The Rise of ESG Reporting Requests from VCs: What Startups Need to Know

As ESG reporting requests from venture capitalists become more common, startups are struggling to keep up with the demand for sustainability metrics. So what do startups need to know about ESG reporting? In this article, we will cover everything you need to know about ESG requests from VCs!

Why is Venture Capital ESG reporting on the rise?

While ESG reporting has steadily increased in the Private Equity (PE) sector, with evidence from the Principles for Responsible Investment that suggests a correlation between ESG rankings and increased financial returns.

The subject has also started to attract interest with Venture Capitalists (VC). Venture capitalists have a unique investment approach. They are at the forefront of riskier investment types and often invest in and accelerate the solutions required to address the world's biggest problems, such as climate change and income inequality. The practice of ESG reporting has taken off for several reasons:

1. Due diligence. First, ESG reporting provides valuable insights into a company's culture, operations, and strategy. It can help identify potential issues and red flags that may otherwise be missed.
2. Investor reporting. Second, ESG reporting is becoming increasingly important to Limited Partners (LPs), who are the institutional investors that provide capital to VC funds. Many LPs have started to incorporate ESG criteria into their investment decisions, and they are increasingly interested in knowing how VC firms are incorporating ESG into their portfolios.
3. Global trends. Finally, ESG reporting is a way for VC firms to demonstrate their commitment to sustainable investing. As the public becomes more aware of the ESG issues, there is growing pressure on businesses to address these issues. By reporting on their ESG performance, VC firms can show that they are taking these issues seriously and are working to address them.

Is VC ESG reporting having an effect?

Yes and no. Research has shown that only 7% of VC invested startups have a net zero strategy, and 11% are actively measuring their emissions. While this suggests that ESG reporting is having a limited effect, it is also clear that ESG reporting is in an early phase of growth.

Several of the largest VCs in Europe have committed to tracking portfolio ESG metrics. SFC Capital is one of the most active VCs in the UK, they track ESG reporting with their portfolio companies and publish an annual ESG report. Over 25 VCs have also joined VentureESG to help boost adoption of ESG tracking and implementation. This includes Kindred Capital, HV Capital, and 500 Startups. Several VCs have launched their own ESG strategies, such as Balderton with their Sustainable Future Goals. This will help to boost the adoption of ESG metrics with startups over the coming years.    

What ESG data are VCs asking for?

The rise of ESG reporting requests from VCs is having a significant impact on the startup ecosystem. Startups are under pressure to collect and report data that they may not have previously considered, and this can be time-consuming and expensive. In some cases, startups

The most common ESG reporting request from VCs is for a company's carbon footprint. This request is usually in the form of a questionnaire that asks for information on emissions from company operations, employee travel, and business-related air travel. Other common requests include information on water usage, waste, and energy consumption.

In recent years there has been a global push towards Diversity & Inclusion. A report from the World Economic Forum uncovered that 84% of founders in the EU are white or caucasian. Workplace diversity isn’t just a box-ticking exercise - ensuring there is a diverse workforce is the right thing to do. Research from McKinsey has also shown that teams that prioritise D&I are 35% more likely to outperform their competitors and capture new markets. VCs may ask for social impact data, such as employee diversity statistics or customer satisfaction rates to help keep track of this.

Why is it a challenge for startups to report on ESG?

The impact of ESG reporting on startups depends on a number of factors, including the size and stage of the startup, the amount of ESG data they are required to report, and the VCs' investment criteria.

Startups are often reluctant to report on ESG because they fear it will be time-consuming and expensive. In some cases, this is true. Collecting and reporting ESG data can be a significant undertaking, particularly for early-stage startups that don't have established systems and processes in place. Additionally, many startups don't have the internal resources to dedicate to ESG reporting. It can often fall to someone on someone in finance, operations or HR, with little ESG reporting experience and a full time job to get on with.

Another challenge for startups is that VCs' investment criteria around ESG can be unclear. This lack of clarity can make it difficult for startups to know what data to collect and report, and how to present it in a way that will appeal to investors.

What can VCs do to help with ESG reporting?

There are a number of things that VCs can do to help with ESG reporting, including providing templates and guidance, investing in data and analytics tools, and offering ESG-focused training for startups. There are a few things to highlight:

1. Commit to a set standard. There are a number of ESG standards such as GRI, PRI and GHG. Commit to a set structure up front so that startups can use this as a guide.
2. Make ESG reporting part of the investment process. Include ESG criteria in investment decision-making and make it clear to startups what data you need and why. This will help them to understand your requirements and make ESG reporting a priority.
3. Provide resources and support. Invest in tools and training that will help startups to collect and report ESG data. This could include data and analytics platforms, ESG reporting templates, and guidance on disclosure requirements.
4. Make it easy to collect data. ESG data can be collected in a number of ways, including surveys, interviews, and data from existing systems such as accounting software (check out how Dodo automates the calculation). Look for opportunities to make data collection easy for startups, such as by integrating ESG reporting into existing tools and processes.

What should startups do if they receive an ESG request from a VC?

The first thing to do is take a step back and assess the ESG request. This means understanding what data is being asked for, why it's being asked for, and whether you have the resources to collect and report it.

If you decide to proceed with ESG reporting, the next step is to develop a plan (you can find our guide on creating a sustainability strategy here). This should include identifying who will be responsible for ESG reporting, what data needs to be collected, and how it will be reported.

Once you have a plan in place, the next step is to start collecting data. This can be done through surveys, interviews, and data from existing systems.

Next, once you have collected the data, it's time to start reporting. This involves putting the data into a format that can be easily understood, such as a graph or table, and presenting it in a way that is clear and concise.

Finally, if you've gotten the approval of your team, you can begin to act on these goals and see emissions go down. Contact your energy providers to determine whether they provide renewable energy, and work with building managers to implement energy-saving measures. You may also contact your top suppliers to learn more about their emissions and how they are reducing them.

In summary

ESG reporting is a relatively new phenomenon, and the full impact of this trend is still unknown. However, it is clear that ESG reporting is having a significant impact on the startup ecosystem and that startups need to be prepared for this trend.

If you're a startup looking to measure your emissions, or a VC looking to help measure your portfolio's emissions, you can get in touch with us here.