Why on earth should VCs care about sustainability?

January 20, 2022 12:01 pm

Sustainable development has recently gained momentum; the public is paying attention to the topic, and governments are taking it into account in their legislative activities, and VCs are also getting more interested in the concept of sustainability. In 2021, 80% of investors stated that businesses that follow a sustainable approach have a better chance of generating higher returns and long-term investments.

Sustainability in business

The United Nations Brundtland Commission defines sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” When it comes to business, sustainable development entails understanding our planet’s long-term concerns and factoring them into strategy and practice. The business environment looks at sustainability in all its aspects: environmental, social, governance (ESG). In environmental terms, it means controlling climate change and conserving resources. The social aspects of sustainability are dealing with poverty, violence, education, health, employment, and human rights. Corporate governance refers to the management of the organization as well as auditing, internal oversight, and shareholder rights.

“I don’t get it, as a VC why should I care about ESG?”

“ESG is the buzzword of the last decade in the finance industry, and this trend has finally reached venture capital too, which means that we have to change and we have to do it fast,” — comments Michael Szalontay from Flashpoint Venture Capital.

One of the main reasons for VCs to start caring about sustainability is government intervention in the regulation of this sphere. Despite the fact that the most significant element of sustainable business development is the organization’s voluntary commitment, regulatory involvement is crucial. The government and authorities advocate and support a sustainability-focused approach. As a result, VCs that follow sustainability principles will be less affected by legislative changes (Whetten, 2017).

The environmental friendliness of an organization is becoming a criteria by which it is rated, a reputation criteria (Institute of Ecolonomics, 2018). Indeed, if a VC takes its resources responsibly and is willing to take responsibility for the consequences of its actions, it will also take its finances, clients, and employees seriously (Whetten, 2017). Moreover, the organization that is most conscientious in its operations and maintains transparency will gain much more trust from stakeholders and potential partners (Square, 2018).

The three dimensions of sustainability force organizations to evaluate and research not just one aspect of the business but the entire system. In addition to fresh knowledge, this perspective broadens the horizon and allows VCs to find new solutions and recognize previously unidentified or overlooked gaps (Whetten, 2017). Consequently, there are numerous development prospects for positive change.

“ESG is not easy and may impact financial returns negatively in the short term, but the positive impact on the public image of VCs can outweigh this effect in the long term. This can happen both through attracting the ESG conscious founders of the next generations and by driving fundraising from ESG savvy public institutional funds,” — adds Michael Szalontay.

Best ESG Practices from Market Players

Munich Venture Partners (MVP) is a European venture capital firm that invests in technology companies and believes that economic growth and sustainability are mutually reinforcing elements rather than trade-offs. MVP focuses on developing holistic value creation solutions that address the triple top line of economic prosperity, environmental sustainability, and social equity. MVP started addressing sustainability from the beginning of their journey by signing up UNPRI (United Nations Principles for Responsible Investment), under which they also began publishing annual reports on their sustainability activities, training their employees, and leading their entire team toward the one goal they all want to achieve.

Beatrice Böhm, Munich Venture Partners representative, points out the following during our interview :

“We believe it is critical to start the sustainability path as soon as possible; if you push it back and do not prioritize it, it will be tough to start when the organization is in the scale-up phase because each phase brings new challenges. It is easier to align the team during the early stage when there is still room for it.”

“In recent years, the topic of sustainability has become not only more important than ever but also very trendy, and companies that may not pay attention to it may find themselves out of the market in the next few years. Today we have a lot of tools (e.g. sustainability frameworks) that can help — it has become easier for startups to start down this path,” — said Beatrice Böhm, Munich Venture Partners representative.

When MVP became more involved in sustainability and rebranded their website, they noticed an increase in traffic on their social media platforms, a significant rise in job applicants, and higher interest of partner companies. Beatrice Böhm states, “There are a lot of financial benefits of being sustainable. When we look at firms with sustainable performance in the stock markets, there is evidence that they are outperforming the rest, the facts are out there, and it is not just a nice marketing ploy.”

MVP believes VCs and investors should care about sustainability, as they are shaping the future by allocating money and having an impact on the world. Beatrice Böhm concludes: “Recognizing what can be achieved by investing in sustainable technology is what drives me personally, it is one of the most thrilling parts of being a VC.”

Latham & Watkins is another global firm that has implemented a sustainability strategy and actively works with clients to help them achieve their business objectives and overcome legal issues anywhere in the world. For more than three years, Latham & Watkins has been actively conserving natural resources and energy, openly communicating its sustainable activities through annual reports, and donating its legal services to non-profit, sustainable organizations.

Haim Zaltzman, Partner at Latham & Watkins, during our interview notes:

“We have a dedicated group, located all over the world, who are highly educated and focused on sustainability goals. Because we talk a lot about it both internally and externally, we have not met resistance from our employees. We all are aware of the benefits, and we are all working toward a common goal.

Latham & Watkins has its sustainable three-pillar approach: ESG Counsel, Pro Bono, and Sustainable Operations. ESG Counsel helps clients manage the risks, take advantage, and drive value through ESG strategies. Pro Bono engagement provides free legal services to individuals and organizations who are seeking to advance environmental sustainability in different ways. In addition, Latham & Watkins is partnering with Lawyers for a Sustainable Economy, with whom they commit to providing at least $1 million in free legal services by the end of 2021. The Sustainable Operations team is developing programs to reduce, recycle, and compost all waste to the extent feasible, reduce energy consumption and measure the greenhouse gas impact of Latham & Watkins’ operations. In time, they have achieved green certification in 17 offices, electric vehicle charging stations in 16 offices, and 18 offices offer bicycle racks to their employees to encourage more earth-friendly commuting practices.

“Depending on the resources and industry of the business, companies should focus on sustainability because sustainable companies are financially attractive for VCs and others in the industry. VCs and investors, in turn, should be doing it because it is the right thing to do. You do not want to be the cutting edge of technology for return propositions- you want to be the cutting edge of society and the head of the historical moment,” — states Haim Zaltzman.

To sum up, organizations, that prioritize sustainability, outperform competitors, ranging from competitiveness in capital markets to increased attractiveness of talented individuals. In addition, green businesses are supported by the public and government authorities and are less likely to get involved in socio-environmental conflicts. All this contributes to a pleasant working environment.

At some moment, all businesses will be forced to restructure their operations in accordance with sustainable principles. The earlier it happens, the greater the organization’s competitive advantage and the more likely it is to attain market leadership.