ESG Investing & How to Get Involved – A VC Fund Managers Guide to Sustainable Investing

Institutional investors have been increasingly interested in responsible investing or investing with environmental, social, and governance (ESG) factors in mind. This trend has been driven by a growing awareness of the risks associated with climate change and other environmental issues and a desire to align one’s investments with personal values.

While responsible investing was once synonymous with sacrificing returns, this is no longer the case. In fact, a growing body of evidence suggests that ESG factors can actually improve investment performance. As a result, more and more institutional investors are incorporating ESG considerations into their investment portfolios.

VC fund managers are no exception to this trend. Over the past few years, many VC firms have been incorporating ESG criteria into their investment decision-making. This trend will likely continue in the coming years as more institutional investors push for responsible investing practices. For VC fund managers, it is essential to be aware of the ESG trends to make the best investment decisions for their clients.

In recent years, every player in the startup ecosystem has been mentioning ESG factors when talking about their companies. However, there is still a lack of understanding of what responsible investing genuinely entails. This article will provide an overview of ESG investing from a VC fund manager’s perspective.

We will discuss some critical considerations for VCs when incorporating ESG factors into their investment decision-making process. We hope that this will provide some helpful insights for institutional investors who are looking to integrate ESG factors into their investment portfolios.

ESG investing vs. SRI vs. SDG investing

Regarding socially responsible investing, there are three main acronyms you should be aware of: ESG, SRI, and SDG. So, what do they stand for? And what’s the difference between them?

For starters, socially responsible investing (SRI) is an investment approach that considers environmental, social, and governance issues and financial considerations. SRI investors seek to avoid investments that may cause harm, such as companies that produce harmful products or engage in unethical business practices. They may also seek investments with positive social or environmental impacts, such as companies that are leaders in renewable energy or diversity and inclusion.

ESG investing is a subcategory of SRI that focuses specifically on environmental, social, and governance factors. Investors who practice ESG integration consider these factors alongside traditional financial indicators when making investment decisions. The goal of ESG investing is to generate competitive financial returns while also having a positive social and environmental impact. Many asset managers offer ESG-themed investment products, such as exchange-traded funds (ETFs) and mutual funds.

SDG investing is a type of ESG investing that aligns with the United Nations Sustainable Development Goals (SDGs). The SDGs are a set of 17 global goals that member countries have committed to achieving by 2030. They cover many issues, including poverty alleviation, gender equality, climate change mitigation, and access to clean water and sanitation.

Investors who practice SDG investing seek investments to help achieve one or more of the SDGs. For example, they may invest in companies that are working to develop clean energy solutions or improve access to healthcare in developing countries.

All three types of socially responsible investing seek to generate a financial return while also making a positive impact on society or the environment (or both). But the difference between them lies in their scope and their focus.

How does ESG investing work?

Socially conscious investors have many options when it comes to choosing where to put their money. One option is to invest in companies that focus on environmental, social, and governance (ESG) issues. While there are various ways to measure a company’s ESG performance, most investors look at factors such as carbon emissions, employee diversity, and executive pay.

VC fund managers also consider ESG factors when making investment decisions. In addition to looking at a company’s financials, they also assess how well the company is managing environmental and social risks. For example, a VC fund manager might avoid investing in a company that relies heavily on fossil fuels or has low employee diversity levels.

Many investors believe that ESG investments are not only socially responsible but also financially prudent. They argue that companies that focus on ESG issues are more likely to be sustainable and profitable in the long term. As more socially conscious investors put their money into ESG-focused companies and funds, the demand for these types of investments will likely continue to grow.

Why do investors care about ESGs?

A key concern for any investor is how to deploy their investment dollars best. In recent years, many investors have considered environmental, social, and governance (ESG) factors as part of their investment strategy. This shift is driven by a recognition that ESG factors can have a material impact on financial performance. 

For example, companies with poor environmental practices may be subject to higher costs associated with regulations or cleanup efforts. Additionally, companies that fail to address social issues such as diversity or workers’ rights may face reputational damage and lose customers. 

Finally, companies with weak governance structures are more likely to experience fraud or mismanagement. By taking ESG factors into account, investors can gain a better understanding of the risks and opportunities associated with potential investments. As a result, ESG investing has become an essential consideration for investors today.

Is it possible for a new fund manager to fully embrace ESG as a thesis?

