Image: UNSPLASH/Israel Andrade
< Shrinal Sheth Knowledge Specialist, Investors Industries, World Economic Forum Geneva >
- Venture capital is crucial in shaping the future of our people, planet and society.
- However, venture capital has been a laggard in considering environmental, social and governance aspects when making investments.
- The tide is now turning as venture capital firms begin to push for adoption of ESG. Here’s how to stay ahead as a startup founder.
If you’re a startup founder who has raised venture capital (VC) funding or is looking to do so, you know that global VC funding hit USD 454 billion in the first three quarters of 2021, up from USD 332 billion in 2020 over the same period.
What’s interesting is that early-stage funding grew at 104% year-over-year in 2021 to peak at USD 49 billion. VC firms are therefore a critical force in shaping the future of people, planet, and society as they continue to invest in the leading companies and disruptive technologies of the future.
Despite this influence, Deliveroo’s disastrous IPO this year and a report by Amnesty International highlighting the failure of VC firms over human rights due diligence demonstrate that venture capital has been a laggard when it comes to incorporating Environmental, Social and Governance (ESG) considerations in investment processes.
An incessant pursuit of generating outsized returns by focusing on investing, building and, scaling startups that generate rapid growth at all costs, the lack of pressure on VC firms to focus on ESG, and a lack of diversity are likely reasons for the slow ESG uptake.
Venture capital can play a key role in shaping the future
However, several developments over the past 12 months show that the tide is turning:
- The launch of VentureESG, an initiative to push the VC industry on ESG supported by 250+ VC funds and Limited Partners (LPs),
- PRI’s launch of a VC collaboration to improve industry wide practices,
- The launch of MPower Partners, Japan’s first ESG-focused VC fund led by Kathy Mitsui, former vice-chair of Goldman Sachs,
- The new heads of sustainability hires at Gobi Partners, 3one4capital and Prosus/Naspers demonstrate the growing importance of ESG in VC.