In our first articles of this series, we’ve covered the first sections that should be included in your ESG Manual: ESG Definitions, What ESG Means For Us in this article , Responsible Investment Strategy in this article  and Restrictions and Exclusions List in this article . If you have not read the first articles, we invite you to do so.

In an era where environmental, social, and governance (ESG) factors significantly influence investment decisions, companies and startups are recognizing the need to integrate ESG considerations into their core business strategies. The implementation section of your ESG manual is where the rubber meets the road – it outlines how you intend to translate your commitment into action. In this article, we’ll guide you through the process of drafting a robust implementation section that reflects your firm’s dedication to ESG values.

Defining the Implementation Section

The implementation section is the heart of your ESG manual. It articulates the specific actions your firm plans to take to uphold ESG principles and create meaningful impact. When drafting this section, consider the following questions:

Questions to Consider:

• How are we actively integrating ESG considerations into our daily operations?
• What is our approach to engaging with portfolio companies after investments are made to ensure alignment?
• What criteria are we using to monitor and evaluate our ESG performance?

Structuring Your Implementation Section

A well-structured implementation section enhances readability and demonstrates your commitment clearly. Consider organizing it based on the following categories:

Operational Integration:

Describe how you are integrating ESG considerations into your day-to-day operations and decision-making processes. This might involve assessing the ESG risks and opportunities associated with your investments and operations.

Example from Kibo Ventures

To align our investment processes with our commitment to ESG issues, Kibo Ventures has defined principles to consider throughout the investment process:

• Responsible investment. Integrating ESG principles throughout the investment cycle.
• Establishing Exemplary Corporate Governance. Ensuring excellence in the Corporate Governance of our investees.
• Creating Sustainable Value. Ensuring that ESG is integrated into the strategy of each investee as a lever for value creation.
• Becoming Catalysts for Change in Society. Ensuring that the investments we make have a positive impact on society.

Post-Investment Engagement:

Explain your approach to post-investment engagement with portfolio companies. How are you actively encouraging and guiding these companies to align with ESG principles? This may include collaborating on sustainability initiatives and governance improvements.

Example from Kibo Ventures

IV.Value creation

As a minority investor, Kibo Ventures’ ability to influence and manage the investment is limited. Nevertheless, Kibo Ventures is committed, to the best of its ability, to use its best efforts to influence the decisions of the Management and the Board of the Investee Companies in the integration of ESG aspects in the value creation plans.

To this end, Kibo Ventures will seek agreements with its co-investors to achieve alignment in ESG matters and obtain sufficient capacity to influence the Management of the investee.

The purpose of these agreements will be to encourage the investee to manage the material ESG risks detected that could affect the value of the investment, or to activate ESG value creation levers in the different phases of the investment process.

Follow-On Criteria:

Detail the criteria and metrics you use for ongoing monitoring and evaluation of investments. How do you ensure that ESG factors continue to be prioritized throughout the investment lifecycle? What would be considered a reason to not do a follow-on if ESG principles were not respected?

Example from Kibo Ventures

V. Follow-on

For the “follow-on” phase, i.e. the investment of new capital, Kibo Ventures will re-evaluate the ESG progress made and propose ESG adjustments to the value creation plan if necessary. The assessment will be done by updating the ESG questionnaires carried out during the due diligence phase.

Divestment Strategy (if applicable):

If divertment is part of your ESG strategy, clarify the circumstances and criteria under which you would divest from an investment. Ensure transparency in your divestment process to align with ESG goals.

Example from Kibo Ventures

VI. Divestment

A key objective at exit will be to demonstrate and quantify how ESG has been taken into account as a lever for value creation in portfolio holdings. The ability to demonstrate and quantify the ESG value created will enhance Kibo’s ability to reach more investors in future funding rounds. In this regard, Kibo Ventures will conduct an ESG exit evaluation, based on the ESG questionnaire, to assess the progress made during the investment period.

Reporting and Accountability:

Address how you plan to report on your ESG initiatives and hold your organization and portfolio companies accountable. Include mechanisms for transparency, performance tracking, and regular reporting to stakeholders.

Example from Vista Equity Partners

Transparency and Reporting

Through our commitment to the PRI, Vista plans to report on its ESG approach and performance each year. Beginning in 2023, this disclosure will be publicly available on the PRI website. Vista’s ESG Report highlights our progress to date and how we plan to advance ESG throughout the firm.

Vista utilizes a software platform to track private equity portfolio company ESG engagement. The ESG team seeks to report our progress and other data gathered from this platform to leadership and relevant stakeholders where feasible and appropriate.

This policy is subject to change and is intended to be reviewed annually by the Executive Committee. Further, this policy shall supersede and replace any prior Vista ESG policy and shall cover on a going forward basis, subject to the limitations discussed herein, Vista’s existing and future investments.

Key Components and Checklists

Operational Integration:

• Explain how you actively integrate ESG considerations into daily operations and investment strategies.
• Describe the strategies in place to assess and manage ESG risks and opportunities within your investments and operations.

Post-Investment Engagement:

• Outline your approach to engaging with portfolio companies post-investment to ensure ESG alignment and sustainability.

Follow-On Criteria:

• Specify the criteria and metrics used for ongoing monitoring and evaluation of ESG performance within your investments.

Divestment Strategy (if applicable):

• Define the specific circumstances and criteria that would trigger divestment from an investment within your ESG strategy.

Reporting and Accountability:

• Detail your plans for transparently reporting on ESG initiatives to stakeholders.
• Explain the measures in place to hold your organization and portfolio companies accountable for ESG commitments.

Recommended Resources

When crafting your implementation section, leverage these resources to strengthen your approach:

• • https://hbr.org/2022/01/how-vcs-can-help-startups-set-and-meet-esg-goals
  • https://assets.cdcgroup.com/wp-content/uploads/2020/01/16092500/Responsible-Venture-Capital.pdf
  • https://kiboventures.com/responsible-investment-policy/
  • https://www.unpri.org/introductory-guides-to-responsible-investment/an-introduction-to-responsible-investment-policy-structure-and-process/4917.article

Demonstrating Commitment

An effective implementation section not only outlines your initiatives but also showcases your commitment to creating lasting impact. Use examples and leverage existing commitments and efforts to support your claims and highlight your progress over time. Regularly update this section to reflect your evolving strategies and achievements.

In a landscape where ESG considerations are crucial for sustainable growth, a well-crafted implementation section is the cornerstone of your ESG Manual. By addressing key questions and structuring your section thoughtfully, you can communicate your dedication to investors, employees, and other stakeholders effectively.

By following these guidelines and tapping into recommended resources, you’ll be better equipped to navigate the complexities of ESG implementation and create a meaningful, positive impact on both your business and the world. At Cap Inclusive, we understand that turning intentions into impact is a transformative journey. Our partner Cap Inclusive can help you seize this opportunity to create positive change, foster innovation and contribute to a more sustainable future for your organization and society as a whole.

Discover other articles from this guide :

This content series is aimed at guiding investors in drafting their ESG Manual. While an ESG Policy is a legal document that should be revised by your legal team, an ESG Manual sets the intentions for how a Firm will align its thesis and values with ESG guiding principles and reporting standards. Lastly, drafting an ESG Manual implies aligning the team and all managing partners around a shared vision and understanding of what ESG means for a Fund that isn’t an Impact Fund.