PARTNER CONTENT
By Lorraine Spradley Wilson, Chief Sustainability Officer, Novata
Elizabeth Meyer, Chief Legal Officer, Novata
There are dozens of standards available that speak to the transparency needs of mature publicly traded companies and their stakeholders. Dedicated teams and external consultants pore over public company information to meet clear reporting deadlines from nonprofits and other standard-setters. While standards for venture are still developing, there is still a need for transparency and infrastructure around ESG issues.
For the venture capital (VC) space, taking a long-term and holistic view of a company’s material issues is important; however, the time constraints are real. According to the World Economic Forum (WEF), historically, the venture due diligence process has not formally considered the needs of different stakeholders “such as employees, regulators, suppliers, civil society organizations, investors, and “end-users.” WEF’s takeaway is that this has been “to the detriment of the VC community.” To create future-proof, resilient companies, venture investors must make a conscious decision to consider ESG factors in their early-stage company investments.
What is the value of creating an ESG reporting strategy for a venture capital fund’s portfolio? The answer is multifaceted.
For many across the ESG reporting spectrum, the data now lives alongside traditional financial disclosures and has become an important part of the overall investment process. A key reason for making the time commitment to collect and analyze ESG data from portfolio companies is the fact that the data provides a fuller picture of the risks and opportunities at the companies in question. Research from McKinsey shows that a strong ESG value proposition leads to higher top-line growth in the form of attracting “B2B and B2C customers with more sustainable products.” This research also shows that companies with better ESG profiles can “boost employee motivation” and “attract talent through greater social credibility.”
Taking ESG factors into account helps manage downside risk as well. Companies with better ESG profiles incur fewer fines, penalties, and enforcement actions. When an early-stage company can get this balance in place correctly, research shows that it adds value at exit. A 2023 PWC survey of private equity firms found that 33% of respondents cite the impact on exit value as a reason why they prioritize ESG for their firm/fund.
In a recent interview with The Sustainable Finance Podcast, Elizabeth Meyer, Chief Legal Officer at Novata and Rosalind Bazany, Partner and Head of ESG and Impact at Antler, examined some of the structural barriers for VCs integrating ESG into their investment practices and ways in which they can overcome these challenges. They noted that while VC investors often represent a small percentage of ownership of a company, having a clear owner for ESG reporting and integration goes a long way towards increasing adoption of ESG among portfolio companies. It’s also important to recognize that ESG reporting doesn’t have to look the same across venture and private equity. In our experience, venture firms tend to select a smaller subset of metrics to reduce the burden of reporting on earlier stage companies as well as ensure they are right-sizing metrics for the growth stage of the portfolio.
While there are thousands of ESG metrics in existence, the best approach is to start early, select a small subset of metrics, and expect to manage an iterative reporting process. Venture investors should look to engage founders early and provide access to education and resources that can ensure buy-in and a clear ROI. In turn, what founders get is a process that helps them tract progress on important issues over time, and perhaps also makes their company more valuable to the next investor.
Lorraine Spradley Wilson, Chief Sustainability Officer at Novata – Prior to Novata, Lorraine was managing director and head of investor solutions at JUST Capital. Previously, Lorraine held roles in investment management in New York at Bank of America Merrill, Third Avenue Management, and Goldman Sachs. Lorraine has served on the board of several community organizations and is an advisor to the NYU Center for Sustainable Business. She is based in Washington DC.
Elizabeth (Beth) Meyer, Chief Legal Officer, Novata – Prior to Novata, Beth was Head of Compliance & ESG for Techstars, a global seed stage investor and accelerator. Before joining Techstars, Beth specialized in mergers and acquisitions with a focus on private equity and transactional liability insurance. She began her career in human rights working in education and community development on the ground in the Pacific and Sub-Saharan Africa, then with the World Bank working in anti-corruption.
