Opportunity, Risk & Impact: Why ESG Matters to VC Limited Partners
Investing to produce strong investment and social returns
It’s among the buzziest of buzz “words” these days: ESG.
But really, why should LPs in venture capital funds care? At SixThirty Ventures, we believe that ESG has moved from a matter of values to a matter of value, and our firm, our portfolio companies, and our LPs are all working together to move the needle. In anticipation of our first annual ESG report, we’ll be talking about why ESG matters to our investors, to us, to startups, and how we can all work together to achieve a world that strives for not only financial returns but strategic and societal returns as well.
At SixThirty, we’re a minority-owned and managed firm ourselves, and ESG has always been something that matters to us. When speaking with our investors, I have always shared statistics around our women & minority founded companies, and in the last several quarters our LPs began asking for more and more information on the impact of our investments.
ESG has hit its stride, and SixThirty is proud to support our LPs, Founders, and the wider community in driving impact and building a brighter future.
As investors, our LPs often think of ESG in terms of risk management within the portfolio. At SixThirty, we would add opportunity and impact to that list. Let’s examine all three.
First, the opportunity:
McKinsey’s 2020 ESG Study took a deep look at the value that environmental, social & governance programs can create for companies, both short-term and long-term. Global sustainable investment has grown 68% since 2014, to $30T+ in 2020. It isn’t just the investment dollars though, executives now recognize that ESG programs can contribute to financial performance: strengthening a company’s competitive position, attracting and retaining talent, and meeting expectations for good corporate behavior are key areas that can contribute to financial performance.
For the early-stage companies that SixThirty invests in, taking ESG (and particularly social & governance) into consideration can be a strong contributor to returns over time. Imbedding strong governance in a company at an early stage sets the company up for success in the future.
Companies with a strong social orientation and impact can deliver outsize returns over the long term, both by building solutions that deliver value to currently underserved or minority populations and by creating a culture and environment where the best talent wants to work. For our investors, backing companies with strong social and governance policies help them not only put their capital behind companies that will help them grow their business, but that are engaging in work that drives ESG outcomes as well.
While risk is often the first reason that a company would incorporate ESG metrics into investment and business decisions, we think this is a good gateway into a broader understanding of the value of ESG. In the last several years, there has been a growing recognition that a company that isn’t considering its environmental, social, and governance impacts runs risks that could erode value in the future. Of course, risk mitigation is a key imperative, whether those be from bad debts or ESG factors like environmental damage from boxes in shipping or over-use of water.
In Fintech & Insurtech, risks can sometimes be found on the governance side. One example from our portfolio of a company involved in ESG risk measurement is Elucidate, which is focused on measuring, pricing, and reducing financial crime, which costs global banks over $1T annually. Financial crime is a significant cost to large financial institutions around the globe, and one that currently isn’t accounted for in most risk analyses.
The risks presented by poor ESG policies and actions are real and measurable, and this is often an open door for investors to start considering ESG factors. For our investors though, the opportunity to drive returns and outcomes are much more exciting reasons to incorporate ESG into your metrics. We’ve talked about the opportunity, so how can we have an actual impact with our investment dollars?
Impact can be a loaded word. It means different things to different people. Many of us are involved in local or national organizations with different “impact” goals. But, at SixThirty, we think that we have an opportunity to use our investments to create an impact in the world at large. Our thesis at the intersection of wealth, health, and privacy speaks directly to building a better world, at a time when a perfect storm
of pressures is challenging our sense of personal wellbeing: including an aging demographic, shifts in accountability for retirement and health care from institutions to individuals, and relentless breaches of our private information. The scale, speed, and pervasiveness of these changes gives room for big, bold ideas.
One question we often get from our investors is: how can we accurately measure the ESG opportunity, risk, and impact? YvesBlue, a SixThirty portfolio company, is a recognized leader in this space. YvesBlue offers a simple and elegant reporting platform that investors can understand, with a mission to mobilize more capital into sustainability. Unlike existing solutions, it offers material insights, broad asset class coverage, advanced data modeling, and contextualized reporting.
As investors, including SixThirty’s LPs and beyond, continue to grow and evolve their ESG focus areas and integrate them more deeply into their investments and operations, we’re here to partner with them on the journey.
By understanding the priorities of our LPs, deeply understanding their business models, bringing investment ideas that produce strong financial and social returns, and working together to drive strategic returns internally, we can make an even greater impact. This combination of investments and impact is why leaders work with us at SixThirty — to drive returns that are both financial and strategic in nature.