The Australian Investment Council recently published the inaugural ‘State of play: ESG in Venture Capital’ report covering Environmental, Social, and Governance (ESG) performance in Australian and New Zealand venture capital funds and their portfolio companies.
The report is based on the results of a pilot program that ran in 2023. Ten of the most active venture capital firms across Australia and New Zealand participated in the pilot, with 166 portfolio companies contributing data.
What is ESG?
ESG stands for Environmental, Social, and Governance, and it refers to the factors used by investors to assess potential investments by considering a company's environmental practices (like waste management and carbon footprint), social responsibilities (such as labour practices and supply chain management), and governance structures (including board diversity and business ethics). Incorporating ESG criteria can mitigate risks, align investments with investors values, comply with regulatory demands, and potentially enhance long-term financial performance. Investors use strategies like negative screening, positive screening, ESG integration or thematic investing to incorporate ESG factors into their decision-making processes.
Eva Rodriguez Rodriguez, Director of Impact and Space Lead at BV and Sabina Curatolo, Senior Director of Impact at Breakthrough Victoria took a look at the results of the report and discussed below what they mean for the industry.
Introduction
At BV, our investment philosophy is rooted in a commitment to investing in science and technology that has the potential to change lives and the world. As responsible investors, we firmly believe that all companies should think about the environmental and social impacts their business has while also considering their governance (ESG). Establishing these foundations early can yield significant benefits as companies mature. This approach is not only beneficial for people and the planet but also advantageous for business.
This principle guided us to proudly contribute to the Australian Investment Council’s inaugural “State of Play: ESG in Venture Capital” report. This groundbreaking publication examines ESG performance in Australian and New Zealand venture capital funds and their portfolio companies, marking a significant step forward in our regional investment landscape.
The necessity of incorporating ESG factors into business strategies is clearer than ever. Companies that prioritise sustainability, social responsibility, and sound governance are better positioned to navigate the complexities of today's market. They are more resilient, more attractive to investors, and ultimately, more successful.
The “State of Play: ESG in Venture Capital” report is a testament to the progress being made in our industry. It highlights the collective efforts of venture capital firms across Australia and New Zealand to foster a more sustainable and equitable future. The findings underscore the importance of ESG considerations in driving innovation and impact, setting a new benchmark for our region.
ESG (investmentcouncil.com.au)
What the report findings highlight and what this means
There is growing interest in ESG across society: investors are increasingly focusing on ESG performance, driven by growing evidence of its positive impact on financial returns. Consumers are demanding more information about the products they buy, employees prefer to work for companies that share their values, and governments are more actively monitoring non-financial outcomes of businesses.
The ESG_VC tool can help early-stage start-ups (Seed to Growth stages) map their roadmap to sustainability:portfolio companies using the ESG_VC questionnaire said the questions helped them identify areas of focus and where they should prioritise actions. This is a finding we share at BV: the tool goes beyond “reporting”, raising awareness for start-ups on ESG areas they may not have considered before and providing further actionable links and resources.
Companies prioritise addressing governance and social issues before environmental: this is not unreasonable – as the report points out - as early stage technology businesses are likely to choose to allocate their scarce resources to risk mitigation and focus on governance issues first. Other BV companies are set up to address social and environmental issues through their business models and these companies adopt additional tools and practices to track their impact.
A positive relationship between company maturity and ESG scores - an area where impact companies can break the cycle: the report results showcase that later-stage, more mature companies have more established ESG strategies, leading to higher scores. At BV, our portfolio results showed that ESG scoring was not directly linked to the stage of investment maturity. Some early-stage companies achieved higher Environmental and Social scores than those at the Series B stage (Growth). While this finding is preliminary due to the small sample size and the pilot nature of the exercise, it is promising. It suggests that the companies we invest in are committed to positive environmental and social impact from the beginning.
Diversity, equity and inclusion (DEI) presents an early area of opportunity: the report shows that while 92% of portfolio companies track gender identity, 41% have no women on their boards. This figure aligns with industry standards. At BV we have a focus on diversity, equity, and inclusion, aligning with UN Sustainable Development Goals 5 (Gender Equality) and 10 (Reduced Inequalities). We are implementing our Diversity, Equity, and Inclusion Action Plan (DEIAP) and developing DEI Guidelines to support our portfolio and improve our overall performance in this area.
Why BV is involved
In today's fast-changing investment landscape, responsible investment and impact creation are crucial. At BV we are committed to actively engaging with and supporting our portfolio companies, co-designing growth and fostering sustainability throughout their ESG journey.
Our investees are often early-stage, innovative, and deep-tech pioneers. Integrating ESG in these sectors is challenging because traditional ESG approaches are often unsuitable for startups. To address this, we adopted the ESG_VC framework, designed for venture-focused entities, which includes 53 questions across 13 ESG objectives. This framework is used by over 250 VC firms in the UK, Europe, and the US and incorporates insights from established frameworks like GRI, SASB, and BCorp.
As ecosystem builders, we aim to simplify and harmonize our ESG approach to ease the burden on our investees and reduce transaction costs through better coordination with other investors. A key benefit has been developing a community of practice among Australia's leading VC firms, increasing ESG awareness and guiding its direction in Australia.
We thank all BV portfolio companies for their valuable data contributions, and the participating VC firms in this pilot project: Airtree, Alberts, Blackbird, Brandon Capital, Giant Leap, Main Sequence Ventures, Mandalay Venture Partners, OneVentures, and Square Peg.
Looking ahead, we aim to expand this effort across the investment community. We are already collaborating on the next reporting cycle. If you're a fund interested in ESG and want to join next year’s program, please reach out or email info@esgvc.org . Together, we can drive meaningful change and foster a more sustainable future.