When people think about Venture Capital investments they tend to focus on the exponential financial return from their participation as investors in startups. They usually consider financial metrics as part of the decision. However, new environmental, social and governance (ESG) considerations are gaining relevance in the investment process. Corporate Venture Capital Funds (VCFs) such as Shell and Phillip Morris have incorporated ESG data into their investment process, with the aim of having a full understanding of the companies in which they invest.
ESG principles are based on the Socially Responsible Investment philosophy, which relies on value judgments and negative analysis to decide which companies to invest in. ESG investment and its study seeks to find value in companies and not just a set of values that support the investment (CFA Institute).
UN PRI defines responsible investing as the strategy and practice of incorporating environmental, social and governance (ESG) factors into investment decisions and active ownership. With a strong emphasis on stewardship and close contact between the GP and company management, private equity, including VC, will naturally adapt to responsible investing. A systematic and up-to-date approach to identifying and managing ESG issues across the portfolio will protect and significantly enhance the value of the investment. Responsible investing is also an indicator of the operational excellence of the fund itself, demonstrating transparent and strategic fund management.
ESG factors can usually be measured, however, it is difficult to assign a monetary value to them and therefore they can be categorized as follows:
Environmental Factors: issues related to the quality and functioning of the environment and natural systems. These include:
- Greenhouse emissions and climate change.
- Air and water pollution and contamination.
- Biodiversity loss and deforestation.
- Renewable and efficient energy.
- Waste management
Social Factors: issues related to the rights, welfare and interests of people and communities. This includes:
- Human rights.
- Labor standards in the supply chain; child labor, slavery, and servitude; workplaces with safety and health standards.
- Freedom of association and expression.
- Human capital management and employee relations
- Diversity and local community relations.
- Consumer protection and satisfaction
Corporate Governance Factors: As it relates to corporate governance and other investment entities. This includes:
- Board structure, size, diversity, skill, and independence…
- Business ethics, bribery, corruption, internal controls, and risk management.
- Executive pay, shareholder rights and interaction with stakeholders.
- Disclosure of information
- Issues related to the relationship between a company’s managers, its board of directors, its shareholders, and other stakeholders.
According to Geert van de Wouw (Managing Director of Shell Ventures) and Alexander Stoeckel (Director of Venture Capital at Phillip Morris International), responsible investment through venture capital is of utmost importance for any company. Companies such as Shell and Phillip Morris are multinationals whose reputation has been damaged over the years due to the social and environmental impact generated by their products: oil and gas production for Shell and tobacco sales for Phillip Morris, which is why VC is so important for them.
The ESG investment strategy in Venture Capital in any company must be aligned to the corporate strategy, and to the vision and culture of the organization. For example, Shell’s strategy is to reach 2030 with carbon neutral emissions. Therefore, all Shell’s investments are aimed at decarbonizing the energy system.
In the case of Phillip Morris, its approach is broader, seeking to impact all ESG factors. Their vision today is “To be far more than a cigarette company”. They want to: “change society and deliver a smoke-free future”. Their CVC arm aims to change the internal processes and strategies of the business, working hand in hand with product development, operations, and consumer relationship areas, in order to accelerate the strategic initiatives, they have and to seek inspiration from startups and increase their relationship with them.
When investing in startups, they seek to collaborate by adding value to both parties. One way to add value in these businesses is to incorporate an ESG approach as Shell does, which helps startups find different revenue opportunities by leveraging their assets and business units. Phillip Morris has an internal implementation area that helps startups collaborate with business areas.
Considering ESG is of great relevance for CVC’s as it adds value to all stakeholders in the ecosystem. In addition, startups have a great opportunity implementing ESG in their business and processes, working hand in hand with corporations that allow them to scale and be more successful along the way.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Gonzalo Soriano. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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