VCs are ‘opting up’ with SFDR — findings from our VentureESG SFDR Survey

Authors: Johannes Lenhard and Joanne Azem

The Sustainable Finance Disclosures Regulation, or SFDR, is one of the main drivers for investors to embrace ESG in Europe — including for VCs. It came into effect in March 2021 and reporting will start next calendar year, a timeline which put quite a bit of pressure onto investors and hence created momentum in the ecosystem.

We conducted a survey on how VCs are handling SFDR recently and almost a third of our community answered (we got 75 responses!) — thank you so much for your support and for shedding light on how SFDR actually affects VCs. What we gather from the responses is very promising: VCs take SFDR seriously, and not as a box-ticking exercise but as a rationale for starting to do things differently, including having clear responsibilities of ESG internally and committing to it publicly.

Here are the top five take-aways and learnings from the survey for you:

1. VCs are ‘opting up’ rather than doing minimal box-ticking: The large majority of survey respondents is either registering as Article 8 fund (ESG focused; 43%) or Article 9 fund (impact focused; 25%); less than 20% are choosing Article 6, which requires only minimal reporting and indicates neither any consideration of ESG or impact. Funds cite a variety of reasons for this ‘opting up’: ESG is increasingly seen as value-add for themselves and their portfolio, it also is an LP demand or the choice is ultimately about regulatory compliance. Overall, however, we are positively surprised that the lawyers and economists (who might want minimal reporting and compliance requirements) didn’t win and there is a clear choice for ESG and SFDR and against minimal box-ticking.
2. ESG (and SFDR) matters across fund sizes: Despite hearing regularly how SFDR regulation is too onerous for small funds, our survey finds that also small funds opt into SFDR. Assets under management of our respondents are very mixed and balanced overall (19% < 50m AUM, 17% 50–100m, 40% 100–500m, 24% >500m). Interestingly, 57% of the < 50m AUM follow either Article 8 or Article 9. Similarly, big funds (>500m AUM) and the medium sized funds (50–100m in AUM) are (perhaps not surprisingly) opting in (61% will go for Art 8 or 9 in the ‘big’ funds group and 73% in the other). The lowest (38%) adherence occurs in the small to medium sized fund with 50–100m AUM.
3. ESG is led by a variety of functions in VC: We haven’t seen a ‘consolidation’ of ESG responsibility in a specific role; while the majority of funds has appointed a head of ESG, COOs, GPs, more junior investors as well as legal and compliance oversee ESG. Only a small minority (14%) doesn’t have a dedicated person responsible for ESG.
4. Across SFDR categories (and geographies), funds are committed to an ESG policy as a first step: While SFDR policies are mandatory across SFDR categorisation (and hence not the best indicator for commitment to the underlying principles), ESG policies are voluntary. In this light, we are happy that the large majority of respondents has an ESG policy (79%) and many of the funds have made those policies public and transparent (63% of the respondents with ESG policies). Making commitments and making them public is a first important towards accountability and these numbers are promising.
5. …and even many UK- and US-based funds are ‘complying’: The majority of respondents are headquartered in Europe (60%) which is not surprising given the European nature of SFDR. However, SFDR applies to everyone doing investments in Europe overall (80% of the respondents predominantly invested in Europe). Despite that no compliance issues will arise a number of funds headquartered in the UK (50%) and the US (30%) already have or are planning on having an SFDR policy.

Obviously, there are quite a few more findings in the survey data we aren’t able to get into with a short post but the overall picture we are finding is very positive; across find sizes (and European geographies) funds are often ‘opting up’ rather than just ticking boxes. We are obviously in the very early stages of figuring out how exactly SFDR requirements (especially around reporting, including on the portfolio level) will be achieved without SFDR-washing but funds are at least taking up the challenge. We are here in our VentureESG community to work the solution out together.