ESG_VC is an initiative in the venture capital industry, responding to the pressing ESG issues that affect early-stage businesses. The initiative has established a whole VC community spanning across the UK, USA and Europe. The aim is to progress and support the efforts of early-stage businesses in managing and integrating ESG into their operation. The initiative equips entrepreneurs with the knowledge and tools necessary to embrace ESG from the very beginning.
Can you give us an introduction to yourself and what led you to become involved in ESG?
Henry: I'm the Director of Marketing Communications at Beringea. Beringea is a transatlantic VC firm that manages about $750 million across the UK and the US. I largely focus on our UK and European operations where I lead marketing by advising our portfolio companies on marketing communications. I also run our portfolio programme, the Beringea Scale-Up Academy. We use this programme to help portfolio companies think about the various issues that they might face when scaling up. Over the last couple of years, we've seen an increasing number of questions from those companies about all the different issues that largely relate to sustainability and diversity. Questions range from “how do I measure my carbon footprint?” to “how do I measure the gender pay gap within my organisation?” I don't tend to find that entrepreneurs ask us about ESG, a lot of people are just looking for quick responses to simple questions. As investors, we then overlay the idea of ESG on top of the issues they’re asking us about. In responding to questions and thinking about how we provide valuable resources, we started our journey on ESG.
Earlier this year, we started bringing together a group of funds to think about developing an initiative.
“The very first meeting was just four or five of us, from then on it snowballed into an initiative that's now 125 funds across the UK and Europe.”
We structure our operations in three main areas of focus.
The framework that we've built.
Providing events throughout the year that aim to help portfolio companies to think about their operational challenges related to ESG.
Providing off-the-shelf resources to founders to help them embed many of these principles within their company.
Serena: I joined Talis last year and I was tasked with looking at the fund and its different operational aspects. I've always been curious to understand why investment decisions haven't always integrated operational risk. I’m really interested in the role of values in investing. Previously, I’ve looked at sustainable finance, but in joining Talis, my role is to integrate ESG across the fund. We see 3 key areas in which we do that:
In our investment process
In our portfolio management
In our fund itself - how we look at ESG internally and make sure we're walking the walk as well as talking the talk
Talis is an early stage VC firm focusing on Seed and Series A investments in Europe, the UK and the US. We have 3 segments: 1) consumer internet, 2) tech infrastructure and 3) climate and sustainability . From an operational perspective, it’s really key for us that we not only consider commercial factors, but also material issues in our investment process. I think this is what started our ESG journey. It then translated into portfolio management and into the fund itself. We thought about how we could encourage other funds to also embrace ESG in the same way. This is why we're trying to be as active as we can in all the broader initiatives.
Why have other funds wanted to join the ESG_VC initiative?
Henry: The key reasons we have seen are:
People are looking for a level of standardisation in the industry
People genuinely want to help their portfolio companies to think about ESG
We are all seeing an increasing reporting burden which means that these types of initiatives are proving to be valuable to funds
Ultimately, we are seeing a varying degree of ESG maturity across the industry. For some people, just getting to know and understand what ESG might look like for them is a useful starting point. We've hosted webinars most months this year. For some of our attendees, the webinars have been useful for introducing ESG. For others, the webinars have been useful for understanding how to fully embed an ESG strategy into their operations.
What data is required by ESG_VC’s measurement framework?
Henry: It’s a relatively simple framework. It's 48 questions that companies will try to respond to. The framework is largely designed for companies to begin their ESG journey, meaning that in instances where the company cannot respond to a question, then that's okay. This is often the case for companies that have just raised their angel round or that only have a handful of employees. The questionnaire is about setting yourself a benchmark and making progress over the next few years as you scale. There’s a mix of qualitative and quantitative questions, ranging from simple Yes/No questions, to some slightly more detailed numerical responses such as “What's the ethnic diversity of your team?”
Serena: For questions that ask whether a particular policy is in place, the framework is good as it allows for the option to select ‘No, but plan to in the next 12 months'. Things change very quickly in portfolio companies, particularly when they move from Seed to Series A. The option provides a nice reminder of their plan for the next 12 months.
Does this option mean that the company has specifically made a plan and set a date on it? Or does it mean that they would like to start thinking about implementing a policy?
Henry: Ultimately, a lot of this is at the discretion of the individual entrepreneur. I can't definitively say that all companies that select this option will then go on to implement the respective policy. But for investors, it certainly provides us with a useful tool for understanding what a company needs. When we collate all of this data into a single source, we can get a clearer sense of the improvement targets set by our portfolio companies. It informs us of which resources we need to provide over the next 12 months. For example, under the ‘G’ section of the framework, companies most consistently set the target of simply implementing an ESG policy. From this, we would know to provide an off-the-shelf ESG policy for our portfolio, as well as a workshop on how to craft an ESG policy to suit their business. Ultimately, it provides investors with a useful tool for checking in with companies and holding them to account.
What has been the biggest challenge in thinking through the right ESG metrics for early-stage companies?
Serena: Collecting the right data and having the right mechanisms in place to collect the data, is a really big challenge for a lot of the companies we work with. At Seed stage we don't expect all of our portfolio to have awith good access to their diversity data. We want to help businesses understand why that data is useful and important. We can then work with businesses to develop their strategy for the following year, based on the collected data.
The other challenge is in finding out where to start. For a lot of founders, it can be super overwhelming; they might not have the time and resources internally. Our first onboarding session with companies aims to confirm how to best allocate the different tasks within the team. We also aim to ensure that there's a system of accountability to make sure these points don’t get lost.
