How the Best in Venture Capital are Nailing ESG Due Diligence — 12 Best Practice Examples from our Member Funds

The VentureESG Team
18 min readJun 18, 2024

ESG due diligence has become a standard part of many venture capital investors’ due diligence. LPs are asking for it more and more and they want to see ‘evidence’.

Across our community and membership, we have seen a large variety of ways of integrating ESG into the steps leading up to the investment decision and the IC. Many funds are experimenting and — from our point of view — there is no single right answer. These examples from twelve funds, across geographies, fund sizes and sector focus, show the large variety of approaches.

The goal of this post — and the forthcoming one on post-investment ESG integration — is to take away the fear of ‘doing something wrong’ and hopefully inspire action.

Atomico

Ashleigh Brown, Head of Sustainability

At Atomico, ESG due diligence starts in the pre-screen phase led by the investment team covering possible exclusionary industries and the founding team’s perceived ability to handle risk. The investor on the due diligence (DD) submits a risk assessment covering standard ESG factors at the preliminary investment review for investment committee (IC) discussion.

Once a term sheet is signed, DD is handed over to the ESG team (Head of Sustainability and General Counsel). The target company is given a questionnaire which includes 20 questions covering ESG factors in addition to the company’s views on risks and opportunities. The questionnaire is designed to not only assess what initiatives a company has in place, but also what factors will be most material to the company both now and in the future and how the company is currently thinking about them. The answers are discussed directly in a follow-up ESG conversation with the founder / founding team to assess and deep-dive on the material factors and agree on the key priorities over the next 6–12 months. The ESG manager then scores the company based on maturity, benchmarked against what we would expect to see of companies of a similar stage, and submits a formal assessment in the investment memo covering material risk, opportunity and priorities as well as commentary on founder/leadership engagement to the IC at the final investment review where the investment decision is made.

HV Capital

Marie Bos, Vice-President ESG

Our Vice-President ESG (VP ESG) conducts the ESG due diligence process for potential investments. On certain occasions, the investor responsible (Investment Manager, IM) for the deal will join the ESG DD call between HV Capital and the startup. Although the VP ESG is the person conducting the DD, there is always communication between the VP ESG and the responsible IM to ensure the most relevant questions are asked throughout the whole DD process.

The ESG Due Diligence process involves a call with the founders and the responsible person for ESG within the potential investment company (if in place). The discussion during the call or the meeting is based on a questionnaire. As HV Capital invests in different-stage companies, three base questionnaires (for seed, Series A/B and Series C+) were prepared with some core questions based on SASB, Invest Europe guidelines, VentureESG’s Universe of Issues and in alignment with reporting requirements from our LPs. Each time, customised questions in line with the companies’ business model and industry are added. During the call, the conversation between HV Capital and the potential investment company is semi-structured, led by predetermined questions (coming out of the questionnaire) but open for in-depth discussions where relevant.

The findings from the ESG DD process are discussed with the IM and key steps to be completed by the potential investees until the next financial rounds are suggested. Subsequently, the IM includes them in the investment memo in two ways. The summary table with yes/no answers to the questionnaire is added as an annex while a general comment highlighting key risks and opportunities is included in the body of the investment memo.

The purpose of the ESG DD is twofold: i) it raises awareness of what ESG is and how it can serve the founders’ vision of building a resilient business (hence the importance of asking company-specific questions), and ii) it assesses the founders’ willingness to work on these topics.

Kinnevik

Rebecka Elming Saidac, Sustainability Lead

Sustainability is an integral part of Kinnevik’s investment and value-creation process. At the pipeline stage, Kinnevik’s sustainability team reviews potential sustainability risks to ensure our investment team is fully aware of those and is able to investigate further if needed. When a company is brought to our Executive Investment Committee for review (before a term sheet is offered), the Sustainability Team, together with the deal team, performs a desktop review based on the company materials we received and additional, externally available information. The findings from this review are included in the investment memo. The key to this contribution to the IM is an overall ‘sustainability opinion’ from the Sustainability Team, including traffic lights on the status of E, S and G in general, as well as an impact assessment and risks/opportunities/KPIs for low-carbon alignment. If the opportunity receives a green light for further review from the Executive Investment Committee, the Sustainability team will dig deeper into potential issues identified based on the desktop review. This phase will usually include a call/meeting with the company before full due diligence.

