Story of the year: ESG policies take root in venture

Investors in the VC community have shined more of a spotlight on ESG in 2020. The signs point to more firms adopting ESG practices.

The pandemic and social protests of 2020 spurred change throughout society, and in the investing world, too.

It’s no surprise in looking back over the past 12 months that environmental, social and governance-focused investing is on the rise in the US.

Different Funds, an advisory service that helps institutional investors analyze and connect with venture funds and strategies, told us that the events of 2020 (from climate change to social protests) made it difficult to ignore the need for more responsible investing.

As I wrote about in my Friday Letter, Different Funds found that the number of ESG-focused funds is on the rise. Since 2015, the number of VC funds raised each year by ESG firms quadrupled, up to more than 40 in 2019. The amount of venture capital raised each year by ESG firms has similarly quadrupled since 2015, up to $2.4 billion in 2019.

The topic of ESG also came out during our LP roundtable, in which Dana Johns, of Maryland State Retirement and Pension System, said that ESG is being talked about more often.

“[ESG and diversity] is not a deal-breaker but it is a recognition that we are the stewards of this capital and we need to be making the best investment decisions possible,” Johns said.

It’s no wonder, then, that the LP Hamilton Lane added its first ESG director, as did Cathay Capital, which is affiliated with the venture firm Cathay Innovation.

500 Startups is also emphasizing ESG, hiring impact investing veteran Tracy Barba.

Guest columnist Johannes Lenhard (who plans to write again for us in 2021) wrote that for LPs, the evidence is not necessarily enough yet to really put pressure on GPs to enact ESG principles. But Lenhard suspects the VC community will see more ESG policies in the next decade.