Bringing the International VC Industry Together to Address ESG Challenges through ESG_VC

On this episode of Zero One Hundred Conferences ESG & Impact Talks, we have Henry Philipson, the dynamic Director of Marketing & Communications at Beringea and the visionary co-founder and president of ESG_VC. Henry's role at Beringea encompasses leading marketing and communications efforts in the UK, collaborating closely with investment and fundraising teams, and advising portfolio companies on public relations and communications strategies. He also spearheads the Beringea Scale-Up Academy, an annual program of workshops and webinars designed to support the growth of portfolio companies.

Henry's commitment to environmental, social, and governance (ESG) practices is evident in his leadership role at ESG_VC. This industry initiative aims to help portfolio companies enhance their ESG performance, reflecting Henry's dedication to fostering sustainable and responsible business practices.

In our conversation, we delve into Henry's journey in marketing and communications, his insights on the importance of ESG in venture capital, and the transformative impact of ESG_VC on the industry. Join us as we explore the intersection of marketing, communications, and ESG with one of the field's most influential leaders.

Read ESG_VC 2024 report: Insight to Impact: Research and Trends A Roadmap for ESG in Startups, supported by BVCA and Marriot Harrison.

What prompted the creation of ESG VC and how has the initiative evolved since its inception?

Sure, of course. So if I just give you a very brief introduction to ESG VC today, we're a network of about 250 venture capital firms, largely in the UK and Europe.But we now have members across Australia, New Zealand, Canada, the US, even across Asia. And what we're really looking to do with ESG VC is to help early stage companies to measure and improve their ESG performance. So the genesis of the initiative were actually some internal conversations we were having at Beringia.

So as you highlighted in your lovely introduction, we were an early stage venture capital firm. We have about 50 or so portfolio companies across the UK and Europe. We're typically investing around series A or series B. And what we spotted in recent years is that we had more and more businesses coming to us and asking for support on sustainability, on diversity and inclusion, on corporate governance, on the responsible use of AI.

And whilst we were often able to provide some ad hoc support or guidance on those topics, we didn't really have a structured approach. And we thought that there needed to be one. So having spotted that opportunity, we started talking to a few of our friends across the venture capital ecosystem.

So we just hosted ultimately a Zoom meeting. This was back in the days of the pandemic with the likes of Atomico, 8Roads and a handful of other VC firms to talk about how we could support our portfolio companies more on ESG. Because at that time, there wasn't an approach in the industry.

When a founder wanted to think about the problem of ESG, if you will, they could maybe look to some policies and templates that were designed for listed businesses, or perhaps a private equity firm has set out a measurement framework for ESG in their portfolio companies. But it was never really in the language or strategy of a startup. And so we quickly went about designing a set of resources, which I can tell you more about in a moment, to ultimately help startups to first of all, understand ESG, so educate themselves about what it incorporates, and then to begin to measure it within their organizations.

And then over time, hopefully, make improvements on any score that they can generate for their business.

So this first point, you've met your partner, your colleagues in the industry, and they were doing the same thing. They were getting the same questions as you were getting, and they were having the same issues as you were having, right?

Exactly.

We started ESG VC in early 2021. The pandemic sparked a lot of questions, I think, about the purpose of companies in general, but specifically startups. Many entrepreneurs and investors were beginning to question whether organizations could have a more positive impact on the environment, on society, and on the wider economy.

Likewise, broader social movements such as Black Lives Matter were also bringing these issues to the forefront of business generally. Therefore, we saw a real crescendo in the volume of conversations around ESG, diversity, and inclusion, around sustainability across the venture capital ecosystem at that time. And to be honest, that hasn't died down.

 It's only got more pressing as an issue, and we can sort of delve into some of the other trends that are driving that, which more relate to regulation, engaging with LPs and other stakeholders.

So you already mentioned some of the concerns you mentioned about diversity and inclusion, and some more like the sustainability approach. So what are the primary concerns and inquiries raised by the portfolio companies regarding ESG topics on a more industry level?

So I think the first question is always, where do I start? For most founders, ESG can seem like quite a complex and onerous task.

Ultimately, ESG VC is here to remove a lot of the burden of pressure and time that was being placed on founders before we existed. And so a lot of what we'll do in the first instance with companies is just to lay out to them what ESG entails. So what are the different types of issues that you may be considering, without any judgment about what exactly a company then goes and does in terms of implementing new ESG-related initiatives?

There are then probably some areas that are particularly pressing for businesses today. Net zero is clearly a big topic of discussion for any organization currently. With the legally mandated targets, in many instances, for achieving net zero around particularly Western economies, net zero has become a very important topic for people to consider.

