A pilot is underway of a common standard in use globally.
Okay, form-filling is no-one’s idea of fun but measuring your startup’s ESG impact brings value to your business rather than just being a tick-box exercise.
A number of venture capitalists have collaborated on an ESG measurement framework so startups with multiple investors don’t have to fill out a bunch of different forms on the same topic.
Heather Gadonniex, CMO and operating partner of Auckland VC firm Global from Day One (GD1), has been the driving force behind the move and the firm has also been walking the talk by becoming the first local VC to get B Corp Certification.
Gadonniex says the aim is to avoid having portfolio companies, who are “heads down, focused everyday on growing and solving problems, being nimble and scaling their organisations” being faced with a deluge of different reporting systems to assess their ESG or impact footprint.
“If everyone is using a different system it can get really complicated and overburdened, and is not necessarily beneficial to organisations that are being asked these questions. Furthermore, it can be quite discouraging and put people off from even thinking about ESG if they are bombarded with questionnaires.”
The overall goal is to help early-stage companies and their investors understand, measure and improve ESG performance, and understand ESG-related risks in order to provide the best governance possible to startups.
“A founder and operating team have literally hundreds of things firing at them every single day. They’re faced with decisions around, not just growth, but sometimes survival of their companies, and the more we as a VC industry can come together and support and relieve any kind of burden associated with that growth, the better,” she says.
In early February, with the help of the NZ Super Fund, Gadonniex pulled together a group of VC funds interested in working together on a new reporting framework. Industry group NZ Private Capital has taken on management of the initiative. Those involved include GD1, Icehouse Ventures, 2040 Ventures (which manages the Punakaiki and Climate Venture Capital funds), Movac, NZ Growth Capital Partners, Nuance, Bridgewest Ventures and WNT Ventures. Blackbird Ventures is piloting the same framework as part of a working group in Australia.
ESG measurement frameworks have been around for decades but they’ve only been adopted in venture capital in recent years. That’s been driven by a push from the institutional investors that VC funds hope to get capital from, as well as consumers purchasing from portfolio companies, and an environment in which early-stage companies are battling for skilled workers and must increasingly align their values with those of employees.
“If everyone is using a different system it can get really complicated and overburdened, and is not necessarily beneficial to organisations that are being asked these questions".: Heather Gadonniex
The working group has been figuring out how to rightsize ESG for New Zealand to ensure that shared portfolio companies receive streamlined, realistic reporting requirements that encourage embedding ESG into day-to-day operations and ensure limited partners, who are under pressure from their own investors, get timely and accurate ESG-related data on their funds, Gadonniex says.
NZ Private Capital executive director Colin McKinnon says everyone agrees that ESG reporting is the right thing to do but the question is how to do it in a way that isn’t haphazard and is consistent across the country. Private equity firms are also working on their own framework, he says.
The VC working group grappled with creating its own framework or adopting an existing one and has ended up opting for the ESG_VC framework, which was established in Europe in 2021 and is now used by more than 200 firms.
ESG_VC has created a set of 57 questions that cover the key areas necessary for VC firms, while ensuring the process is mutually beneficial to startups.
In June its annual report contained data collected from 16 venture capital firms covering 450 startups, which was analysed by the British Private Equity and Venture Capital Association.
The analysis had six key conclusions: startups were weaker on environmental metrics than social and governance factors, with only 16 percent measuring their carbon footprint; companies were prioritising their mental health agenda; SaaS companies outperformed on social issues; female representation was still lacking on startup boards; only one-fifth of surveyed companies provided staff with codes of conduct on responsible use of code and artificial intelligence; and that governance is the backbone of ESG, with companies having a clear opportunity to put sustainability on the board agenda.
"If you think about it on a continuum, ESG is something that any organisation can and should be doing".
The New Zealand pilot
The working group decided it was important to adopt a framework widely used globally.
“If startups choose to eventually raise money offshore or if they are working in markets that have different types of ESG requirements, the good thing is this basic questionnaire is very aligned with many of the globally applicable ESG, sustainability or CSR [Corporate Social Responsibility]-related standards,” Gadonniex says.
The New Zealand pilot is now underway with each participating VC firm taking 12 portfolio companies through the ESG_VC framework, including those that have shared investors. The group will collate what has been learnt from the pilot by the end of this year, with the aim of rolling it out industry-wide in early 2024. McKinnon says analysis of the collected data will help highlight industry best practice and also areas for improvement.
The working group also looked at B Corp certification, but Gadonniex says the certification could be a bit too great an undertaking for those who hadn’t yet dipped their toes in the water.
She also points to the differences between ESG and Impact – with B Corp covering the latter well. Impact measurement focuses on monitoring measurable positive and social environmental outcomes while ESG emphasises understanding and incorporating ESG factors into decision making and risk management.
“If you think about it on a continuum, ESG is something that any organisation can and should be doing. It helps you understand risk factors and how they apply to your business. Impact measurement is focused on ensuring that organisations that have an impact focus or bent to them are able to monitor and measure for positive social and environmental outcomes.”
It can take a relatively long time to get B Corp certified, Gadonniex admits, but she says that means the process is robust. The value to GD1 of getting certified is two-fold, she says.
There’s an old adage that what gets measured, gets counted and when you’re trying to build sustainability impact within an organisation it helps to have data on how the firm has fared in certain sections and what it can do to improve, she says.
The other reason to undertake the evaluation was the firm is doing a lot around ESG, for example looking at how its portfolio relates back to the UN Sustainable Development Goals. It has ESG-related investment documents that are applied to term sheets, and discussed with founders before GD1 invests in them. “But ESG is very different from impact, and for us to really walk the walk we wanted to embrace more of a sustainability or impact-related certification.”