When it comes to investment choices, more and more fund managers are considering environmental, social, and governance (ESG) criteria. But what does it mean to embrace ESG as a thesis fully? And is it actually possible for a new fund manager to do so?

There are several reasons why some investment managers have been hesitant to embrace ESG fully. One reason is that there is a lack of clear guidelines when it comes to defining what constitutes an ESG-friendly investment. This can make it difficult for investment managers to know which investments to make and how to measure the impact of their investment choices. 

Another reason is that some investment managers worry that they will be unable to achieve their financial goals if they focus on ESG factors. Some believe that they can make a positive impact on the environment and society without sacrificing returns by making responsible investment choices without fully embracing ESG as an investment thesis. 

However, there are also several reasons why some investment managers have fully embraced ESG as an investment thesis. One reason is that an increasing number of investors are interested in investing in companies that are working towards environmental conservation and social responsibility goals.

This trend is likely to continue as more millennials enter the workforce and begin investing. Additionally, many institutional investors are allocating more capital to ESG funds due to the increasing evidence that responsible companies outperform their less reliable peers over the long term. 

There is no right or wrong answer regarding whether or not a new fund manager should fully embrace ESG as an investment thesis. It ultimately depends on the manager’s goals and objectives. That being said, all fund managers need to consider how ESG factors might impact their investment decisions and how they can best align their investments with their values and beliefs.

To pursue this form of investment, VC managers will need to educate themselves about the different ESG criteria and how they can be applied to investment choices. They will also need to convince other members of their team of the merits of integrating ESG into their investment process. And finally, they will need to find ways to incorporate ESG criteria into their investment decisions without sacrificing financial returns.

While these challenges may seem daunting, they are not insurmountable. With education and perseverance, any fund manager can learn how to integrate ESG into their investment process and make investment choices that reflect their own values and goals.

How difficult is it for new VCs to push for an ESG thesis when dealing with their investors?

New investment firms that focus on environmental, social, and governance (ESG) principles may have a difficult time convincing older investment firm to back their ventures. Pulling investment from firms that don’t adhere to ESG principles can be difficult when faced with losing meaningful connections and years of experience.

Many newer investment firms are focused on sustainability and the triple bottom line but adopting these principles can often mean foregoing short-term goals for the benefit of long-term market success. That being said, young investment professionals may experience difficulty making investment decisions that go against the grain of traditional investment practices.

Lack of resources

To encourage companies to adopt ESG principles, new investment firms need to provide clear and concise investment advice and push for transparency in business practices. New investment managers may also be worried about alienating potential clients by pushing for an ESG focus. 

However, there are a few things that new VCs can do to encourage their investors to consider ESG principles. They can start by educating their clients on the benefits of ESG investing and providing investment advice that considers ESG factors. Or they can make a point of investing in companies that are leaders in sustainability and responsible business practices. By suggesting minor changes that won’t jeopardize a company’s bottom line, new investment managers can show their clients that they are serious about ESG investing and positively impact the entirety of the industry.

What are the ESG KPIs you should follow?

When it comes to investing, there are a lot of different factors to consider. And while each investor has their own process and preferences, some key performance indicators (KPIs) are universally important to examine – especially when considering an ESG company. The first element is looking at the company’s investment activities and determining whether they align with ESG principles. These principles include promoting gender diversity, supporting renewable energy initiatives, and avoiding investments in companies with a negative environmental impact.

The second element is looking at the company’s financial performance. This includes traditional indicators like profitability and revenue growth, but also things like how much debt the company has and what its cash flow looks like. The last element is a standardized set of KPIs for assessing each portfolio company’s performance on the material ESG criteria identified in the ESG Heatmap. 

While investors can use many KPIs to evaluate a company’s ESG performance, some of the most important ones to examine includes carbon emissions, energy usage, water consumption, and waste generation. By tracking these KPIs regularly, investors will be able to get a better sense of how well a company is incorporating ESG principles into its operations and whether or not it is making progress on these fronts. Additionally, by comparing the KPIs of different companies, investors will be able to identify which ones are leading the way in terms of responsible investment practices and which ones still have room for improvement.

As more and more investors incorporate ESG principles into their investment decisions, it is becoming increasingly important for companies to track and report on their progress in this area. By doing so, they will not only be able to provide valuable information to their shareholders, but they will also be able to differentiate themselves from their peers. In the end, this will help them attract more investment capital and create long-term value for all stakeholders involved.

Why are startups trying to be ESG?

