ESG Compliance for VC Firms: Meet Investor and Regulatory Demands

Over the last few years, Environmental, Social and Governance (ESG) issues have emerged as a central focus of the corporate agenda. According to a PwC study, two-thirds of CEOs report efforts to improve energy efficiency, and more than half of respondents have plans to innovate climate-friendly products or services. 

Today, companies implementing sustainability policies view them not just as mere goodwill and enhanced brand but rather as a prerequisite for business stability and growth as well as a competitive advantage.

This shift has not gone unnoticed by private funds, which now need to ensure the ESG performance of their portfolio companies. PE and VC firms experience even greater importance of ESG factors due to pressures from multinational corporations where their portfolio companies often act as suppliers, as well as due to higher investor expectations. 

This report explores the increased focus of investors and regulators on sustainability factors and explains how venture capital and private equity firms can ensure multi-jurisdictional compliance while staying ahead of the ESG curve.

Meet Investor and Regulatory Demands for ESG

Investors are demonstrating increased demand for ESG products and paying greater attention to risks and metrics, creating new pressures for private funds to measure and disclose sustainability. Meanwhile, the lack of standardized metrics and terminology presents a number of challenges for investment advisers aiming to provide for investor-grade ESG reporting.

With current expectations from investors, private funds are also becoming more selective in which portfolio companies they choose to invest in. According to the PwC's Global PE Responsible Investment Survey, 37% of respondents turned down investment opportunities because of ESG concerns. 

In these circumstances, PE and VC firms face challenges in seeking to reach a balance between generating a return for investors and meeting their broader ESG goals. 

Regulatory Requirements

Regulators across jurisdictions are actively designing ESG policies and setting up new disclosures to address environmental challenges, promote sustainable practices, and ensure transparency and accountability for businesses.

Facing the ever-changing regulatory landscape, PE and VC firms have to implement change management strategies and stay ahead of regulatory changes while operating under increased scrutiny.

The Securities and Exchange Commission (SEC)

The US Securities and Exchange Commission (SEC) has initiated a proposal that would require both SEC-registered advisers and exempt reporting advisers to report about their use of ESG factors in their advisory business and their use of ESG providers.

If adopted, the proposal would require PE and VC firms to provide additional information on their implementation of the ESG framework in their investment strategies. The SEC believes that the proposal will contribute to consistent, comparable and decision-useful information for investors. 

Regulations in the EU, UK and Internationally

Private funds with portfolio companies in other jurisdictions have to prepare themselves for compliance with a number of sustainability standards and provide ESG-related disclosures. These include:

• The Corporate Sustainability Reporting Directive (CSRD)  in the EU,

• Recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD Recommendations),

• standards developed by the International Sustainability Standards Board (ISSB).

While many of these ESG-related standards cover publicly listed companies, these larger organizations set the mark for the rest of the businesses that operate as their suppliers. PE and VC businesses need to build awareness of new sustainability regulations to conduct due diligence on their portfolio companies and to ensure their compliance with ESG standards set by regulators.

Protect your fund's reputation and financial stability by prioritizing ESG integration; discover how to align your investment strategy with evolving investor preferences and regulatory standards here.

The Roadmap to ESG Excellence

With an increasing demand for ESG products from investors, regulators, and consumers, many  PE and VC firms have started to view sustainability as an opportunity rather than a liability. 

At the same time, many private funds face considerable challenges in implementing ESG compliance due to regulatory uncertainty, a lack of standardized performance indicators and different priorities across industries and countries.

Under these circumstances, private equity and venture capital funds need to have a clear roadmap identifying their ESG next steps for the short and long term.

From a strategic planning perspective, such a roadmap could include:

• Building an understanding of the ESG standards and frameworks relevant to industries and jurisdictions operated by portfolio companies,
• Choosing standards and metrics that investors can trust,
• Collecting standardized sets of key performance indicators from portfolio companies on a regular basis,
• Running due diligence on portfolio companies, starting from those that are closest to exit or that operate in sectors subject to the highest scrutiny,
• Developing investor-grade reporting, providing decision-useful information,
• Monitoring existing and emerging regulations across jurisdictions and implementing compliance reporting mechanisms,
• Enabling the teams with modern technology to streamline data gathering, ESG due diligence, and investor and regulatory reporting.

Streamline VC & PE Operations: Single Source of Truth Data Platform

Venture capital and private equity firms explore multiple ways to gather data across their portfolio companies and streamline their investor and regulatory reporting. For example, as demonstrated in the PwC 2023 Cloud Business Survey, many PE firms are now actively exploring ways to use the cloud to support their ESG goals.

One of the options now available for PE and VC firms is offered by Athennian, providing a unified data platform for a Single Source of Truth (SSoT) on all portfolio companies, accessible from anywhere on any device, equipped with automated templates and a comprehensive toolset for due diligence automation and reporting. 

For more information about the Athennian platform and regulatory filing software capabilities, please do not hesitate to contact our team to request a free demo.