VentureESG LP white paper launched — ESG for VC is here to stay

Yesterday, we launched our long-awaited LP white paper ‘Driving it Forward’ on the practices of LPs when it comes to ESG engagement in VC. We had a full room of over 65 LPs and VCs for the (virtual) launch and

We wanted to share four insights from the panel conversation and breakout rooms yesterday, in addition to the higher level observations from the White Paper.

1. EU > Asia > US: the 26 conversations with institutional LPs hint in the same direction, but the launch conversation hammered it home: the Europeans (including the UK) are ahead when it comes to ESG integration in VC. The US is seen as lagging behind the most — and also being most resistant to engage in conversation on ESG. This is obviously partly driven by the political backlash in the US (which is not making as many international waves as expected) — but does not necessarily result in a complete lack of options. One suggestion: while VCs (and other investors) might be unwilling to engage (and talk about) ESG, how about calling it ‘responsible investing’. It is important to remind people that this is about ensuring higher risk-adjusted returns.
2. Engagement is key: in line with the first conclusion of the white paper, the ‘room’ in our launch was undivided on the importance of focusing on engagement with their GPs and VCs rather than exclusion. In parallel to the ‘value-add VC’ approach helping their portfolio companies, LP see their role when it comes to ESG integration in VC as a ‘value-add LP’. Many point their managers to relevant and fit-for-purpose resources, such as the ESG policy template we published. Education, training, tools and helping VCs build ESG capacity is a priority for LPs going forward.
3. Codification as a next step: requiring VCs to have ESG policies has become a starting point for LP engagement; our launch conversations pointed in a direction where more codification of certain requirements in LPAs and side letters is necessary in order to move towards concrete action. This is true both for ESG integration generally and DEI more specifically. Some LPs are not only making investments conditional on the creation of an ESG policy (within x months post-investment) but also steps to integrate ESG explicitly across VC processes (e.g. by requiring the existence of an ESG framework informing investment decisions, a section in the investment memo, etc.).
4. Process trumps metrics, especially in VC: venture capital, especially into early-stage tech companies means dealing with companies which are small and collect very little data; the usual approach of ‘ESG measurement’ is complicated in such a context, even compared to late-stage equity investing and buyout. This is even more true thinking about the shifting ‘sector trends’ VCs invest in — crypto/web3, AI being the latest examples — the specific risks of which will not be captured in existing metrics. A stronger focus on process — e.g. captured in an ESG policy — rather than on over-reliance on KPIs and metrics is hence even more important in the VC ESG context.

In the White Paper, you will find more insights of a similar kind, providing some transparency of current LP best practice and also the direction of movement. At VentureESG, we will continue working with our network of 110+ LPs to on the one hand make their practices more transparent going forward but also to help harmonise requirements and best practices across the ecosystem. This White Paper is the first step in this direction.

We want to thank both Luminate for funding the underlying research (very importantly the co-authors on the report, Dr Moriam Masha and David Kampann) and Preqin for supporting our work with valuable data.

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, fill in this form, or drop us an email at hello@ventureesg.com.