And so, therefore, many startups are having to think about"how do I measure my carbon footprint". How do I then think about perhaps setting a net zero target? And how maybe do I tackle carbon offsetting, for example, if I'm unable to remove or reduce enough of my carbon footprint to reach net zero on my own initiatives? And then, clearly, as you've highlighted, diversity and inclusion is a really important topic. And I think particularly given the war for talent that we've seen in recent years, many startups are now realizing the value of creating more inclusive workplaces in order to recruit and retain well.

And that's only become more of a consideration as budgets have become constrained and people don't want to churn through employees. So creating the right sort of environment to keep people as part of your team and keep them happy and productive have been super important in terms of how companies think about what they should be doing for their workforces. And then I think one area that I'm really interested in for the coming months and years is the role of AI within early-stage companies and particularly how we use it responsibly.

You know, many of our portfolio companies at Beringea are beginning to adopt generative AI throughout their businesses, whether it's designing new products or just driving greater efficiency within teams. But they need to know that they're using this technology responsibly, and that's one of the things that we also look at within our approach at ESG_VC.

So are the concerns of your portfolio companies aligned with the priorities of the LPs, for example, or do you as ESG_VC need to bridge this gap in some way?

Yeah, I think that's a nice way of putting it.

I think we do bridge the gap between portfolio companies and LPs, and that's not any disservice to either the portfolio companies or the LPs. And in many respects, the overarching objectives of what they're seeking to achieve for the world, for the planet, for society are the same. People want to see more inclusive teams and workforces.

People want to ensure that companies are meaningfully contributing to our efforts to achieve net zero. But I think the disconnect comes between how we're expecting to move forward on that journey and the needs of a startup and the needs of an LP are incredibly different. And I think what we saw before ESGVC was founded was that there just wasn't a simple way of those two ends of the venture capital ecosystem to come together to meet in the middle, and that's what we've tried to do with ESGVC.

To give you a specific example, if I'm a limited partner, I'll typically be investing across a range of different assets. It might be listed companies, it might be real estate, it might be hedge funds and other private assets, including private equity and venture capital. And so I will have a very detailed, very complex, but quite standardized, often, approach to ESG and sustainability across my investments.

What we've seen, and I think even what many LPs will admit, is that that approach is not very friendly, ultimately, to startups who don't have the same level of resources as large organizations to deal with often the data requests, but it's other initiatives as well that an LP would therefore expect. So what we've tried to do is understand the needs of an LP, but ultimately try and think through what can a founder meaningfully engage with when it comes to ESG. What are the types of questions that would be productive for them to ask themselves, which will surface exactly the types of data initiatives and activities that an LP wants to ultimately see? So that's how we sought to approach the problem.

And for example, all the over 200 members, I mean, probably what percentage of them, maybe you can tell us, are impact funds? And what's your approach to these whole regulatory waves in the last years? What's your approach to SFDR? And how do you translate these needs into your portfolio companies?

So just thinking in the first instance about impact, I don't have the specific numbers, but I'd guess it's around 15 to 25% of our members would be impact funds or have some impact strategy.

And I think that speaks to the general differences in approach, let's say between ESG and impact. ESG is looking at the processes within a company and trying to ensure that they are as beneficial for the planet, for society, for the economy as possible. And just ensuring that organizations are all moving forward toward those positive goals.

Impact will often typically identify a specific target or issue that it wants to address. It may well be that many venture capital funds, for example, will have both an approach to ESG and an approach to impact as well, but the two are not necessarily the same. In all likelihood, I think we believe that most venture capital firms, if not all, will need over time to have some sort of approach to ESG or at the very least sustainability, but it will only be a smaller proportion that will be able to incorporate an impact strategy into their work as an investor.

So then to think about the second point, which is related, I think we've seen that regulation and impact have sort of developed alongside one another, and many venture capital firms have thought through how regulation could provide an opportunity to think about an impact strategy, particularly in Europe, as you highlighted, the implementation of SFDR has encouraged lots of venture capital investors to think about how they might become what's called an Article 9 fund, effectively more of an impact-focused fund, and use that as a way of starting conversation often with LPs around how their investments can drive positive impact. And so we as ESG VC have clearly had to think a lot about what the regulatory landscape looks like for our members, and how we can support them. But what I would say is that we haven't really reached the end point of regulation and its development around ESG, but we're at quite an interesting inflection point in terms of how it's beginning to shape the thinking of VC firms, particularly in the UK and Europe, but I'm sure over time that will expand further afield.

And so what we try to do as ESG VC is in the first instance, ensure that as much of our resources and our measurement framework as possible can align with regulatory standards. And we can talk a little bit about how that actually works in practice in a moment, but just to give you the high-level picture, we're trying to really understand what sort of questions regulators are asking it, and just at the very least ensuring that we're asking the right types of questions in turn to our portfolio companies. And that doesn't necessarily mean that we will be asking the same question, it just means we're looking to be able to facilitate the same output.

