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‘LPs need to up their game’ to engage VC firms on ESG

Some top-performing VC firms show 'very little acceptance' of ESG, and LPs must understand the unique VC model to engage them, says UN PRI’s Peter Dunbar.

Peter Dunbar, Principles for Responsible Investment

Venture capital firms might do ESG better if their LPs understood the venture capital model better, says Peter Dunbar, senior specialist at the UN-backed Principles of Responsible Investment.

Venture capital lags behind the rest of private markets, according to a report released by the PRI this week. “At the top of the VC industry, there are a handful of really influential VC firms [where] there’s very little acceptance or acknowledgement about ESG,” Dunbar, author of the report, told New Private Markets. “They don’t need to listen to LPs or civic society because they’ve had fantastic returns and their funds are multiple times oversubscribed.”

LPs should collaborate and take a united ESG stance for venture capital, said Dunbar. “LPs need to voice their opinion on ESG more. But getting them to do that as individual asset owners is quite difficult. Because some of these firms are just so successful, the LPs tread very carefully for fear of being seen as difficult by VCs if they do it alone… LPs that do interact with VC firms on ESG don’t always properly understand the VC model.”

Venture capital firms often interact with an LP ESG professional covering private equity or another asset class. “To get the [venture capital] GPs to engage constructively, LPs need to up their game and tailor their approach more to VC”, taking into account the early stage of portfolio companies, the minority ownership and that venture capital firms are generally smaller and less well-resourced, Dunbar noted. “We’re not calling for VC firms to have the bleeding-edge ESG approach of buyout firms transplanted onto VC firms.”

What can venture capital firms do to address ESG risks? They can be reluctant to add to centralised costs by hiring dedicated ESG professionals, Dunbar said. However, this need not be a problem. “The way to do it is to have one person, or to have an ESG taskforce – somebody from investor relations, somebody from the investment team, somebody from general counsel – overseeing ESG so you don’t need to have additional headcount. There are [publicly available] template ESG clauses for deal documentations that you can just include for all your deals. Or you could just have an ESG policy, for a start.

“Venture capital firms need to better understand how to scale their investments responsibly – what will this business model do positively or negatively to society or the environment? Think now about what their impact is going to be and how you can manage those risks.”