On successful completion of the above, a term sheet is offered; once a term sheet is signed and full DD begins, the process will include a specific sustainability workstream led by the Sustainability Team but with involvement from the deal team. The sustainability workstream will include meetings with founders and other relevant management representatives from the company. The Sustainability team will cover the material and relevant (based on sector and stage) topics included in the so-called Kinnevik Standards (approx. 84 sustainability-related topics); however, we do not use a questionnaire or demand other written input from the company. Findings from the Sustainability due diligence are then summarized and included in the due diligence memo as well as our Sustainability dashboard for the company which will inform our post-investment engagement. Our main objective with the sustainability due diligence is to ensure we take an informed decision in relation to sustainability risks and assess the tone from the top on these topics from the founders and management.

Balderton Capital

Elodie Broad, Head of Impact and ESG

At Balderton, the Investment Team is responsible for the pre-investment ESG due diligence exercise. All investments are subject to the same initial screening process, using our ten Sustainable Future Goals (SFGs) as our due diligence framework. For each prospective investment, we explore through discussions with founders what the business’ positive and negative impacts are on two levels: (1) the products and services that the business is building; and (2) how the business operates and is structured.

We ensure that our ESG due diligence approach is proportionate to the stage of the company. Sometimes, we will identify business model- or operations-related ESG risks, but will not be expecting to find fully developed and implemented risk management and mitigation systems and processes yet, given the potentially very early stage of a company’s development. This is why we also gauge founders’ awareness of and commitment to sustainability and responsible innovation in early discussions.

The first objective of this pre-investment due diligence is to identify any ESG red flags that could influence the investment decision outcome. However, it is highly unlikely that companies with such red flags would ever make it to IC in the first place. The second objective is to identify material ESG risks that will require management during our holding period, directly informing our Head of Impact and ESG engagement work post-investment. All of these considerations will be systematically documented in the dedicated “SFG section” of investment memoranda. These will be discussed ahead of the company’s presentation to the IC.

Our Head of Impact and ESG supports the ESG DD process by:

  • Participating in the investment team’s weekly deal-flow meeting where “Hot” companies’ ESG-related matters can be raised for group discussions.
  • Reviewing and validating investment memoranda’s SFG section ahead of IC meetings. Should the assessment be deemed incomplete, they will engage directly with the investment lead to address identified gaps.
  • Codifying the ESG DD approach and developing tools. They developed a list of potential adverse impacts to help frame and consider negative impacts and risks against our SFGs. Recently, they also led the development of a dedicated due diligence tool for climate risk with the support of a third-party provider, to strengthen our climate risk identification approach.

Post-term sheet, the Portfolio Finance team sends a short ESG questionnaire alongside its Financial DD to start collecting non-financial data alongside financial data, to feed into our Head of Impact introductory conversation with the company post-closing. We also add an ESG clause in our terms sheet and long-form, requiring the company to publish an ESG policy within twelve months of closing.

Project A

Paola Compés Tatay, Head of ESG and Platform

As a starting point, Project A abstains from investing into companies and industries whose business activities conflict with those on our exclusion list. The exclusion is anchored in our fund formation documents (i.e. LPA).

For those segments where we do invest, we are incorporating ESG characteristics in our investment decisions by performing a high-level materiality analysis of the company to understand the key risks and opportunities. For this exercise, we refer to consolidated frameworks such as GRI, SASB and the Universe of Issues of VentureESG — which is geared towards start-ups—as well as leveraging the segment expertise of the investment team.

The degree and depth of diligence undertaken to assess ESG characteristics will be tailored to each investment opportunity — industry, stage, geography, etc. Our first findings are included in the investment memo for the evaluation of the Investment Committee. At this stage, we would attempt to catch any major red flags, for the attention of the Investment Committee.

Once we have decided to invest, we apply our best efforts to uphold our ESG term sheet clause where companies give us the right to request data, collaborate with them on their ESG performance and commit to observe the Ten Principles of the UN Global Compact. These terms are also integrated into our side letter.

After the term sheet has been signed and in parallel to our legal and, as the case may be, tax and/or financial due diligence, a more detailed ESG Due Diligence may begin — this largely depends on the maturity and stage of the company — to understand internal ESG responsibilities, the presence of policies and relevant operational structures. We take this first assessment as an opportunity to exchange with founders, present them with their material issues and gauge them on building their ESG capacity over time.