Startups are increasingly trying to be “ESG,” environment, social, and governance friendly. The pressure to be more sustainable has come from customers, employees, and shareholders who want businesses to impact the world positively. Many startups are responding by incorporating sustainability into their business models.

For example, some companies are developing new technologies to reduce emissions, while others are working on initiatives to reduce waste and promote fair labor practices. By being ESG-friendly, startups hope to attract more customers and investors and create a positive reputation for themselves.

A recent survey asked startups to rank the reasons that drive them to consider ESG. The results are encouraging as half of the startups ranked attracting new customers as a top three driver. This evidence is promising because it shows that companies acting sustainably are on the rise and that more and more consumers are shopping with an eye for sustainability. 

In addition, showing a commitment to ESG helps companies attract new employees and retain existing talent. However, only a quarter of startups see ESG as necessary in attracting new investors, and only 10% say that investor expectations influence their thinking about the topic. While there is still room for improvement, it is clear that startups are beginning to see the value in integrating ESG into their business models.

BCG study shows that more than half of European consumers claim to shop green. Demonstrating a commitment to ESG also helps them attract new employees and retain existing talent. But only a quarter of startups see ESG as necessary for attracting new investors. Nevertheless, startups continue to try to be more sustainable because they view it as the right thing to do for the environment, society, and their business. As one startup founder said, “ESG is aligned with our company values…It’s good for society and it’s good for business.”

Some of the most significant ESG funds today

As more and more consumers become interested in sustainability, many companies are incorporating environmental, social, and governance (ESG) criteria into their business models. As a result, these companies are not only gaining competitive advantage but also making a positive impact on the world. Partners Group is one of the most successful ESG companies in operation today. The firm invests in private equity, private real estate, and European infrastructure. What sets Partners Group apart from other companies is its commitment to external initiatives such as UN PRI, TCFD, and IFC. In addition, six of its offices are powered using 100% renewable energy. As more consumers continue to demand sustainable products and services, it is clear that companies like Partners Group will only become more successful.

Tikehau Capitals is a French asset management company that specializes in private debt, real estate, and private equity. The company was founded in 2004 and has grown to become one of the leading asset managers in Europe, with over €30 billion in assets under management. Tikehau Capital is also a top player in ESG investing and was ranked the 3rd most sustainable company in the world in 2020. This can be attributed to the company’s near-flawless performance in Responsible Investment and its high performance in In-house ESG.

Tikehau Capital’s commitment to sustainability is evident in its practices. The company publishes annual sustainability reports, and for each ton of CO2 equivalent emitted by Tikehau’s operations, it acquires the equivalent number of Verified Carbon Units from the Borneo-based Katingan Forest conservation program. 

Tikehau has a long-term 2022 incentive plan for senior executives based on financial and ESG objectives. This shows that Tikehau is not only committed to being a sustainable company but also that it recognizes the critical role that ESG plays in achieving long-term financial success.

Why you should invest in ESGs

In recent years, there has been an increasing focus on environmental, social, and governance (ESG) factors in the world of investing. This is especially true for impact investors and venture capitalists, who are often interested in making a positive difference and earning a financial return.

While there are many reasons to pursue ESG investments, three key factors stand out. 

VCs and impact investors not already pursuing ESG investments should consider doing so in the future. This sector of investing can offer many benefits, both financial and non-financial. In addition, it is likely to become even more popular in the years ahead as more investors seek to align their portfolios with their personal values. By doing so, they can help to drive positive change in the world while also generating strong financial returns for their investors.

M Accelerator

There is no lack of evidence that environmental, social, and governance (ESG) investing delivers superior risk-adjusted returns. And yet, many venture capitalists (VCs) and impact investors remain skeptical of whether or not they should incorporate ESG considerations into their investment decisions. Part of the reason for this skepticism is that there is still a lack of clarity around best integrating ESG factors into the investment process.

The bottom line is that ESG investing is a powerful tool for creating positive social and environmental impact, and M Accelerator can help you unlock its potential. We offer comprehensive support for building clarity and a persuasive pitch deck with an investment approach. Our team of experts can help you assess opportunities, identify key risks and challenges, and develop a tailored strategy for maximizing impact. 

With our help, you can develop a clear and actionable plan for incorporating ESG considerations into your investment decisions to deliver superior risk-adjusted returns. Our services can give you peace of mind by knowing that your investments align with your values. Contact us today to learn more about how we can help you build a successful ESG investment portfolio.