Is sustainability the big differentiator for VCs?

Competition is one force which can bring about radical changes. And the changes are agnostic of sectors.

Take the case of venture capital investment funds. One can perceive a typical venture capital fund manager to be a returns oriented investment professional, who has one eye on the growth of the business he has invested in and other on the value it would fetch when sold. According to London headquartered Preqin, a provider of alternative-assets investments data, that appears to be changing and sustainability is becoming a key differentiator that such funds are seeking.

Preqin’s special report on venture capital fund managers outlook, H1 2018 says that in an increasingly competitive environment coupled with an evolving limited partner (LP) preferences, general partners (GPs) have been pushed to further distinguish themselves in order to successfully fund raise. That differentiator is increasingly turning out to be an increased focus on the impact of their investments on environment, society and corporate governance.

Preqin’s survey of 221 venture capital fund managers finds that a majority of the LPs are now with the impact and sustainability of their investments, the importance of environmental, social and corporate governance (ESG) policies and this concern is now greater than ever. “The majority (51%) of fund managers surveyed either have an active ESG policy or have one pending,” says Preqin.

Yet, just under a third (31%) of GPs require portfolio companies to report on ESG or responsible investment activity.

The largest proportion (67%) of managers do not track ESG metrics, while just 13% of GPs report ESG metrics to investors quarterly or more frequently

And, there is regional disparity when it comes to ESG focus of venture capital fund managers. Europe-based managers are most likely to consider ESG factors: 61% of respondents either maintain an ESG policy or have one pending, while nearly the same proportion (62%) of North America-based GPs do not consider ESG factors. And, under a third of Asia- and North America-based managers have an active ESG policy.

“Although a significant proportion of managers consider ESG factors as part of their investment strategy, only a few actively collect and report on ESG metrics,” says Preqin. A window of opportunity exists for managers to further differentiate themselves by employing more granular ESG objectives such as mandatory reporting, active engagement with portfolio companies, integration of ESG initiatives with fund strategy, and timely communication with LPs, among others, Preqin opines.

Could venture capital funds change for good? Lot of the impact and sustainability focus seems forced, then voluntary. But, chances are that GPs can change the music and make the LPs dance to a totally different tune.