The potential of ESG investment criteria in Early-Stage VC funds

Max Germann
4 min readFeb 3, 2021

In the last months I conducted several expert interviews with funds having more than 5.1 billion Assets under Management combined. The first blog post of this ESG in VC series will give you an overview about the main findings of my interviews with funds such as Octopus Ventures, Speedinvest, Frontline Ventures and Mustard Seed MAZE and why you as an investor must act now.

Why should VC firms integrate ESG into their investment policy?

In the last decades it became alarmingly evident that the world’s economic development led to social and environmental misappropriation. In order to solve the world’s most pressing challenges such as climate change, radically new solutions are required. Start-ups with impact driven business models are depended on the transition to a more sustainable financial market. The EU Taxonomy Regulation surely marks a decisive starting point and enables European funds to develop Sustainable and Responsible investment (SRI) or ESG (environmental, social or governmental) investment frameworks for the VC industry.

The investment approach of VC funds must change

Venture funds urge early-stage start-ups to achieve exponential growth rates, the primal issue leading to irrational business practices and disparity. However, the inclusion of environmental, social or governmental criteria in the investment decision and higher returns are not contradictory. In fact, 63% of studies found positive correlation between the inclusion of ESG factors and financial performance (Friede, Busch, and Bassen 2015).

Unfortunately, many VCs are in fear that the integration of ESG might limit the investment funnel and excludes them from promising deals. It is clear that investors are opportunistic and always want to catch the wave of new opportunities in the market. However, investment criteria that are embedded along the entire investment process are a necessity to reduce potential bias and ensures sustainable growth in the long run. Think about how many VC firms are still excluding founders of diverse backgrounds or female founders in their investment process. Funds need to get away of tacit knowledge and move into data driven approaches. The implementation of an ESG policy in your fund will help to encourage change.

ESG investment is becoming mainstream

ESG factor integration in Early-Stage VC funds in Europe is still at a nascent stage but seems to be entering the investment mainstream as more and more VC firms are incorporating ESG criteria into their investment process. A study of the European Investment Fund shows the current progress of the industry very well.

Unfortunately, a consistent way of reporting and a framework that may be easily applied is provoking which leads to a lack of adequate data available. But at the same time the pressure from LPs and start-ups intensifies and many LPs are already asking for non-financial data in quarterly reportings. If you are currently working on the implementation, focus on the 3 building blocks to ensure a smooth transition to more sustainable investing approach.

1. Define your impact ambition

Most VC funds who originally had a traditional finance approach already covered the basics and are investing responsible, meaning they have a so-called negative screening approach in place. These funds exclude investment sectors, companies or practices in their fund and portfolio companies. PRI helps you to classify your fund along the sustainable investment spectrum and in which direction you may want to move in the long run.

Sustainable Investment Spectrum by PRI (2013)

Afterwards define which strategies you may apply at which levels of your organisation. Make sure the selected strategy is embedded along the entire investment process of your organisation from fundraising and LP reporting to the investment process and portfolio management. The Global Sustainable Investment Alliance provides an overview of the different sustainable investment methods you can use. Make sure to use a strategy and topic that fits well into your current processes to have the greatest impact and start raising awareness.

2. Firm Consciousness

Firm consciousness is essential and ESG must be deeply integrated into the company culture to guarantee that ESG criteria is not only well incorporated in the investment process but also part of portfolio management. Only as such, the fund serves as a role model for all employees and its portfolio.

3. Using the right framework to measure impact

The most challenging part after implementing an ESG strategy is defining and measuring impact along the entire investment process. The best starting point for Venture Funds are the Sustainable Development Goals of the United Nations.

Sustainable Development Goals by UN (2020)

The 17 SDGs are covering long term themes along the environmental, sustainable and governmental investment spectrum such as clean energy, climate action and gender equality. This portrays an excellent framework to check your investments against. Only pick topics where you as a fund can identify the biggest synergies with your current investment approach. Afterwards, an expansion into more SDGs might be more fruitful for all stakeholders involved. If you want to check out another useful framework highlighting the transition from the narrow shareholder model to the broader stakeholder model take the one from European Think Tank Bruegel.

Once you have an understanding about the different investment strategies and frameworks that may be applied in your Venture Fund, make sure to develop an understanding about measuring impact and implementing it at every part of your organisation. My next blog post will cover this in more detail.



Max Germann

Building NOUMEN and the global destination of men’s health and well-being. Interested in the future of healthcare, D2C & impact-driven investments 🇪🇺