Northzone

Sanna Blomkvist, Sustainability Lead

As a multi-stage investment company, the integration of sustainability assessment factors is done slightly differently depending on stage, sector and company maturity. Each deal team is responsible for incorporating ESG and impact aspects into their due diligence, covering a high-level screening for ESG risks (using sector materiality maps to address general ESG concerns and guide priorities) and company-specific analyses (such as exclusion list, evaluating impact risk/potential, and alignment of financial and impact goals).

To support the deal team, we have developed a Responsible Investment Toolkit, including materiality maps for our main investment sectors, templates, ESG definitions and common pitfalls. Northzone’s Sustainability Lead oversees the overarching strategy, documentation and guidance.

As part of our pre-investment due diligence, we are also keen to understand the attitude of the founders, as well as our own additionality, considering questions like how the investment fits into Northzone’s overall materiality map and how we can enhance its impact. This is presented to the Investment Committee together with the findings of our sustainability assessment.

Once a term sheet is signed, we use a combination of a DDQ, sent via our sustainability platform Apiday, and when needed, follow-up conversations between the founding team and Northzone’s Sustainability Lead to discuss potential risks, opportunities, and priorities. Post-investment, we leverage our active ownership to promote responsible scaling practices, and believe our support is most valuable when tailored to each company’s specific needs and timeline.

PreSeed Ventures

Emma Kjellander, ESG and Impact Lead

ESG and impact are integral to the PSV due diligence. It offers us both insights into our investment decision-making and forms the basis for our support post-investment. Between our two funds, PSV Tech01, with an agnostic focus on fast-to-market companies, and PSV DeepTech (1st close later in 2024), focused on investing in science-based startups, including in GreenTech, HealthTech, and Industry 4.0, the DD processes differ slightly. Both processes are founded on dialogue, as the DD is the first step in aligning on intentionality, additionality and contribution.

PSV Tech01: emphasis on understanding material ESG aspects of the company.

  1. Screening & pitch: The investment team conducts informal, high-level screening for ESG risks and PSV’s ‘ESG compliance checklist’. In cases where such obvious risks appear, the PSV ESG team is opted in for a second opinion. If not, the PSV ESG team gets involved during the pitch to understand the business case and potential ESG implications.
  2. Deep dive: After a term sheet is offered and signed, the ESG team conducts a DD call with the founders, during which industry and case-related material ESG matters are discussed from a risk-mitigation and opportunity-enhancing perspective. The aim of the call is to understand the material ESG matters of the company, the founders’ motivation and willingness to work with such, and align on PSV’s expectations going forward.
  3. Investment decision & post-investment support: Findings from the deep dive are gathered in the ‘Investment Recommendation’ document, which is used as decision material for the investment team. If an affirmative investment decision is made, an ESG clause is included in the Shareholders’ Agreement (SHA). It outlines ESG sessions planned post-investment, which are designed based on the deep dive’s outcomes.

PSV DeepTech — emphasis on understanding the Impact Business Case and material ESG aspects of the portfolio companies.

  1. Screening & pitch: The investment team conducts a three-part screening process, including PSV’s exclusion criteria, impact score, and high-level industry-based ESG assessment. If the company screen is clear and a term sheet is signed, the deep dive is carried out.
  2. Deep dive: To determine if the company promotes the E/S characteristics of the fund, an ESG & Impact in-person DD workshop takes place, where the GP team conducts an Impact Business Case (‘Product’) and ESG Materiality Assessment (‘Operation’) together with the founders. Impact and ESG matters are discussed both from a risk-mitigation and opportunity-enhancing perspective. The aim is to outline the Impact Business Case for the startup, integrate it into the strategy, identify the right KPIs to track and monitor, and agree on an ESG action plan. Furthermore, a good governance assessment and action plan is conducted.
  3. Investment decision & post-investment support: The findings from the deep dive are used as decision material for the investment. If an affirmative decision is made, the impact monitoring and data requirements are outlined in the SHA. In addition, the ESG and impact action plan designed during the deep dive is put into action.

Daphni

Damien Didier, Head of Sustainability

When a potential deal is identified by our investment team, we begin with what we call the “ESG gut feeling”. This informal yet crucial step involves our investors initially assessing the project from an ESG/impact perspective using the initial info they have, primarily the pitch deck and the first call with the founding team. At this stage, we evaluate the externalities of the project’s core service or product, categorizing them intuitively into three levels: positive, neutral, and negative. Our Head of ESG then reviews the company during the “hot deals” weekly meeting, using available materials and investor notes to identify any early red flags (for example, a project focused on increasing conversion rates for children would be considered unsustainable due to its high negative externalities). This proactive approach allows us to start ESG discussions with our investment team as early as possible, reducing ESG risks related to our investments; it is also a great way to sensibilize the investment team on ESG topics more widely. By integrating this process, we have observed a shift towards more sustainable projects proposed by the team. Consequently, the most unsustainable projects are often dismissed before requiring intervention from our ESG team.

