TLDR:
- Venture capital firms are facing pressure to integrate ESG principles due to institutional investor expectations.
- Asset owners, like Aware Super, are seeing progress in ESG integration among VC managers.
Venture capital firms are being pushed by asset owners to enhance their focus on environmental, social, and governance (ESG) factors. While ESG integration has not traditionally been a priority for start-ups and early-stage companies, rising investor expectations and requirements for ESG disclosures are driving VC firms to adapt. For example, Aware Super, a prominent Australian retirement fund, has noted improvements in ESG data collection and reporting capabilities among its VC managers. The fund has also observed a strong commitment from VC firms towards incorporating ESG considerations throughout the investment lifecycle, including engaging with portfolio companies on ESG principles.
This trend towards a greater emphasis on sustainability is not limited to Australia, but is also apparent in Asia, with investors like Malaysian state pension fund KWAP seeking to boost their venture and start-up ecosystem. Large institutional investors now commonly have net zero targets and expect comprehensive emissions reporting from all companies, regardless of their stage of development. While progress is being made, particularly in Europe, VC firms still face challenges in balancing the ESG needs of their investors with the resource constraints of their portfolio companies.
In light of the sluggish regional VC activity in Asia, enhancing sustainability credentials could be a strategic move for Asian VC firms to attract more investor capital. Implementing ESG procedures without burdening portfolio companies directly, maintaining dialogue with limited partners, and highlighting the commercial benefits of ESG best practices for portfolio companies are some strategies suggested for VC managers to navigate this evolving landscape. As the focus on ESG continues to grow, VC firms will need to adapt their investment strategies to meet the changing expectations of investors.
