In my previous work experience, I worked at a startup that was developing a portfolio management tool for venture capital investors. The tool would automatically track a fund’s portfolio metrics according to the investor’s needs. During the product development, we often consulted with venture capital investors to understand their needs in order to deliver a useful product. That was when I found out that most VC investors consider ESG an important aspect of their investments and put a lot of emphasis on the sustainability of their investments. As I delved deeper into this trend, I found out that the growing importance of ESG in venture capital is critically important for the future of investing in startups. Moreover, several research studies have shown that ESG has a positive impact on their performance.
ESG (Environmental, Social, and Governance) considerations are increasingly important in the venture capital industry, and for good reason. Companies with strong ESG performance are often viewed as more resilient and better equipped to manage risks and capitalize on opportunities, which can translate into long-term financial success.
In fact, a survey by the Global Impact Investing Network found that 84% of impact investors, including those in venture capital, reported meeting or exceeding their financial expectations in 2019, indicating that financial performance and ESG considerations can go hand-in-hand. Additionally, a report by the Harvard Business Review found that companies with strong ESG performance had a lower cost of capital and were less likely to experience negative events such as lawsuits or regulatory fines.
Investors are taking note of these potential benefits. A survey of global institutional investors conducted by the CFA Institute found that 54% of respondents indicated that ESG considerations were a primary factor in their investment decisions, up from 42% in 2017. Furthermore, the Morgan Stanley Institute for Sustainable Investing found that 75% of individual investors surveyed in the US were interested in sustainable investing, and that sustainable investments accounted for one-third of all professionally managed assets in the US in 2020.
These statistics demonstrate that ESG considerations are becoming increasingly important to investors, as they recognize the potential for long-term financial success and positive social and environmental impact. By incorporating ESG considerations into their investment processes, venture capital investors can help drive positive change in the startup ecosystem and create long-term value for both investors and society as a whole.
Resources:
https://thegiin.org/research/publication/annualsurvey2020
https://hbr.org/2010/12/the-impact-of-corporate-sustainability-on-organizational-processes-and-performance
https://www.cfainstitute.org/-/media/documents/survey/esg-investing-practices-progress-and-challenges.ashx
https://www.morganstanley.com/pub/content/dam/msdotcom/infographics/sustainable-investing/Sustainable_Reality_Analyzing_Risk_and_Returns_of_Sustainable_Funds.pdf
https://pitchbook.com/news/articles/us-sustainable-startups-attract-record-145b-in-vc-funding-in-2020
Pictures:
https://carta.com/blog/esg-is-coming-to-venture-capital/
