG white paper published
For the last year, Susan Winterberg, author of the groundbreaking Harvard Belfer Center paper ‘Responsible Investing in Tech and Venture Capital’ conducted research in collaboration with VentureESG on how to perform an ESG materiality assessment for Venture Capital.
We are very happy to publish the resulting white paper “Materiality Assessment for Venture Capital: Identifying ESG Risks and Opportunities for Due Diligence and Portfolio Management”. The report outlines both the basics of materiality as well as concrete steps to conducting a materiality assessment and special considerations for evaluating ventures during early and growth stages. For VentureESG members, an accompanying Excel template for materiality assessment is accessible through Notion, too.
Why Materiality Assessment?
Materiality assessments — common in corporate contexts — are one of the fundamental tools which VCs need to learn to ensure successful ESG due diligence and portfolio management. Materiality assessments provide a clear framework for how to prioritize material ESG issues among the hundreds of ESG factors. In simple words, materiality assessments help with identifying those issues (e.g. from the VentureESG Universe of Issues) which a company is most likely to impact and be impacted by. Materiality assessments also have the unique quality of identifying which social and environmental issues are most likely to drive long term financial performance of a company. In fact, ESG has been shown (in public markets) to have a positive impact on the financial bottom line of companies only when material (in contrast to ‘any’) ESG factors are considered.
How Materiality Assessment is Different for Ventures
Materiality Assessments are a well-established method practiced by sustainability teams at most leading global companies, often based on the SASB methodologies and templates (see Sustainability Materiality Matrices Explained, 2019). The VentureESG report provides an introduction to the standard methodology of financial materiality assessments but focuses on the additional issues investors need to consider in the context of VC. The big difference: VCs are investing in fast scaling ventures deploying innovative business models and emerging technologies. Materiality assessments need to be adapted when dealing with the unknowns of emerging and disruptive technologies; it is especially important to account for product pivots and build timelines for when a particular issue might become material as a company scales and gains impact and influence in its market.
How to Integrate Materiality Assessments into ESG Activities
VentureESG has recently developed a comprehensive, fit-for-purpose VC ESG universe of issues, applicable to all major VC focus sectors (accessible for free here). Materiality assessments can help due diligence teams go a level deeper to identify industry-specific and technology-specific issues that a company might impact or be impacted by. This is crucial to make your due diligence process more robust, resulting in a more comprehensive understanding of a potential investment’s product-market fit and business risks and opportunities. Post-investment, materiality assessments can aid company leadership teams in developing a priority action plan for what issues they most need to address; it will also help to define a roadmap to identify which processes, practices and policies need to integrate ESG when.
Get in touch and give us feedback
VentureESG welcomes feedback on this report and suggestions for future tools and collaborations. Please contact us at: hello@ventureesg.com.
