ESG in Venture Capital: Cavalry’s take

Stefan Walter
Cavalry Chronicle
Published in
7 min readMar 11, 2021


“We are becoming an ESG fund” — a phrase we have heard so often in recent months. A sentence that shows that even within the community of professional venture capital companies, an insane amount of misconceptions prevail on the subject of ESG.

We cannot and do not want to dispel all these misunderstandings, but rather describe our view of things. As have a lot of others, we have been talking and thinking about how to integrate and track ESG more in our daily business for a while now. Now, at the latest with the new regulations, it’s time to stop talking and testing but rather start implementing.

tl;dr: ESG compliance is important, and we as VCs, given the influential position we’re in, should take our role seriously and guide our portfolio companies in how to sensibly incorporate ESG factors in their organisations. Having said that, this is just a starting point and we will have to figure out together which actions turn out to be practicable, especially for early stage start-ups.

And the emphasis here is on “together”. Let’s try not to build moats, but rather make this a common effort for the benefit of all of us!

“As of 10 March 2021, we are an ESG fund”

Okay, where are we at?

On 8 March 2018, the European Commission published a Sustainable Finance Action Plan. The main points are:

1) Improving the contribution of the financial sector to sustainable and inclusive growth by financing the long-term needs of society;

2) Strengthening financial stability by taking into account environmental, social, and governance (ESG) factors in investment decisions.

One of the most important measures is to increase transparency on sustainability issues in the financial market. This is to enable investors and stakeholders to assess the long-term value creation of companies and their exposure to sustainability risks. The Disclosure Regulation has now come into force on 10 March 2021.

Alternative Investment Fund Managers (AIFM) will now be called upon to disclose what they invest in and how they justify their investments from a sustainability perspective. With this regulation, fund managers are put in a position, where they either comply (meaning: they incorporate ESG criteria in their internal processes and investment decisions and disclose this accordingly) or don’t, but in that case to communicate an explanation, as to why not and, to what extent they’re planning to implement this in the future.

We at Cavalry are happy to comply.

But does that make us an “ESG fund” (whatever that is)? We don’t think so. And we wouldn’t refer to us that way.

Why not, you ask? First of all, the ESG regulation applies to pretty much everybody. So, what’s the point? Secondly, and while there isn’t an established definition of the term itself, “ESG fund” very often seems to be put in the same bucket as “impact fund” (see definition here) — so unless we’re aiming at greenwashing, why would we want to do that?

“We don’t have time to incorporate ESG criteria into our investment decisions”

Yes, we are all very busy. And given how Covid-19 has impacted a lot of industries all over the world, we consider ourselves very lucky about that. But back to the point.

A big part of what implementing an ESG policy for us as fund managers initially comes down to is risk assessment. And that already is, and has been, the fiduciary duty of every investment professional even before the new regulation comes into effect (just think of topics such as data security or a company’s financial accounting and compliance setup that you’re likely looking at anyways).

What’s new is the establishment of a formal structure that requires all AIFMs not only to do what most of us have done already in the past, but to incorporate a wider range of ESG aspects in the evaluation of both the risks and opportunities connected to any investment decision.

And if this still feels like unnecessary overhead to you, we’d recommend focusing on the opportunity side of things — after all, numerous studies (such as this one) indicate there is much more to gain than to lose.

“ESG is a trend”

If you look at the past 30 years alone, globalisation, innovation and technological advancements have brought us all closer together and for a lot of stakeholders, have created enormous value — such as economic growth, an overall higher standard of living across the world or global collaboration on topics such as healthcare and science. Having said that, we’re all very much aware of the accompanying downsides of this development as well — just think about social and environmental challenges, not only but especially in developing markets, or how social media lately has become a reinforcing factor of political and societal polarisation. These processes are not trends, but long-term developments with serious consequences.

Formalising our responsibility to create a globally sustainable economy in the interest of everybody in our view is an important first step — not a trend, but in fact a turning point.

