San Francisco-based Piva Capital has adopted an ESG approach to its investing practice, another indication of how environmental, social and governance criteria is making its way into venture capital.
Typically, ESG is talked about among large asset managers. But it has been making its way into venture, especially as the pandemic, climate change and social protests of 2020 has spurred change throughout society.
Piva partner Bennett Cohen told affiliate title Venture Capital Journal that all venture investors seek to back companies that have long-term transformational and positive impacts on society. But he said more investors are growing aware that supporting portfolio companies with appropriate ESG standards and perspectives at the early stage will increase their odds of long-term success.
Cohen said the firm’s ESG program is about responsible investing.
“It’s about being a smart investor, with eyes wide open, and with the goal of making better decisions,” he said.
Piva Capital was launched in 2019 with a $250 million fund to invest in the energy and industry sectors. The firm primarily invests at the Series B stage, but also participates in Series A rounds.
Cohen referenced a Morningstar study, which found that large asset managers – such as hedge funds and other private and public fund managers – that apply ESG principles last year raised $51.1 billion of net new money from investors. The year before, investors poured about $21 billion into funds that apply ESG standards.
Anecdotally, more in the venture community are lately instituting or considering ESG principles when investing.
LP Hamilton Lane added its first ESG director, as did Cathay Capital, which is affiliated with the venture firm Cathay Innovation.
500 Startups is also emphasizing ESG, hiring impact investing veteran Tracy Barba a year ago.
Cohen noted that the growth is driven by findings that ESG investing does not compromise financial returns, and often outperforms.
“Usually when you talk about ESG investing, it’s about large companies trying to course correct,” Cohen said. “But we want to get ahead of that and focus on ESG standards in the companies when they’re still start-ups.”
Evaluating the mega-trends
Cohen said that the ESG programme the firm developed evaluates environmental and social mega-trends, such as whether companies reduce carbon emissions with their products or services; have independent directors; and look for diversity when filling seats on their boards, executive management and across all employee positions.
Other factors come into play, too. One example he provided was whether a company relies on foreign semiconductor parts but sells to the US government.
Evaluating these risks and financial scenarios shows the impact on long-term value and returns, he said.
He said the firm will use the ESG framework when conducting due diligence on new investment opportunities. Piva Capital has also applied its standards in evaluating about half of the firm’s current 10-company portfolio.
For example, he said many of the firm’s portfolio companies are already actively reducing their carbon emissions, such as Boston Metal, which is developing a carbon-free method of producing steel.
In another example, Cohen pointed to its backing of Joywell, which is developing a sugar alternative. The key metric in that instance is the company’s focus on health, one of the 17 Sustainable Development Goals outlined by the United Nations.
“The goal of our ESG program is not to use a single metric across all investments, but to see what positive impact each company brings to society, since each company is different,” he said.
“This is still new for venture, but it’s exciting,” he added. “Today’s start-ups are tomorrow’s largest companies.”