Why Should Private Equity and Venture Capital Care About ESG?

VC firms, in particular, can be especially well-suited to remain ahead of the regulatory curve. By investing in start-ups and disruptive technologies, they have the opportunity to integrate ESG into their portfolios from the get-go during the early stages of a company’s life cycle. By weaving ESG into the very culture and fabric of start-ups, which by their nature are incubators of innovation, VCs are in a unique position to shape the post-COVID economy.

Given political, social and, critically, climate volatility characteristic of our still young 21st century, genuine ESG credentials will become critical in strengthening a portfolio’s ability to weather a storm, encourage longevity and minimize risk of all kinds. Thus, for institutional investors, ESG performance will play a not insignificant factor in price negotiations and valuations. In fact, in a recent KMPG survey of private equity general partners worldwide, 54% had reduced a bid after carrying out ESG due diligence, while 34% increased one. Firms that ignore ESG will suffer down the line in their fundraising efforts or if limited partners inquire about their ESG credentials. Reputationally, millennial consumers (along with Gen Z, who will come into their own in the next two decades or so) have repeatedly reported themselves as willing to boycott companies on poor ESG grounds. It can all go downhill with a meme.

While the ESG pressure has been slowly building on public markets over time, the PE and VC spheres are still relatively new to the game. As such, a dearth of market tools or advisory services exist to cater to the needs of investors who will now face additional scrutiny and pressure to collaborate with ESG forward companies.