Or as our colleagues from Atomico very appropriately put it: “We must invest in companies that return profits but also create returns for society. If not, we’re setting capitalism up to fail.”

“ESG obliges me to only make impact investments”

First of all: No, that’s not the case.

And to clarify what we briefly touched upon above: ESG regulation tells you to screen ESG matters and to incorporate these into your internal processes and investment decisions, (and now the important bit) while you’re still focused on financial return first. In impact investing on the other hand, this main focus shifts from financial return to actual positive impact.

Secondly, and although we still don’t like the term “ESG fund”, we believe that the line between impact investment strategies and traditional investment strategies is becoming increasingly blurred (e.g. read “Larry Fink’s 2021 letter to CEOs”).

Looking at a VC fund’s investor base, more and more LPs, both institutional and private, ask about and require ESG being incorporated in internal processes. One could (and probably should) argue, the game is not as on as it should be and in a lot of cases the requirements are still too high level to drive real change. But based on our own experience, from institutional anchor investors such as the European Investment Fund or (in Germany) KfW Capital and deep pocketed family offices to private investors committing low 6-digits, the topic is gaining significant momentum.

Based on that and assuming, as we very much do, ESG is here to stay, not applying ESG criteria into your internal processes can put your foundation as a fund manager at risk — while playing by the rules (even if you’re not 100% in love with that yet), comes with a very realistic chance of broadening your potential LP base.

And it will not make you an impact investor.

“Certain aspects I can’t measure at all, for example, because of GDPR”

To a certain extent, fair point. When it comes to creating transparency, GDPR isn’t necessarily a catalyst. As a practical example, just ask yourself how you would go about measuring diversity and inclusion within your portfolio. And how thoroughly you would measure this in terms of age, gender, marital or parental status, sexual orientation, ethnic or national origin, political affiliation, physical abilities, appearance, education or religious background. All while remaining GDPR compliant of course.

Approaching this in an efficient way obviously isn’t always very straightforward to us either.

But should this keep us all from getting started? We honestly don’t think so — and neither does the EU regulator.

So what will Cavalry do?

We obviously don’t have all the answers. But the gradual introduction of ESG measures for us is an important step in the right direction, in shaping a sustainable economy. And again, we’re all just at the beginning and developing standards along the way.

In lack of these standards, one of the biggest challenges we as early stage VCs are facing right now seems to be keeping the balance. On the one hand, and given our position in the ecosystem, many of us will (hopefully) accept the responsibility that comes along with that, and will aim at providing guidance and support to our portfolio companies in incorporating ESG aspects in their internal processes. On the other hand, and given the very early stage of our initial investments, we’ll have to keep in mind not only what is operationally feasible for our portfolio companies but also how we can achieve relevant buy-in on their end.

Therefore, our approach to this topic is very collaborative.

As an early stage VC, we invest in founding teams for very specific reasons, a major one being that we firmly believe they are excellent entrepreneurs with a solid moral compass. And while that is a good base to start from, we also feel very strongly about only “what gets measured, gets managed”.

So what we do in our onboarding workshops after we initially invest, is sitting down with a founding team and together with them finding out which ESG aspects, measures and goals we conjointly consider important — and discuss how efficient implementation could look like. This is where we start. And we’ll take it from there. We’ll monitor feedback we’re getting from our portfolio companies as well as other stakeholders in the market, evaluate it and very likely adjust our approach along the way.

For now, our overarching goals are moving ESG on the agenda in the first place, and establishing a certain level of transparency in the second. If we all can get this right, we believe everything else will follow.

And we, like many other VCs, are still learning (we might be repeating ourselves here) and are very open for discussion and mutual support. So please feel very much encouraged to share your view and give us feedback.

If by that, we eventually manage to establish a certain level of standardisation that enables us all to act more efficiently, we all win.

PS: You can find more details on our internal guidelines here (we also share our questionnaire here, in case you’re interested).