Towards an ESG roadmap for growth companies

Henry Philipson, Director of Marketing & Communications, Beringea

When we founded ESG_VC in 2021, there were few (if any) solutions for understanding the ESG performance of early-stage companies. There were plenty of frameworks for public markets and private equity, but these tended not to reflect the practical realities of high-growth businesses.

Moving through the lifecycle of a venture capital investment, the profile and priorities of a company will change dramatically. Imagine a university spinout securing its first round of institutional funding – five people and a dog, a WeWork office, and little in the way of corporate structure – and the ESG footprint of the company is close to non-existent.

Fast forward several years, and the company has hopefully grown through additional rounds of funding, scaled headcount rapidly, added physical office space, built supply chains, and developed corporate structure. It is now a business with an impact on the environment, its people, and its stakeholders.

As investors in venture capital grapple with the increasing demands for ESG strategy and reporting from limited partners and regulators, it can be hard to know how to tailor an approach to ESG that can cater to businesses throughout the lifecycle of venture capital funding.

This is why ESG_VC has spent the past two years developing an ESG roadmap for growth companies, which is supported by our research with the BVCA. In this article, I will try to lay out how we think about adapting your approach to ESG for companies as they scale.

Phase one: Building foundations

For companies securing their initial rounds of venture capital funding, education is the name of the game. As investors, you have an opportunity to establish simply the ‘why’ and the ‘what’ with the leadership teams of your portfolio companies.

To consider the ‘why’, it is critical to work with new investments to lay out the rationale for embracing ESG. For companies, this is likely to come down to attracting talent, securing further investment, complying with regulation, and leaning into the commercial opportunities that can develop through leading on sustainability, diversity, and corporate governance.

For investors, it is also critical that you are transparent about why you are working with your portfolio to adopt a robust approach to ESG. The factors may be similar for companies and investors – regulation, talent, and fundraising will play their part on both sides of the table – but it is still essential to ensure that you are reading off the same page.

These early stages – which would tend to be pre-seed or seed investments – are also an ideal time to set out a blueprint for ESG and explain the types of issues that a company may consider as it scales. Highlighting key areas of focus – such as carbon accounting, building an inclusive workforce, or corporate governance – will help translate the big picture into the practical reality.

This is not to say that you should expect companies to grapple with these issues, simply to educate them about the areas that are likely to be scrutinised as they grow. Together, you will also be able to identify areas that resonate strongly with the mission and purpose of the company, whether that is their environmental impact, their team, or corporate responsibility.

This work is cemented with simple corporate policies and team initiatives that enable a company to take its first steps on their ESG journey. From our work with the BVCA, we find that ‘quick wins’ can be developing an ESG policy, adopting structured board meetings with a regular consideration of ESG, and providing training on issues such as DEI and cyber security.

Phase two: Identifying strengths

As a company secures its next rounds of funding at Series A and Series B, investors are better placed to work with leadership teams to identify areas of opportunity within ESG.

For companies, this is likely to be a stage in your growth when you have the operational structure and resources to engage meaningfully with ESG. It can also provide a valuable tool for connecting with your workforce and building a shared vision for the growth of the business. One of our portfolio companies at Beringea – DASH Water – allocates specific impact objectives to individual members of its team to foster this shared responsibility and accountability.

At its core, this phase is about measurement: alongside our ‘why’ and ‘what’, we now add ‘how much’. From measuring their carbon footprint to running employee surveys for wellbeing, inclusion, and diversity, companies will begin to collect the data that will underpin their future ESG strategy. Once you have your hands on the information, investors and portfolio companies will be able to make informed decisions about how to invest time and resource in ESG.

This will also likely be a time when companies can begin implementing programmes that enable them to stand out from their competition – for example, a business may consider implementing a recruitment programme for under-represented groups or look to take on apprentices. Any new initiative clearly needs to be weighed against your commercial priorities, but building your talent pipeline can be a sensible place to start.

Through our work with ESG_VC, we also see that these stages of growth will provide an opportunity to consider more technical aspects of ESG. Carbon accounting is a persistently important issue for companies to get to grips with, and one that they regularly highlight as a core objective for the year ahead. With the growth in artificial intelligence, we have also seen a rising interest in how to build responsible technology and manage data securely.

Phase three: Developing expertise

Through capturing data early in a company’s growth, companies have an opportunity to use our final phase to focus on refining their approach to ESG and becoming experts in specialist fields.

Those businesses that have taken the time to conduct a thorough measurement of their carbon footprint will now be able to think about how to reduce it, and potentially target net zero. There will even be scope to capture the operational and commercial benefits of these exercises – for example, we find many scale-ups with substantial supply chains will often find cost-savings and efficiencies through targeting a reduction in emissions.

Similarly, companies with a detailed picture of inclusion and diversity within their organisations will be able to identify meaningful targets for the future growth of their workforce. And scale-ups that have established a robust position on corporate governance will be well placed to respond efficiently to the needs of their team, investors, and customers. Crucially, this work is also likely to pay off during the scrutiny of an exit – whether through a public listing, M&A, or investment.

Together, the venture capital ecosystem – from limited partners through to general partners and portfolio companies – is working hard to ensure that a growing cohort of companies can successfully follow an ESG roadmap. The BVCA’s ‘Excellence in ESG’ initiative is a fantastic opportunity to showcase this innovative work and celebrate the progress being driven.

Authored by Henry Philipson
Director of Marketing & Communications, Beringea