And maybe you can go deeper on that from over 200 members, most of them are in Europe, etc. Because that also shapes the conversation. Here in Europe, we kind of speak the same language when it comes to ESG and regulation. You take this conversation to the US and you take it to other places, which like in Asia and level of conversation is completely different, right?

Yes, yeah, absolutely. And I think it's a really interesting question to tackle. So I think one important point I would add to the summary that you just provided, is that clearly we now have regulatory differences between the UK, which is still a huge venture capital hub, and the rest of continental Europe.

And so as an organization that speaks to members in both the UK and Europe, more broadly, we need to ensure that we're not being dragged into too much specificity when it comes to any single regulatory standard. So for example, we wouldn't necessarily want to overhaul our approach purely with SFDR in mind, because SFDR, which will come into force in the UK in the coming year, will be a slightly different approach. That's not to say that they won't be broadly similar, but we just want to make sure that we're not going too narrow in our focus.

And I think a kind of interesting point to consider here is the issue more broadly of standardization versus specialization. So just to really lay out for your listeners, how we think about ESG measurement specifically, ESG_VC has built its own measurement framework for understanding ESG within early-stage companies. It's a simple spreadsheet, anyone can go online and download it from our website.

It should typically take a company between one to four hours to complete, depending on their size, stage, and sector, asking a range of qualitative and quantitative questions about their approach to all of the different issues that we've been talking about today. And so it's designed to be as approachable and attainable as possible for those early-stage businesses that will typically not have had the resources or bandwidth to think in a meaningful way about ESG, but who are beginning to understand that it's an important issue to consider as they scale. Now, we've always thought at ESG_VC that it's really important to ensure that the types of questions that we're asking companies to consider are standardized as much as they possibly can be.

Because I think the risk is that if we specialize too much, and this is sort of, I guess, a point for the ecosystem as a whole, as well as specifically ESG_VC, but if we specialize too much, we're going to be asking too many questions in too many different ways of companies that simply don't have the time to respond to a thousand different questionnaires that their investors or partners or customers may be asking them to complete. So we try and just make this as simple as possible. Likewise, therefore, I think we see some value in being an ESG standard for venture capital reporting for portfolio companies, whether you're an investor in the UK or in Europe in Australia Canada, or even to an extent, the US.

Now, that's not necessarily to say that over time, we might see some adjustments in the types of questions that we ask to deal with very specific regulatory issues in certain markets or geographies. But I think what I just really want to stress is that standardization is a really important objective for us, and I think one which sort of stands side by side with the regulatory landscape, which is, you know, by the very nature of sort of global politics, slightly fragmented around the world. And how do you evaluate so far the results? You have VC firms that are members, and then you have this big group of portfolio companies that can take or not apart recommendations and tools that you put.

How are the results doing so far? Do you see the number of companies using the tools is increasing, and the quality of data that you are being able to gather is getting better by the day?

Yeah, for sure. And the short answer is we've seen tremendous growth in the usage of all of our resources. So just to be clear, we have the ESG VC measurement framework, which I've just described.

Our members then also get access to a range of different free events that we run throughout the year, typically for portfolio companies, but also for investors. And that'll be things like webinars on measuring your carbon footprint how to run a DNI survey or how to write your first ESG policy. And then alongside the framework and the events, we also provide access to as many sort of off-the-shelf resources guides, and support as we can to companies to help nudge themselves forward on this ESG journey.

And so we've seen great levels of adoption and growth in that adoption across all of those different areas of our support to use the measurement framework and the data that we collect through that tool specifically. ESG VC runs annual research programs in partnership with the British Private Equity and Venture Capital Association, the BVCA. And so we're about to publish our third report in June.

I'm afraid I can't tell you much about it. It's all under wraps at this point, but I'll make sure to share it with you as soon as it is as it is published. But if we just look at the previous two reports that we've done, which were published in 2023 and 2022.

In 2022, we collected data from just over 100 businesses backed by leading venture capital firms across the UK and Europe. And that was just a snapshot of how those businesses were performing when it came to ESG. And we saw some interesting trends and themes, namely, you know, companies were really struggling with the environmental agenda, but actually they're doing quite strong work around social issues.

Fast forward to year two, we doubled the number of companies that were participating in that research, good uplift in the number of VC firms that were contributing data as part of that process. And again, we started to build on the findings and understand how those data points were shifting over time. We were seeing improvements, for example, in the number of companies that were measuring the carbon footprint, but was it fast enough? We then started to ask some interesting questions about how companies were thinking about the use of AI.

Companies were super strong, for example, on the mental health agenda, but they're struggling a little bit more with board-level diversity. So loads of really interesting issues for us to tackle in the rest of 2023 and 2024. And so we therefore see really great uplift in the number of companies that are ultimately being touched by our resources, whether that's the framework or the additional support that we provide.

