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ESG Investing & Venture Capital

In recent years, ESG investing has grown significantly in popularity. Many investors are seeking an ethical approach to how they deploy their capital, and using the ESG investment evaluation framework can help achieve this. Historically, this framework has been applied primarily to publicly traded companies and mutual funds, but we are now seeing ESG move into the private market as well.

What are ESG factors?

Environmental, social, and governance (ESG) factors are a set of criteria that may be used to evaluate a company’s environmental, social, and governance track record and how it performs in these areas. These factors can include:

  • Environmental factors – carbon emissions, deforestation, pollution, green energy initiatives, water usage, etc.
  • Social factors – employee diversity, fair labor practices, human rights, etc.
  • Governance factors – lobbying, board member makeup, political donations, lawsuits, executive pay, etc.

It’s important to remember that a company’s commitment to any one, or several, ESG factors may fluctuate over time.

What is ESG investing?

ESG investing is a type of investment framework or strategy that uses environmental, social, and governance (“ESG”) factors to assess an investment’s positive or negative impact in one or more categories. An ESG score is meant to measure the long-term commitment of a company in one or more ESG categories. ESG factors include climate/environmental impact, working conditions, human rights, anti-bribery and corruption practices, regulatory compliance and regulations, corporate governance, and more.

These factors aren’t just about ethics – they can be used to evaluate the potential for material risks that could impact a company’s value. Should a company choose to ignore or minimize its commitment to ESG factors, it could possibly face serious costs that could impact its ability to achieve and/or sustain profits over the long term.

The ESG landscape

Money invested in ESG funds has grown significantly in recent years. According to a report by Morningstar, ESG funds attracted $51.1 billion of new net money from investors in 2020 – more than double the previous year, setting a new record. This approach has become more mainstream, and potentially for good reason. According to a recent study out of the NYU Stern Center for Sustainable Business, over a longer time horizon, the implementation of sustainability initiatives at the corporate level has been correlated with improved operational efficiency, risk management, and innovation. Therefore, in addition to being a more ethical way of investing, there is some research to suggest that these criteria could possibly result in better financial performance over the long haul.

Measuring ESG

ESG investing is a framework that is often applied to the public market. Measuring ESG factors for publicly traded companies and mutual funds is easier, as there is a lot of data available, making it easier to see how a company stacks up in these areas against its peers. When it comes to private companies, however, using these same criteria can be far more difficult. Not only are there fewer peers to compare to, but most startups will not have this data readily available.

In addition, there is no standardized set of ratings or scores that can be used to evaluate any public company, mutual funds, or privately held company. While private rating systems can be used, their implementation and results may vary to a significant degree. The data used may not be subjective, verifiable, or reliable, and various rating systems may weigh ESG factors differently.

Applying ESG risk factors in venture capital

So, how can this framework be applied to private companies? At this point, there isn’t a standardized method being used to assess ESG factors, though we believe that will likely evolve as this framework continues to become more mainstream. Because of this, it will take some investor research and discretion in determining how to gauge a private company’s ESG factors. It’s certainly not comprehensive, but it can be helpful to approach your evaluation by considering these questions:

  • To what ESG factors does the company claim to commit?
  • Of the ESG factors, which could have a material financial impact on the company or its industry?
  • Is the company currently managing these potential risks and do they intend to do so long term? How so?
  • How could these risks impact the company’s value in the long run?
  • How might an investment in a company align with your goals and priorities?

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.





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