The Business Case for Venture Capital ESG

What is the business case for ESG?

The Harvard Law School Forum on Corporate Governance argues that companies and investors “have become too short-term oriented … leading to decisions that increase near-term reported profits at the expense of the long-term sustainability of those profits” and that ESG factors are a good proxy for the longer-term health of a business. 

Tensie Whelan from New York University’s Stern School of Business states that ESG is essential for customer allegiance and protection against threats such as “social stability, vibrancy, and inclusiveness that makes a health business possible in the first place.” 

Bain and Company’s 2021 paper on the ‘Expanding Case for ESG in Private Equity’ argues that from consumers to employees, the large majority cares increasingly about ESG factors. 

According to a 2020 Capgemini survey, 70% of buyers are changing preferences based on sustainability. Similarly, a global HP survey for workers found that 46% of employees would only work for a company with sustainable business practices.

How does ESG affects revenue and operations?

Integrating ESG does not necessarily have a simple immediate impact on increased revenue - intermediating factors often play a role. Whelan’s team found that one apparel company’s sustainability efforts had a 5% contribution to their labour costs. This impact was mediated through higher employee retention and increased productivity. 

Avoided costs are an important factor in the business case. Deforestation-free practices for agriculture businesses significantly reduce operational risk such as wildfires, environmental costs) which can be monetized as avoided cost.