ESG: How Vcs and Startups Can Get Started

Karen McCormick

Chief Investment Officer, Beringea

In November, 20,000 delegates from nearly 200 countries arrived in Glasgow for COP26. The complexity of the challenges faced by the UN climate summit was enough to make your eyes water. Not only did it grapple with the chaos of staging an international summit amid an ongoing pandemic, but it also faced a firehose of unsettling data about the state of the world we live in.

Antonio Guterres, UN secretary-general, recently commented that: “Unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to 1.5C will be impossible, with catastrophic consequences for people and the planet on which we depend.”

Faced by this stark view of our future, it can be hard not to fall into a state of inertia. What could I possibly do to solve such a dramatic and global problem? The answer, I’d argue, is to do something – it is, after all, better than nothing.

Where founders come in – changing priorities, changing needs

As the Chief Investment Officer of a venture capital firm with more than 60 portfolio companies across our funds in the U.K. and the U.S., I spend a lot of my time talking with entrepreneurs about the challenges they are facing as they try to scale up. They range from the everyday: who is a good lawyer to work with these days? To the complex: how do I grow from £1m to £10m in sales?

Over the past two years, there has been a rapid uptick in the number of questions that I’m asked by entrepreneurs wanting to make a more positive impact upon the world. How do I make my business more sustainable? How do I build a recruitment process that removes unconscious bias? How do I support new parents in a startup environment?

These are not simply people seeking out worthy causes, these are driven founders and CEOs who have identified that their companies must become more sustainable, more diverse, better corporate citizens.

Businesses that take these issues seriously can recruit better, retain better, build better relationships with investors and customers, and remain ahead of regulation. We’ve seen in our own portfolio that senior hires will turn down opportunities with businesses without a purpose, and corporate clients will reject contracts with companies that don’t take diversity or sustainability seriously.

And yet, early-stage companies simply lack the resources, time, and knowledge to tackle the breadth of complex environmental, social, and economic issues associated with the pandemic, the climate crisis, rising inequality, and racial injustice. And there are also a vast number of frameworks and standards offering the opportunity to tackle ESG, sustainability, and impact. Many founders and investors that I speak with are confused by this fragmented array of options in front of them.

We understand that early-stage companies are strapped for time and resources, but implementing the principles and processes of ESG as a company scales ensures that businesses remain ahead of regulation, ahead of scrutiny from future customers and investors, and are not forced into costly and painful work on ESG when a company is larger and more complex.

These are the reasons why Beringea set out to create ESG_VC. We believe that there is a tremendous opportunity to provide venture-backed businesses with a standardised process for improving their carbon footprint, their DEI practices, their parental policies, their corporate governance, and many other fundamentals of environmental, social and governance (ESG) practices.

To do this, we’ve spent the past year working with a network of more than 100 VC firms across the U.K. and Europe, building a measurement framework that can help entrepreneurs to benchmark their performance against a core set of ESG metrics.

Metrics

Working with Social Value Portal, a specialist platform for measuring social value within organisations, ESG_VC developed a framework consisting of 48 metrics. So what are these? You can download the full list here, but here are some examples startups using our framework have used in practice:

• • VC1: Do you measure your carbon footprint? We consider this to be the first step in building a net zero strategy, so it is a simple question that begins and underpins the framework.
  • VC15: How many weeks of paid primary carer parental leave do you offer? A critical lever in improving gender balance in the workplace, so we benchmark companies’ performance on this issue – for companies that offer statutory leave alone, this can help them make adjustments.

• • VC42: Do you conduct an annual Diversity and Inclusion survey? What gets measured, gets done – early-stage companies that want to embrace DEI should have an accurate picture of the make-up of their company.

Workshops and off-the-shelf policies

We’re also hosting regular workshops, where companies can hear from experts on issues such as net zero or DEI, and best-practice roundtables, where companies can learn from each other on ESG-related issues that they’re currently facing. And we’ll consolidate this work with off-the-shelf policies and resources for companies to adapt for their own use. Here’s two examples of the support that we’ve provided in 2021: 

• Net zero strategy: we hosted a webinar on measuring carbon footprints and setting a net zero strategy in partnership with Tech Zero – check out our write-up and recording of the session for a practical guide to these two critical topics

• Measuring diversity and inclusion: we partnered with specialists at Equality Group to discuss how companies can successfully and sensitively collect inclusion and diversity data – this is a must-watch session for any founder interested in DEI

Underpinning this framework was the mindset that something is better than nothing. It is, therefore, designed to be inclusive for companies from seed to growth across consumer, software, life sciences, and manufacturing. It enables entrepreneurs to take the pulse of ESG in their company, creating a benchmark of performance and a list of key priorities for the next twelve months. While we keep the results and progress of portfolio companies anonymous, here’s two examples of the progress businesses can make:

• Implementing parental leave policies: an early-stage SaaS business that participated in our pilot had previously only provided statutory leave for parents – a key metric in the ESG_VC framework highlighted the need for further work on this issue, particularly in the context of advancing gender diversity in their team.

• Setting ESG standards for supply chains: through joining one of our best-practice sessions focused on sustainability, a later-stage business was able to share its approach to vetting ESG standards across its retail supply chain with an earlier stage business in our portfolio.

We think this framework is a relatively simple one, where companies are in control, identifying areas where they believe they can have the greatest impact. With the support of the British Venture Capital Association (BVCA), the ESG_VC Measurement Framework is now being rolled out across the portfolios of leading venture firms across the U.K. and Europe including Atomico, Seedcamp, Highland, Act, Talis, Beringea, and Par Equity. We’ll also be working with the BVCA to produce research on the VC industry’s ESG performance.

We hope ESG_VC can take a lot of the burden away from entrepreneurs, providing them with the means and the motivation to improve their ESG performance. In the end, it doesn’t matter which ESG framework you’re using. Do one thing, do twenty things – simply do something to push yourself to be a responsible corporate citizen and prepare yourself for future regulation.

Hopefully, then, we can do our bit to tackle the systemic challenges facing our planet and our society and fuel the growth of a new generation of startups in the process.