After collective investors’ discussion, a deal progresses to the next step: the Investment Committee (IC), before issuing any term sheet. Prior to the IC, we conduct a quick ESG analysis, which is incorporated into the investment memo. This section includes discussions with the investment team, a review of the memo to identify any new red flags, and most importantly, the completion of our proprietary ESG scoring. This scoring system, which is open-source and adapted from the IMP framework, evaluates how an investment opportunity addresses the Sustainable Development Goals (SDGs).

While we strive to make our scoring as objective as possible, it can’t be entirely objective at the seed stage, as deals are built on conviction. Our investors are accountable for completing this scoring, and our Head of ESG reviews and challenges the inputs and associated scores. This process ensures that the IC has all the necessary ESG information to make an informed decision.

To maintain a focus on sustainability, we include two clauses within the shareholder agreement: one focused on climate and the other on diversity and inclusion (D&I). These clauses structure and nurture discussions about sustainability throughout the company’s tenure in our portfolio. Given that we invest at an early stage, we recognize that many of the companies we invest in may have minimal existing ESG practices. This is acceptable as long as we believe the founders are aligned with our ESG intentions, knowing that we can encourage and support further ESG initiatives after investment.

This process is reviewed and renewed annually with the goal of continually enhancing the ESG aspect of our due diligence.

Maki.vc

Mona Saurén, Investment Analyst and ESG

Maki.vc invests in pre-seed and seed-stage companies, hence its due diligence approach is tailored to be proportional to the stage of the potential investments. While our team views that excluding obvious industries at the screening stage and evaluating ESG-specific issues at due diligence is essential for great investments, we also recognize that very early-stage companies seldom have much concrete ESG integration in place. Therefore, a specific focus is placed on testing awareness and ensuring founders’ commitment to ESG topics, especially for the growth stages of the company.

As part of the initial screening, Maki.vc screens potential companies against the fund’s exclusion criteria. The term sheet includes a specific clause requiring companies to write an ESG policy after closing and to provide investors with annual ESG data. If the screening is passed and the term sheet is signed, a separate ESG DD is conducted, involving the ESG lead of the fund, the lead investor of the fund, and the company founder(s). This DD is performed from both the investor’s and the company’s perspectives. Acknowledging that target companies often lack knowledge and resources, the ESG DD serves a purpose to build a foundation for future ESG work. Companies are asked to evaluate company-specific ESG risks and opportunities, map related monitoring mechanisms, and complete a survey to assess their understanding of ESG topics. A similar questionnaire is filled out by the lead investor jointly with the ESG lead. This questionnaire focuses on the current and future risks and opportunities related to the company and its industry. Any issues identified during the ESG DD are included in the post-closing action items in the deal documentation to be addressed after the investment.

Acknowledging that target companies often lack knowledge and resources, the ESG DD serves to identify any ESG related issues in the company and build a foundation for future ESG work. A specific ESG onboarding follows the investment decision.

NGP Capital

Monica Johnson, Operating Partner and CFO

At NGP Capital, our investment team leads the integration of ESG into our investment process. It begins at the research phase where we screen potential companies against an exclusionary list. If we move to the candidate stage, the team completes a high-level risk assessment focused on the product, technology and management team. At this stage we identify any potential issues or follow on questions that warrant deeper diligence to ensure alignment with our ESG standards.

For candidates that progress to due diligence, we’ve added a sustainability framework and assessment to our standard diligence process which separates out the identification of ESG factors. The assessment begins with a questionnaire of approximately 30 questions covering key areas of ESG and is designed to help us understand related risks and determine where the company is in its own journey. The investment team applies the appropriate set of questions as we recognize the different stages and industries the target companies operate within. This process is continually evolving. Recently we have expanded our review to include areas such as responsible use and dual-use of the company’s products and increased the focus on environmental measurement. The questionnaire is completed by our investment team following initial due diligence from data room materials and interviews with the management team.

