ESG consideration in venture capital: drivers, strategies and barriers

Abstract

Purpose There is an increasing awareness of environmental, social and governance (ESG) factors in the private equity (PE) environment. While many studies deal with the implementation of ESG in the field of PE, only little is known about how the subcategory venture capital. Therefore, this study aims to answer the questions: What are the motivations for venture capitalists to consider ESG in their investment decisions? How do they implement it and what are the barriers that hinder them? Design/methodology/approach An inductive study based on semi-structured interviews with 11 investors of venture capital firms (VCs) was conducted to explore the drivers, the barriers and the strategies to implement ESG in the investment decision-making. Findings All investors perceive that ESG will play a major role in investment decisions in the long term. VCs have seen benefits primarily in terms of performance and commercialization of startups that incorporate the ESG aspect. Limited partners are a driving force for change in this process. No standardized framework and lack of resources for implementation are mainly assumed as barriers. Practical implications Politics and industry might support particularly smaller VCs in their implementation by providing standardized frameworks. Owing to increasing awareness and interest of ESG criteria among VCs, startups should also address these criteria. Originality/value This paper contributes to the literature by examining how ESG is currently considered in VCs’ decisions and what challenges they face. Therefore, this research contributes to the understanding of the decision-making process among venture capitalists.

Guest editorial: Sustainable finance

“…Another work studies the relationship between short-term firm performance and sustainable financial performance [Kayani et al (2023)]. Finally, ESG-related issues are also an important major part of this special issue [Lange and Banadaki (2023), Peng and Smith III (2023), Niblock (2024) and Tanveer et al (2024)].…”