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What It Means to be a Sustainable VC Firm

Keslio Team
 minute read  
June 3, 2024
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Sustainability has shaped firmly-established standards and norms that have been set in society for decades. More and more investors are taking sustainability and ESG into consideration when making critical decisions for their operations and their portfolio. The investment landscape is now understanding the great influence ethics, societal norms, and climate change has on economies. With climate change capable of disrupting value chains and society considering more sustainable options, companies and investors must adapt to minimize their risk.

Startups and companies in their early stage have the power and potential to be sustainable, adapting and acting as early as possible as it continues to grow in their respective industries. These young companies, fueled by innovation and technology, wield an aptitude in embedding sustainability in their products and services, reshaping industries and helping consumers recognize the capability of businesses to be sustainable, whether it be through their end products and services or their practices. 

Yet to do this, these emerging businesses would require support and funding.

A venture capital (VC) firm has the capacity to influence businesses and industries in embracing sustainability in their operations and value chain. Through investing in companies in industries aligned with sustainability, a VC can actively take part in sustainable development from fundraise to exit.

Sustainable Practices

What does it mean to be a sustainable VC firm? 

Being a sustainable VC firm means integrating and considering sustainable practices across all fronts, from conducting day-to-day operations to managing portfolio companies. Here are some practices your firm can adopt to become more sustainable.

1. Develop a Sustainable Investment Strategy

Establishing ESG criteria, objectives, goals, and standards can set the foundation for your sustainability journey. Before making moves towards sustainability, first assess your firm’s operations and investment strategies. Are there any existing systems or processes that contribute to sustainability? What performance gaps need to be filled? How can we take the firm’s mindset towards sustainability from aware and passive to active and committed?

Having certain goals in mind can help reshape and improve your investment strategy. One way to unlock these sustainability goals is to assess factors, advocacies, and sectors that matter to the firm or have the greatest yield and impact. Another way is to look at your current strategy and see where your strengths and weaknesses lie and what areas can make the biggest impact when improved on. Whether it be through considering industries where you can make the greatest impact in or integrating sustainability in your current initiatives, your new investment strategy should yield a positive impact. 

Setting these goals and ambitions pave the way to building criteria and metrics essential in evaluating and assessing sustainability across your investments. Through setting your own ESG criteria, you can be more mindful during investing and while monitoring your portfolio companies at an overall and an individual level.

Using these new changes, you can now raise funds with sustainability in mind. Integrating sustainability during fundraising can be done through clearly communicating your commitment to sustainable development and how you apply sustainability into your investment strategy. It is important to build awareness of these changes because your new practices can affect future and current agreements and bring in more capital from investors committed to sustainability. 

2. Funding Sustainable Industries

The investment landscape has been reshaped by sustainability and ESG factors, making investors more conscious of their investments and its risks, opportunities, and rewards. Being a sustainable VC firm helps reduce risk not just to your own firm but also to the environment and society. As a VC firm, you have the capacity to redirect capital to emerging businesses and industries that make meaningful positive impact. 

The right investment decisions can yield the best results.

Moving forward to the investment process, this is where your decisions can influence your future sustainability performance. One way to minimize risk is by filtering industries and companies that do not meet expectations. When considering sustainability in investing, leaning more towards industries that produce a low negative impact to the environment and society may strengthen your commitments. In addition, it is also important to ensure that your investments support and benefit stakeholders, and has the potential to strengthen progress for sustainability.

Consider the industries you want to invest in. A sustainable VC firm will put ESG factors into consideration during the process. To do this, you can exclude certain industries that go against ethical standards and practices or do not satisfy the ESG criteria you have set. For example, you can review their current positive contributions or assess the severity of potential risks to the environment and society. However, it is also important to see if these companies have the willingness and commitment to adopt new sustainable practices. Being open to adjustments and new opportunities can empower and drive other companies into embracing sustainability.

3. Active Ownership

To be a sustainable VC firm, you also have to be an active owner that encourages and supports their portfolio companies into being forces for good. To embed sustainability, you can include ESG-specific terms and conditions into shareholder agreements and term sheets. It is also important to set clear goals aligned with material issues specific to each portfolio company or industry. This ensures that they are able to make meaningful contributions in critical areas relevant to their operations and industry. 

Once you have these standards and goals set, it is time to continuously engage and communicate sustainability with your portfolio. Work with them in setting sustainability strategies that can fulfill these standards. Develop KPIs to track their progress. Ensure that there are action steps that they can do to take them one step closer to achieving sustainability. By being a present figure, you can drive these young emerging businesses into sustainable companies that can support themselves in the long run during these changing times.

4. Measure and Communicate Impact

Measuring impact helps you see the overall progress your portfolio is making towards sustainability. This also allows you to review their performance and determine areas for improvement and other changes that need to be made.

Embracing sustainability also means being transparent during reporting. It is important to communicate your progress and sustainability performance, discussing both accomplishments and other necessary actions to take to improve in other areas. By measuring and communicating the sustainability performance and impact of your firm and your portfolio, you are able to drive more awareness on sustainability and how it can support emerging industries and companies.

5. Enhance Internal Operations

Lastly, sustainability does not just apply to portfolio management and investment strategies. Sustainability can also be found in your own internal operations. Review your ESG criteria and reflect if these can apply to your own firm. Take a look at your sustainability goals and targets and determine how your own firm can contribute to sustainable development. Set your own strategies that can reduce waste or improve energy efficiency in your office. From developing policies on employee welfare and engagement to setting up internal controls and risk management guidelines, your firm itself can be sustainable across all your practices.

Sustainable Ventures

By adopting these sustainable practices, a VC firm takes them steps closer towards sustainable development. Sustainability not only enhances the firm’s business practices and sets them up for a secure future, but also gives them the opportunity to shape the business landscape, strengthening and empowering their portfolio companies and the industries in which they invest.

At Keslio, we are deeply passionate about sustainability, equipping us with the expertise and extensive network needed to guide clients through their sustainability journey effectively and efficiently. Our expertise is particularly valuable for companies looking to embed sustainability practices into their businesses and investors looking to integrate ESG and impact into investment portfolios. To learn more about how Keslio can assist your organization on its sustainability journey, please don't hesitate to get in touch with us.

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