The findings and assessment are then used to score the company within our Sustainability Assessment. Additionally, Sustainability has been added as a distinct category within our overall risk assessment, alongside Market, Product, Team, and Financials. Although many of these factors were assessed during standard due diligence, they are now highlighted separately to add visibility and a separate assessment. These assessments are part of the decision process to proceed to the Investment Committee. If the investment team does present the company for approval, the findings are called out separately in both our investment memos and closing memos.

To formalize and set expectations with companies, we have incorporated sustainability terms and clauses to our legal documents. These clauses are used to set expectations with the company in respect to environmental and other operational measures. When leading an investment, we include a sustainability clause in our term sheet and a sustainability paragraph in the shareholder documents, ensuring awareness and commitment to ESG principles from the outset.

Westly Group

Shaun Chaudhuri, Principal

In the US, there has been confusion regarding interpretation of ESG ratings in the public markets (most often conflated with climate impact). At The Westly Group, we use ESG integration as a way to identify material business risks by examining internal operations of a company (versus any external impact). Here are the three key areas where our team has integrated ESG in our due diligence process:

  1. Initial Screen for Deal Flow: The Westly Group has an exclusion list for types of companies that we will not invest in adapted from International Finance Corporation’s exclusion list. Additionally we will exclude evaluation of companies where:
  • a founder/member of the senior team has been involved with cases of harassment or discrimination (based on publicly available and independently verifiable information), or
  • the company does not comply with international standards and conventions regarding human rights, the environment, anti-corruption or labor laws.
  1. Deep Diligence ESG DDQ: Once a company gets to deep diligence (one step before the term sheet), the investment team member who is leading the deal needs to complete an internal ESG DDQ that consists of 14 questions on Data Security, Responsible Product Design, Governance, and Team & Working Environment. Findings from this report are discussed at our partner meeting to identify material risks for the business. This DDQ is never sent to the startup as a checklist, but rather sits with the investment committee member and they assess materiality based on company materials, conversations with the team, and gauging founder intent. There is a dedicated section on ESG materiality in our investment memo should the company move to term sheet phase.
  2. Term Sheet Clauses: We include two ESG clauses in our term sheet. The first one lists out the full list of ESG metrics we collect on an annual basis. The second term sheet clause focuses on outlining the business case for committing to equal opportunity in the search process and selection for new hires from this financing round and for new board directors.

Post-term sheet, the Westly Group collects annual metrics. They have been working on establishing a baseline for each company and are now working on driving ESG materiality discussions at the board level.

AENU

Elena Stark, Impact & ESG Lead

At AENU, an early-stage SFDR Article 9 Fund, we integrate Impact and ESG analysis into every stage of our investment process from deep dives to post-closing.

But how does this evaluation look in detail during the DD? When evaluating specific deals, we focus on:

  • Assessing potential violations of exclusion criteria.
  • Identifying significant ESG risks and opportunities using the double materiality principle.
  • Reviewing any notable past incidents.
  • Ensuring alignment with our impact objectives and guidelines.

The Impact & ESG team and the deal team jointly validate the initial research based assessments through 1-on-1 discussions with founders and a maturity and sector-tailored impact and ESG questionnaire, using our chosen sustainability reporting tool, Apiday.

The final deal memo includes a detailed summary of the impact potential, ESG double materiality topics, and assessment. In line with SFDR requirements, we conduct a “Do No Significant Harm” test and a principal adverse impact analysis. The findings are documented for the Investment Committee, where impact and ESG potential are critical and formalised voting topics. A positive decision is followed by an Impact/ESG clause in the term sheet.

As part of the clause, we ensure impact and ESG information rights and commitments to Net Zero, diversity strategies, and transparency.

Given the early-stage nature of our investments and our sustainable fund objectives, there are thresholds and minimum performance requirements on the impact side of due diligence. However, within ESG due diligence, our primary focus is on gaining a comprehensive understanding, with limited to no minimum performance requirements on the ESG side (only potential deal breakers are unmitigated risks and past incidents). At AENU, we therefore position ourselves as committed partners to founders in their impact and ESG journey, which only begins with an impact/ESG due diligence and is then followed by our tailored “impact-as-a-service” offerings.

For more information about VentureESG and how we’re working to support Venture Capital funds with implementing ESG across their fund operations and end-to-end investment process, visit our website or drop us an email at hello@ventureesg.com.

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The VentureESG Team

Creating a community around ESG in venture, and helping VC firms integrate ESG practices into their end-to-end processes