Why should Corporate Responsibility and Impact be considered in the VC ecosystem?

sivanlachman
Dec 21, 2021
5 min read

Introduction

A business’s measure of success goes beyond the bottom line. In today’s world, how a company gives back to its community, positively impacts the environment, and acts for the greater good—not just a greater profit—is critical. Corporate social responsibility (CSR) is the concept that a business has to be responsible in all its actions and be accountable to all its stakeholders.

Technological impact is a different story. It relates to the core technology a company is developing. A product can have a negative, zero or positive impact on people or the environment. The more the company grows, the more its impact grows. This relationship between business growth and sustainability can be put into KPIs, measured and exhibited on the company's presentation, website and documentation. Going through this process will appeal to all stakeholders and enhance the company's valuation and reputation.

Venture capital engagement

Research shows that 76% of millennials believe that businesses have the power to make a difference in the world. On the other hand, out of the $85 trillion in AUM, less than 30% incorporate non-financial information such as CSR and impact data as an investment criterion. When rigorous sustainable filters are applied, VC asset managers are better equipped to properly assess start-ups. Contrary to common belief, looking at the sustainability profile of start-ups would only add another serious benchmark.

1. Reducing risk

Sustainability is basically about identifying well-managed companies that have a long-term view. Using such criteria can vastly decrease unnecessary risks that can negatively affect the total valuation of the company.
Regulation is also an issue that needs to be considered. Stock markets around the world are requiring companies to report their ESG and CSR policies. Financial bodies are required to report their carbon foot print and climate action efforts. And that is just the beginning.
Large corporations now require their supply chain to be sustainable. If that is where a start-up is aiming, its chances are directly correlated to its own CSR standards.
Companies can no longer claim to be sustainable without proving it. Measuring impact and CSR goes to demonstrate seriousness.

2. Bigger profits while lowering costs

A survey by BCG found that companies that operate ethically made bigger profits and were valued more highly than their competitors. CSR has a dollar sign on it.
Using sustainable production methods and supply chain result in lower production costs. Being environmentally and financially conscious are two sides of the same coin.
Funding opportunities – from impact investors to EU and US grants. All these will require a strong CSR and impact plan as well as a strategy addressing measurable sustainability goals.

3. Growth potential

Globally speaking, 66% of consumers are willing to pay higher prices from a company that is sustainable and impactful. Obviously, if a start-up sells products or services that will negatively affect the environment or society at large, their growth would understandably be hampered.

4. Branding

CSR and impact efforts can go a long way when consumer perception in concerned, to fostering innovation and to increasing employee engagement and loyalty.

Do not postpone the inevitable

To be socially responsible, start-ups need not add costs to their balance sheets. It’s not an extra weight or new burden on the founders, but rather it is a dimension that will need to be incorporated right in the first presentations and due diligence documentation. CSR is to be built in from the beginning, not added on as an afterthought or retroactively for a remedy. If a CEO is not socially aware, and not ready to shape his company accordingly, then he or she will not be able to be a promising leader.

With investors, consumers, employers and suppliers pressuring companies to be socially responsible, it is both easier and cheaper to be born on the right path than to be forced to re-engineer strategies and business models in an effort to catch up with the market. CSR is not about size, it’s about vision.

Venture capital firms play an important role in building new industries that influence the economy and mold society. Hence, they must take an active stance on societal issues. Managing large sums of money, usually with very minor bureaucracy and regulation, VCs are considered knowledge hubs for technological innovation and the advancement of budding tech companies. While the main goal remains clear, that is to create yield for investors, VCs are shaping the future through technology. The rise of new industries strongly relies on the VC's paradigm. But with power comes responsibility. Looking at large tech companies that are becoming increasingly involved in values beyond profit maximization, VCs should also take a stronger sustainable stance in the ecosystem within which they operate.

This doesn’t mean that investing against their model, but rather holding a new industry standard to this model.

Actions to words

Responsible investment

VCs and their partners should demand that their assets be responsible. It is becoming increasingly clear that socially responsible assets perform better, therefore asset managers and owners are now proactively looking for more opportunities to expand in that space. As such many have started screening through impact filters, if for no other reason than to at least attend to pressures from their partners.

Define criteria

VCs have a distinct influence on the portfolio companies from equity to board positions and influencing decision making and strategy. Therefore, defining that a portfolio company have a CSR policy and measure its impact is crucial. These strategies are not to be taken lightly as they are a long term commitment to social and environmental practices. Criteria should address the managerial level of CSR from environmental foot print to social and corporate conduct as well as the impact at the technological level.

Being transparent about sustainability is key to enhancing value to the VC and its portfolio companies as well as avoiding greenwashing risks.

Determine current status

Many of the VCs have a portfolio that is already full of companies that are already impactful and will benefit from having CSR and impact strategies. Conducting a thorough review of the portfolio will go to show that.

The next step is to determine a baseline for the VC itself. Having a VC level strategy will influence the type of companies that enter the portfolio. This will become one of the acceptance criteria.

Then determine a baseline for the portfolio companies. Do they have a CSR policy and an impact strategy? Do they have measurable goals? Having these in place will influence submission and due-diligence documentation as the companies approaches further funding venues.

Future action

In order to implement CSR and impact in a VC, strategic planning should follow for the VC itself by issuing a status report, CSR and impact strategies at a VC management level and then an annual review report. Then a similar step should be taken by the portfolio companies themselves.

Where is the added value?

Impact VCs publish annual reports of their action and their portfolio. Declared impact VCs already do that. Reporting the sum impact of the portfolio companies sets a standard for founders to follow and become an industry leader.

Some sustainability focused companies do this already as well for various reasons, be it regulatory requirements or founders agenda. This has clear added value as the company is setting the ground for proven impact and CSR action.