“I am really frustrated. They [the VC Funds] don’t want to engage when we ask about ESG but they will have to. We are getting somewhere in all other asset classes already.” During our latest conversations with asset owners and limited partners (LPs) in the U.S., some were complaining that the early-stage venture capital (VC) investors they were investing in weren’t keen on ESG. 

The head of ESG at a major American asset owner explained in depth how many big U.S. VC funds have resisted scrutiny of ESG reporting and integration. This is nearly a standard practice in all other asset classes. 

Similarly, representatives of several big U.S. pension funds have made strong public commitments to ESG and impact investing, including the three biggest ones CalPers, Calstrs, and New York State Comptroller. Their rationale is not based on a sense of moral obligation but on a strong commitment to achieving high returns for their shareholders, those who draw pensions. 

The business case for ESG makes sense. The war on ESG runs counter

Integrating material, meaning specially relevant, ESG factors for a company or investor, is good for the bottom line. It’s often connected to a higher (investor) premium. Using ESG materiality assessments in investment decision-making can help to identify additional risks (e.g. regulatory or environmental) and integrating ESG considerations into portfolio management activities can support value creation opportunities, including those in private equity as the most recent EDCI data shows (e.g. in B2B sales or when getting ready for an IPO). 

On the other hand, bad ESG, especially bad governance, can be a value killer, as examples such as Deliveroo, FTX, or Shein’s forthcoming IPO show. At the same time, the Texas ban on ESG, for instance for its municipalities, has been costing the state’s taxpayers hundreds of millions in raised cost of capital.

This evidence aligns ESG with investors’ main motivation and responsibility: fiduciary duty. Simply speaking, investors will achieve the highest return on investment for their shareholders, limited partners, and asset owners when doing ESG. And this makes a difference for taxpayers and retirees receiving pensions.

VCs predominantly invest other people’s money—often our money from taxes, pensions, and donations. In Europe, for instance, last year, the biggest source of VC investments was the European state funds. They contributed 37% of the Eur11.2bn raised, almost double the amount coming from family offices and private individuals according to Invest Europe data.

Similarly, in the U.S., the LPs with the highest number of commitments are endowments, such as Michigan and the University of Texas, and pension plans, like the California Public Employees (CalPERS), San Francisco Employees’ or HP’s or Liberty Mutual pensioners, according to Preqin data. 

Opponents are playing language games in the war on ESG

The continuing anti-ESG rhetoric is coming from a strong group of conservative businesspeople and politicians who don’t quite want to accept the evidence. From the publication of Woke, Inc. and billionaire investor Peter Thiel’s anti-ESG stance, to more recent Republican regulation, especially in Texas and Florida, there’s a hard push against what they describe as “woke capitalism.” They wrongly equate ESG with a leftist, political ideology focused on identity politics and skin-deep diversity.

Large asset managers, including Blackrock’s Larry Fink, have seemingly caved to some of the rhetoric by avoiding using the term ESG, including in shareholder letters. However, the language games are in fact often masking a continued commitment to acting on ESG shareholder proposals. This is what is called green hushing.

A correction of ESG in the public markets (which the anti-ESG rhetoric is almost exclusively limited to) makes sense. More scrutiny was necessary to avoid continued green- and ESG-washing. What we don’t need, however, is for the anti-ESG belief to swamp more nascent efforts for meaningful and material ESG integration in other asset classes, such as venture capital. 

Venture and startup investment is changing from the inside out 

The recent Milken conference in May brought some hope. John Hope Bryant of Operation Hope pushed his vision of the “big American tent,” building on the country’s multicultural, immigrant backbone. Some of the strongest critics, like Bill Ackman, were “scolded” by participants. 

At the same time, regulations coming out of Europe, such as SFDR for investors and CSRD for larger companies, are starting to take hold. Estimates conclude that several thousand U.S. (Canadian and other international) companies doing business with Europe must also comply with the ESG disclosure standard. 

The venture capital ecosystem in particular is increasingly “self-regulating.” Industry bodies such as Invest Europe have published strong guidance; nonprofits such as Responsible Innovation Labs and our own firm VentureESG have provided tools for meaningful ESG integration and training for several years. This is increasingly supported by European LPs, many of which are ESG-focused state funds and value-driven family offices. They also provide increasing amounts of capital to U.S. funds while their (overcommitted) American LPs are pulling back.

Most of our concerns are about Silicon Valley. Many heavy-weight Silicon Valley funds haven’t understood the impact of ESG and responsible innovation on their fiduciary duty. A senior executive at a major U.S. LP told us the tension they were encountering vis-à-vis these funds: “Some of them shifted their models recently and really are pushing us to the side; charging us management fee for holding public equities longer? They don’t even answer our ESG questions. But we’re staying in because you don’t want to lose your allocation,” they said. 

Particularly in the U.S., the idea of aligning ESG with fiduciary duty needs further emphasis and eventually, enforcement. We understand that investors can’t easily be convinced of wanting to make the world a better place. But let’s grab them by their horns. We need to be more explicit about how fiduciary duty is changing, in line with taxpayers’, retirees’, and donors’ expectations. That’s when even the slowest mover will have to change.