Executive summary

Venture capital (VC) plays a critical role in financing innovation but is exposed to environmental, social, and governance (ESG) risks such as data privacy, governance failures, and climate impacts. Incorporating ESG early can help mitigate these. The report outlines current practices, challenges, and actions needed to improve responsible investment in the VC sector.

About this paper

This research expands the PRI’s private markets work to include VC. It draws on interviews, surveys, and desk research with general partners (GPs), asset owners, and other stakeholders. It aims to inform and support ESG integration across the venture investment chain.

Market overview

VC had US$1.24 trillion in assets under management globally in 2020, with about US$300 billion invested across 22,000 companies—mostly in technology. VC is distinct from other private equity due to smaller fund sizes, founder-led influence, and lower internal resources. ESG risks can include privacy breaches, dual-class governance, and climate impacts from emerging technologies like blockchain.

Current ESG approaches

ESG incorporation in VC is not standardised, though interest is growing. Key ESG issues include:

• Social: DEI (diversity, equity, inclusion), algorithmic bias, human rights.
• Governance: dual-share structures, founder dominance.
• Environmental: climate risk, energy use of tech infrastructure.

Drivers for ESG include leadership buy-in, risk/return beliefs, and employee expectations. 72% of respondents have or are considering an ESG policy. ESG integration is most common in due diligence (86%) and investment decisions (83%), but far less during exit (28%).

Three types of ESG strategies are observed:

• Systematic: ESG is integrated across the process.
• Targeted: Focus on specific risks like diversity or data use.
• Outcomes-oriented: Align with UN SDGs or use impact metrics.

Challenges

83% of respondents find ESG integration difficult. Key barriers include:

• Early-stage company limitations: ESG can be viewed as non-essential due to limited resources.
• Lack of influence: GPs may defer to founders; LPs may be seen as burdensome.
• Business model mismatch: VC firms operate with lean teams and few ESG professionals.
• Lack of transparency: Little ESG data is shared publicly or with LPs.
• Missing frameworks: Few tools exist tailored to VC needs.

Recommendations include setting pragmatic ESG expectations, supporting founders to build ESG capacity, and asking questions to assess longer-term risks and stakeholder impacts.

Next steps

The report recommends:

• Developing tailored ESG tools and guidance for VC.
• Encouraging peer collaboration among GPs and LPs.
• Supporting diversity and inclusion initiatives.
• Enhancing education around ESG terminology and frameworks.
• Continuing industry efforts to align early-stage investments with responsible outcomes.