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If you didn’t already know, there are several companies in the Morningstar family, and one of them – PitchBook – runs ongoing dedicated analysis of the world of venture capital.
In a piece of remarkably fortuitous timing, PitchBook has released its 2022 Sustainable Investment Survey to coincide with ESG Week on Morningstar.co.uk. This year’s 30-question poll asked venture capitalists across the world (and their advisers) to react to various statements about sustainable investing, environmental social and governance (ESG) risk factors, and impact investing.
The survey was completed by 552 participants, and it recorded at least one answer from a further 1,164 people. In summary of the comprehensive resulting report, we have highlighted 10 key learning points below.
European VCs Have Been “At It” For Up To Five Years
The majority (30%+) of respondents to the PitchBook survey who primarily base themselves in Europe started actively implementing their sustainable investing initiatives between two and five years ago. Just shy of 30% of European respondents did so between 12 and 24 months ago, while 23% did so over five years ago.
And They're Really Pushing Their Companies to do ESG
European respondents also displayed the strongest requirements for portfolio companies to measure and report on their financially material ESG risk factors. About 66% of European respondents do so, compared to 61% of central and south Caribbean respondents, 61% of Asia Pacific respondents, and 42% of North American and Middle Eastern and African participants.
It’s Not All Good, Though
PitchBook’s survey includes comparative data. This year, 62% of participants had partially or fully implemented a sustainable investment programme, up from last year’s 58%. But this year, too, there was an increase in the number of respondents with no plans to incorporate any sustainable investment work, going from 9% last year to 13% this year. Furthermore, 20% of limited partners, or LPs (the providers of capital ranging from high-net-worth individuals to pension funds), and 18% of North Americans, had no sustainable investment plans. This is up from 11% and 13% last year.
The Environment is Top (And Rightly So)
When asked to rank the "E", "S", "G", or improving investment returns with an ESG framework in terms of areas of focus, all types of survey respondents selected the "E" as their top priority. S and G were chosen as a first priority least often in roughly equal numbers, with improving investment returns the first choice for the second-highest number of respondents. Respondents were also asked to describe which practices were most and least important when developing a sustainable investment programme. Looking at all respondents, more people said developing a strategy at the firm level was of the highest importance than any other option, with measuring the success of sustainability initiatives another highly valued option. Least important to more respondents was engaging outside experts and hiring in-house sustainability professionals.
The Number of LPs Evaluating Fund Managers’ Implementation of ESG Risk Frameworks as Part of Due Diligence Has Dropped (Slightly)
Well, that was a mouthful. But the fine detail is important. When LPs use or work with fund managers, they may well want to ensure prospective partners are using an ESG risk framework before commencing a partnership. But the number of participants that always examine this as part of their due diligence has dropped, albeit slightly, from over 30% to around 23%.
The Fiduciary Duty Argument is Still Attractive
As much as some LPs are pushing their "general partner" (asset manager) counterparts to develop ESG plans, PitchBook analysts Hilary Wiek and Anikka Villegas say there is a "solid cohort" of LPs who believe that to properly perform their fiduciary duty, they must focus solely on investment returns. Among PitchBook’s LP respondents, 23% said performance was the only factor, while for the other respondent types, it ranged from 11% to 15%.
ESG Matters to Company Purchases
One of the questions PitchBook asked its survey participants was how important it is that asset managers use ESG risk frameworks when acquiring portfolio companies, and the centrality of that behaviour to participants’ decision to commit, re-commit, or recommend funds. 18% said it was "extremely important", 31% said it was "very important", 22% said it was "moderately important", 10% it” was "slightly important", while a concerning 19% said it was "not at all important".
Private Equity Gets a Lot of ESG Attention
When PitchBook asked participants to tell it which bits of their portfolios were the recipients of most of their sustainability efforts, it got interesting results. A majority of around 60% said private equity got the most attention, followed (in order) by public equity, real assets, real estate, and private debt, all of which received under 30% of respondents’ focus.
VCs Think They’ll Do More ESG Work in The Next Year
The survey also made clear that the vast majority of VCs anticipate a greater ESG risk factor workload in the next 12 months. About 59% said "yes", while 19% said "no" as they had already fully implemented their ESG factor programme. An additional 22% said no, adding that they had no intention of integrating an ESG factor assessment into their analysis work.
Environmental Compliance is VCs’ Top Concern
A strong majority (over 45%) of venture capitalists described "environmental compliance and impact" as their biggest area of focus when it comes to investment sustainability. Nearly 23% said improving returns with ESG practices was their main priority, while around 21% said social issues were their main focus. Governance came bottom of the priority list, with around 12.5% of respondents making it their main area of attention.
