The Business Case for Venture Capital ESG

The Business Case for Venture Capital ESG

Johannes Lenhard

ESG & VC Specialist

We know that different stakeholders are pushing ESG for numerous reasons and that attitudes can vary. But the question at the core of this is simple: does implementing ESG in venture capital investing and portfolio companies make financial sense? Join Johannes Lenhard as he explores whether ESG contributes to the financial success of investors.

We know that different stakeholders are pushing ESG for numerous reasons and that attitudes can vary. But the question at the core of this is simple: does implementing ESG in venture capital investing and portfolio companies make financial sense? Join Johannes Lenhard as he explores whether ESG contributes to the financial success of investors.

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The Business Case for Venture Capital ESG

7 mins 12 secs

Overview

Does implementing ESG in venture capital investing and portfolio companies make financial sense? The Harvard Law School Forum on Corporate Governance argues that companies and investors “have become too short-term oriented in their investment horizon, leading to decisions that increase near-term reported profits at the expense of the long-term sustainability of those profits.” Likewise, ESG factors are a good proxy for the longer-term health of a business. While companies that integrate ESG factors into their decision making have indeed been found to outperform the stock market, this is only true for those who focus on material ESG factors (e.g. waste reduction for a car company). There is also pressure from consumers and employees who are increasingly pushing for ESG.

Key learning objectives:

  • Understand the business case for ESG in VC

  • Outline how ESG affects revenue and operations

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Summary

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.

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Johannes Lenhard

Johannes Lenhard

Johannes teaches and researches homelessness and the social science of venture capital at the Max Planck Cambridge Centre for Ethics, Economy and Social Change at the University of Cambridge. Johannes is also a co-founder of the not-for-profit VentureESG, a global community of almost 300 VC funds and asset owners committed to advancing ESG practises in VC.

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