And in turn, obviously, therefore, the investors that are helping them to access all of that useful information and support. And so I think sort of taking a step back and thinking about the future of ESG_VC, we only seem to get more and more inquiries from investors, from LPs, even to a degree from entrepreneurs about how they can access the support that we offer to them. So I think things are looking very positive.

And then by our private equity industry, do you see that there's anything you can do to work together? You said in the beginning when it comes to ESG VC founders and startup companies, they don't have the hands, they don't have the tools. So you're building that in the few things that were available for the industry were more mature and bigger firms like private equity buyouts. So you've had this opportunity or something that actually is not even relevant right now?

 I think it's definitely relevant right now.

And it's quite an important priority for us for this year. And I think what it relates to specifically is an issue around aligning the types of data points that we are collecting to ensure that, again, to my point earlier, we're being as standardized as we possibly can, not only within specific asset classes, like venture capital, like private equity, like even private credit but just ensuring that across those asset classes, wherever we possibly can, we're harmonizing the types of data points that we're collecting. So were I to be a limited partner in the example that I shared earlier, I could guarantee as much as possible that I'm looking at like black data.

So to make it a little bit more specific for you. If I'm invested in all of those different types of asset classes, I want to know the emissions being generated by my investments, whether it's a startup, a large buyout-backed firm, or, you know, a property portfolio. And we can do that.

I think we believe we can do that. And so we're as ESG_VC, we're having some interesting conversations with relevant bodies and organizations who speak to the wider private equity ecosystem. And that, you know, that can include people like the ESG Data Convergence Initiative, which has been a hugely successful and important initiative for the buyout industry, but it's also moving into the mid-market and growth.

Likewise, we do a lot of work with trade bodies, such as the BVCA, which I mentioned earlier, but also Invest Europe. And I think together through bringing these sorts of industry initiatives and organizations together, we can move forward towards sort of a valuable piece of alignment, whilst also understanding that the approach to ESG, when it actually comes to the delivery to portfolio companies will always be different, we'll always need to speak in slightly different ways to startups to those larger organizations that you mentioned earlier.

Yeah, I think that the fact that you're trying to be that bridge between what LPs ask you for, and what you can actually ask for, for portfolio companies, when it comes to data reporting, being able to distinguish between their capacity, what data is relevant for them to report, instead of like trying for everyone to bring all this data into the table, and no one knows what to do with all this data, you know?

Yeah, exactly.

I mean, the simple point here is, that it has to be proportional, and it has to be reasonable. You know, often we're working with companies that have five people and a dog, and there are just some questions that they're never going to be able to engage with. Now, there may be some value in educating them about what questions they consider as they scale, but the reality is they can probably only then put in place some simple policies, and we as ESG_VC's believe that's okay.

We shouldn't be forcing companies to comply with a complex set of rules and guidelines that are simply not taking into account where they are in their growth journey.

Perfect. So, I think we're running out of time, but we can have another conversation in June, June, July, so you can share with us the insights for the report, first of all. Well, I want to thank you for joining us, and also I want you to please tell us your long-term vision for ESG VC, do you think that would be a point where all these ESG issues should be addressed organically, internally, without these external initiatives?

I think that's probably a conversation for another day. There's a whole world of different issues we can unpack within that that are super interesting, and I'd love to be able to share them with your listeners. Namely, even just the sort of definition of ESG is such a sort of interesting question within a startup context, because actually what I think we often end up talking to businesses about is a good business sense, and so over time we see lots of opportunity for how we can just think about helping companies to be as operationally efficient and successful as possible, obviously within the context of some of the sort of non-financial issues that it takes to run a business, but I think that whole sort of theme is one that we could unpack for another couple of hours, probably, so we can have that conversation at a later date.

So, in terms of what we are looking to do as ESGVC, I think this year will probably be another year of growth for us. As I've already mentioned, we see a lot more interest and engagement from our members all over the world, so if anyone wants to learn more about ESGVC, then they can find me on LinkedIn and reach out to me there, or they can go to our website, which is esgvc.co.uk to learn more. And find some of those resources, read our research, access our framework, and then there are some interesting themes that we've already discussed today around aligning with other industry standards.

I think there's really interesting work taking place in terms of how ESGVC translates into new markets, so we've got some interesting news to share with the ecosystem about our launch in Australia and New Zealand in the next few weeks, likewise, I think, from my point of view, sitting sort of here, I guess, at the top of ESGVC, if you will, there's just an interesting opportunity for us to continue to professionalize the resources and support that we provide to our members. So, we'll be launching a new version of our toolkit soon, publishing our next piece of research with the team to run ESGVC, and it continues to grow sort of on its own two feet.