“Founders often don't have as much time as they would like to spend on these processes so it's got to be a team effort.”
Henry: We've always thought about this in terms of setting the foundations for future ESG success. For many companies, ESG has been something to think about when they're considering an exit. They might get to that stage where they’re preparing to list or to be acquired, and suddenly realise that there are lots of problem areas not previously considered. They’ll have to retrofit all of their processes and policies to get through this important stage for their business.
If companies just put some really simple processes in place at the early stage, we believe that they will scale with those. The steps at the start of a company’s journey make sense for future growth and future success. I also think there’s a need to make these objectives seem attainable. Many entrepreneurs look at ESG with a lot of enthusiasm, but when they think about the practicalities of delivery, they often feel the need for time and resources or else it will be taking on too much. Therefore, we deliberately try to help break it down into easy steps for companies.
What are some examples of a startup showing dedication towards ESG in the early stages?
Serena: From my portfolio, Nøie is the company that comes to mind. This is because of the depth in thinking around their environmental emissions. It's a DTC skincare brand, focused on providing solutions for people with chronic skin conditions. A lot of the time when a starts to do a carbon emissions audit, generally, they don't go into much depth of scope 3. With Nøie we saw a real depth in scope 3, particularly focusing on their digital spends. This related to the ads and services that they’d bought, which contributed to 33% of their scope 3. That's a really interesting example of a company doing extra work to really understand their digital spend. To then provide a tool to other portfolio companies is great so that they can do the same.
Henry: These initiatives can be really valuable for sharing knowledge between entrepreneurs. Across our portfolio, we have companies ranging from pre Series A through to Series D and beyond.
“There’s huge value in providing a connection between businesses that are at different stages in their sustainability journey.”
To give an example within our consumer portfolio. Monica Vinader has taken sustainability very seriously from day one, using recycled silver in their jewellery. They've always been committed to ensuring that there's no slavery involved in their supply chains. Their sustainability strategy has always been quite advanced. Through engaging them in this initiative, they're able to share a lot of really valuable insights with other consumer businesses in our portfolio. They connected directly with a business called Thread. The experiences that Monica Vinader developed over the years of building a comprehensive sustainability strategy could be shared directly with another company that was at a different point in their ESG journey.
“The initiative has facilitated these connections so that companies can ask both strategic and quite tactical questions on topics such as recycled packaging, etc.”
What are the most common weak areas for start-ups in their approach to ESG?
Serena: It’s hard to generalise across the portfolio as we invest in a really broad range of businesses. Therefore, there’s a real range of needs. But, for some of our more consumer-facing portfolio, there's still a lot of interest in understanding digital emissions and understanding data. There are a lot of questions around how to collect data and the right way to collect data. Questions on how to understand the different carbon emissions associated with collecting lots of data and also questions around the different digital carbon spends. It’s an area that's really hard to quantify.
Henry: In recently collected data, on average, companies tend to be weaker on the environmental metrics within our framework. This becomes particularly true with SaaS businesses. Because software businesses typically don't have a tangible, physical product or a clear supply chain, we’ve found that they seem not to have embraced many of the general principles of environmental sustainability that we would now expect from an early-stage business. Looking through the data that we're receiving from those companies, this must now be an area of focus for capital funds that are investing in SaaS.
How has the ESG_VC community developed?
Henry: It’s developed very well. We're incredibly grateful for all of the support that we've had from funds across the European venture ecosystem. There’s now around 125 funds involved in the initiative as a whole. We’re then led by a core group of funds who sit on our steering group, Serena and the team at Talis are one, but there’s also Atomico, Seedcamp, Lakestar, Par Equity, Astanor, and we’re also supported by the BVCA. The groundswell of support that we've seen for this initiative has been really encouraging. I think that this year will be very much about continuing to expand that group, but also encouraging people across the industry to adopt as many of the practices and standards that we are developing.
Serena: As the community is still developing, it’s really nice to feel a shared sense of ownership. The way in which the community is formed, allows for input from members in terms of the events that they think the portfolio needs as well as input regarding what they want to see from the next year. It's a bottom up initiative which is great!
Where would you like to see the community evolving in the years to come?
Henry: There are a few clear targets for us for next year:
We would like to continue to expand the community and its reach.
We want to see a good level of adoption of the framework - We've had a really encouraging level of engagement for this year, but we need to follow through on that.
We want to make the process of collecting data as seamless as possible. Integrating some sort of software platform into this journey will be really helpful.
Continuing to professionalise and make sure that all of our processes are as valuable as possible for portfolio companies and funds, is where I see this heading.
Serena: Yeah I think that Henry is doing a really great job of expanding the reach of the framework and expanding its professionalism regarding how the framework is administrated and how the data is collected. Great work is being done for how portfolios use the data. I think there's a lot to do but it’s an exciting time for the initiative.
What excites you most about ESG?
Serena: For me, it's thinking that every time we invest in a business, we will have a clearer understanding of all the risks and opportunities. It's a useful lever in understanding how we should invest in early-stage businesses today and how they create businesses of tomorrow. It's a really exciting proposition, to be able to help create businesses that are sustainable.
Henry: For me, it's just encouraging people to do something. A lot of my experiences of starting to think about ESG and its integration into our investing, have had a feeling of being overwhelmed by all the different options and processes. Breaking it down into bite-sized chunks helps those early-stage businesses, who are in many instances focused solely on growth, to understand what small changes they can make that can have a really huge impact on their hiring and on their culture, and ultimately, their sustainability.
If someone is interested in learning more about the community, how can they get in touch?