How to write an ESG policy for a VC fund — a practical guide
This post has been authored by Anna Ott, VP People & ESG at HV Capital, and Steering Committee member at VentureESG. It is the second piece in a series of case studies from the VentureESG community.
An ESG policy is a vital start to think through and (ideally publicly) communicate about your ESG ambition as a VC fund. As such, VentureESG recommends in its cheat sheet that writing up an ESG policy is one of the first things you should do as a fund getting started on your ESG journey. It fulfills a tripartite function: it forces you to verbalize and write down what ESG is for your VC, ideally with input from the whole team. As such, writing the policy ‘tricks’ you into having the conversation. Second, it is a powerful internal document, both as a constant reminder of your commitments and an evolving work-in-progress that requires continuous updating and input. In that sense, the mere existence of an ESG policy keeps you on your toes to stay up to date. Lastly, communicating externally with various stakeholders can be powerful and can serve as a good tool to hold you accountable.
But ESG policies built on templates alone can be mere box-ticking exercises — which is what we might see more and more of with the (European) legal requirements around SFDR. But they don’t have to be. How do you make an ESG policy a ‘meaningful document’ that effectively fulfills the above three functions?
Anna Ott, VP of People & ESG at HV Capital, Germany’s biggest VC, which has been investing in early-stage companies across industries for 22 years, has recently written up HV’s ESG policy — based on the VentureESG ESG policy template. In this second VentureESG case study, Anna explains first-hand how this process worked, what issues she encountered and what learnings are most important.
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As I set out on our ESG journey, I’m not sure I was fully prepared for what I was getting myself in. It was an emotional and demanding process but one of the most rewarding things I’ve done in my 22-year career. ESG touches so many aspects of a fund and requires a lot of commitment and responsibility — you really need to practice what you preach and set an example for your portfolio. Looking back, I picked up many key learnings along the way and now have a clearer idea of what I’d do differently. I’m happy to be able to pave the way ahead for more funds to start their own ESG adventure. Here’s my step-by-step guide and top tips for writing your own ESG policy.
1. Get everyone in a room
Before you draft your ESG policy, I recommend blocking off a full day with the partnership team to introduce ESG, why it’s essential and what you want to achieve. Even if this requires a campfire and s’mores — do it. You’re naturally going to have people across the full spectrum of interest: from skepticism to full support. Many stakeholders are going to sit somewhere in the middle — interested in the concerns raised but not ready to fully commit to changing their daily practices. This is your moment to get their buy-in and support for your ESG policy right from the start. Give everyone the chance to share and be heard. You’ll probably touch on things that would have never crossed your mind (e.g. whether you want to link ESG to compensation, banning domestic flights, gender quotas). The earlier you dive into these challenges and opportunities, the better.
2. Do some soul searching
The VentureESG template offers a great concrete starting point for your policy with many of the right questions and examples, but if you want it to feel authentic and truthful, you need to figure out who you are as a firm. You can spend some time diving into this during your kick-off session — what are your core values, purpose, and overall mission? VCs are notorious for ignoring these questions, but they are all important aspects to explore. We always ask start-ups for their mission, strategy, and end game, but we also need to ask the same of ourselves. Define what ESG means to your firm and how you want to integrate it into your own processes, including how to measure it. You should think about what you wish your portfolios to achieve and, more importantly, the consequences if they don’t. If a start-up takes a stand on an issue that causes its MRR, valuation or your reputation to suffer, will the firm stand by them? Are you willing to be there for good, the bad and the ugly? This may require a more profound mindset shift, but it is something to think about. Founders are generally very enthusiastic about ESG — they want to build the most sustainable and diverse company and it makes attracting and holding good people easier — but we also need investors on board.
3. Map out your processes and start integrating ESG
One of the main things I would do differently if I started this process again would be to take the time to map out all our operations and find places to implement ESG from there — rather than reverse engineer things by starting with what you want to achieve. It’s not an easy task (these things are rarely written down), but it makes life a lot easier in the long run. You’ll want to look at two streams — the firm and the portfolio — and start to map out internal operations, investment procedures and how the business typically functions. Once you have this, you can begin integrating ESG by looking at what can change and what it will achieve. ESG happens in many small places — recycling in offices, business travel, hiring and so on. Truly embedding it at all levels of the firm requires going through all these daily processes with a fine-tooth comb.
4. Ensure the investment team is on board
The investment process is the link between the two sides of the VC business connecting the firm and the portfolio. This is where you’ll need to consider what is best practice and what is realistically feasible; ultimately, you will have to meet somewhere in the middle. When it comes to writing up the ESG policy, the best person is a General Partner or someone from the investment team. However, this task often falls to someone from Operations. If this is the case, try to have one representative from the investment team on hand to workshop the policy and add input throughout the process. At the end of the day, investment professionals are the ones that need to follow the policy and will be accountable for it, so there needs to be a close liaison and agreement on the result. To ensure this, consider hosting larger internal alignment sessions to talk about the changes needed due to ESG implementations. A second step could be ESG-specific investment training to ensure everyone is sharing the same language, mindset and ambition level.
5. Review, iterate and shorten
It can feel overwhelming starting on a task as important as this but you should take some pressure off when writing the first draft because there will be more versions. Put progression over perfection, and you ultimately need to start somewhere. After making a start, you can keep tinkering until you have a machine that works. The first draft will also be long, so go back and give it some structure and try to cut it down where you can. You can get to a level of excessive details when it comes to ESG, so think about the ultimate stages of things you want to achieve and look at how the puzzle pieces fit together. You can always extend, revise, and add more down the line. It’s all a work in progress and everyone is experimenting right now. At HV, we are in the phase of revising it regularly, as we learn more about what we want to do, how far we want to push and what matters to our ecosystem. But at some point, this ongoing revising will change its cadence to an annual review.
6. Consult stakeholders, regularly
Following our belief that an ESG policy is a living document, a regular (e.g. every 6 or 12 months) review, including with a wider range of stakeholders is important. In the VC and tech ecosystem, we are only starting to understand more about what best ESG practice looks like and different stakeholders can help us move forward. Input on your policy can come from various directions, and that’s how it should be. We have learned much from ESG interns who are knee-deep in studying sustainability and are more ahead of the curve than many seniors across the industry. At the same time, you want to set up a dialogue with founders or ESG officers in your portfolio, peers in the VentureESG group as well as LPs. There are so many unknowns in the realm of ESG, and we are just getting started. The more people we talk to regularly, the better.
7. Don’t be afraid to be emotional — and bold
ESG policies can feel very transactional but making them human is okay. It’s a topic where you can and should be emotionally invested. I was very emotional the day our policy got sent out for approval. It was a document I worked hard on, and I was very proud of the commitment we want to show and apply. I’ve set the bar to the highest level — and made my job difficult in the process — but we wanted to go beyond the baseline for ESG. If you don’t feel a little nervous when you send it for approval, then maybe you haven’t gone far enough. You know you’ve done an excellent job. If your finger trembles a little when you hit, send.
The outline of our ESG policy
1.Our Approach to ESG
1.1.Introductory note
1.2.How we see ESG
1.3.Scope of this policy
2.Integration in the investment process
2.1.Exclusion & Positive Impact
2.2.Deal Sourcing
2.3.Investment Decisions
2.4.Follow-on investments
2.5.Team Training
3.ESG Portfolio monitoring and support
3.1.Procedures
3.2.Frameworks & Tools
3.3.Ambition
3.4.Exi
3.5.Team commitment
4.Implementation of ESG at HV
5.Industry Impact
6.Closing Remarks
6.1.On Philanthropy & Giving Back
6.2.Overall ESG responsibility and development
