How Shrewd VCs are Making the Most of ESG
It’s time for venture capital to start thinking about sustainability and find partners in the space, just as they would find and recommend other operational partners for portfolio companies. The opportunities related to sustainability are too significant to ignore.
What are these opportunities? Sustainability can help VCs compete for the best companies, boost IPO opportunities, increase a company’s ROI and support their visibility within the broader ESG industry.
Sustainability access can help you compete for the best companies
A commitment to sustainability through partnerships with experts helps you attract like-minded companies. Crucially, for companies with a built-in mission or environmental focus (like cleantech) but even for companies without it, the ability to access an engine that will turn on operations, hiring and customer engagement appeal to forward-thinking companies.
ESG and sustainability can also be a way to evaluate potential companies at later stages. A materiality assessment or risk verification can uncover future ESG plans. If VCs are in a place with access to materiality or potential carbon savings, they can better evaluate companies.
Increase the company’s ROI
Data from McKinsey shows companies with robust sustainability practices were more potent in these five areas: "top-line growth, lower costs, fewer legal and regulatory interventions, higher productivity, and optimized investment and asset utilization." These are compelling symbols and arguably vital for companies.
The data on purpose-driven companies points to the same indicators as above, including customer attraction, employee engagement and financial performance.
Jessica Appelgren, vice president of communication at Impossible Foods, spoke to GreenBiz about how purpose-focused companies attract and retain talent, a key indicator for investors at all company stages. Research that points to venture capital’s focus on the team as an essential investment factor dovetails nicely with data that sustainability helps create better teams.
Building ESG and sustainability practices from the beginning allow the companies to avoid painful pivots or changes closer to an IPO or later when it’s harder to change policies and culture. As organizations become more extensive, it can be difficult to redirect or integrate purpose.
Consider the IPO
There were 480 IPOs in 2020, a 106% increase from the previous year. Investments with ESG considerations grew 42% between 2018 and the end of 2019. If you're considering an IPO within the next 18-36 months, you need to be considering how current and future ESG strategies will help benefit your IPO.
The same reasons companies support a sustainability strategy (access to customers, employee engagement and cost savings) indicate a stronger IPO and pre-IPO position.
Reduce environmental impact
As with other ESG at companies, stakeholders are also looking to investors for meaningful sustainability literacy. Putting money into technologies and companies that will thrive in a lower carbon economy is a way for the VCs themselves to attract other businesses and help climate change.
ESG and sustainability are potent forces for change within companies, for investors and other stakeholder groups. As ESG and sustainability become more mainstream and acknowledge their powers, VCs have a significant opportunity to increase their value and portfolio companies.
Want to talk more about making the most of ESG? Reach out and say hello!
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