In our first article of this series, we’ve covered the first 2 sections that should be included in your ESG Manual: ESG Definitions and What ESG Means For Us. If you have not read the first article, you can find it here .

Companies and startups are increasingly recognizing the importance of integrating Environmental, Social, and Governance (ESG) principles into their operations. ESG not only aligns with ethical considerations but also presents significant investment opportunities. In this guide, we’ll explore how to create a robust “Investment Opportunities” section in your ESG Manual.

Responsible Investment Strategy

Why Invest in ESG?

Before we delve into the specifics of crafting this section, let’s address why ESG is important for both startups and Funds:

1. Risk Mitigation: Companies that integrate ESG factors into their operations are better equipped to mitigate risks related to environmental, social, and governance issues, ultimately protecting their long-term value.
2. Market Competitiveness: Late-stage investors, potential acquirers and large corporate clients increasingly favor companies with robust ESG policies, as they are seen as more resilient and forward-thinking in a changing world.
3. Innovation and Efficiency: ESG initiatives often drive innovation and efficiency within an organization, leading to cost savings and increased competitiveness.
4. Long-Term Value Creation: Companies that prioritize ESG are more likely to create sustainable, long-term value for shareholders, aligning with the goals of investment firms.

Now that we understand the importance of ESG, let’s explore how to create an impactful “Investment Opportunities” section for your ESG Manual.

Key Considerations for Your ESG Manual’s “Responsible Investment Strategy” Section

1. ESG Investment Considerations

When evaluating potential investments, it is crucial to have a comprehensive understanding of how to incorporate ESG commitments into your decision-making process. This involved not only identifying the industries to exclude from your investment portfolio but also determining the degree to which ESG factors play a role in your due diligence.

Questions to consider:

• What specific ESG criteria are we evaluating during our due diligence process, and how much weight do we assign to each criterion?
• At what point in our due diligence would we identify ESG risks that might lead us to reconsider a potential investment?
• If we encounter ESG risks that do not rule out an investment but still raises concern, how do we plan to address and mitigate these risks?
• Are we actively seeking opportunities that align with emerging ESG developments?

Example from Flashpoint’s ESG Statement

Pre-Investment: As part of our screening process and due diligence, different ESG-related risks and factors are assessed (with particular focus on effectiveness and corporate governance issues). ESG-related factors are included in our Target Investment Criteria Analysis (“TICA”), which is used to comprehensively analyze entities before making investment decisions.

[…]

Positive ESG Impact (as well as avoidance of ESG risk) is seen as a relevant decision-making criteria. The consideration of possible ESG impacts is part of our investment assessment process. Flashpoint takes into account social factors, namely: environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.

2. Diversity and Inclusion Initiatives (DEI)

Investors are recognizing the increasing importance of aligning your operational practices with your values. This includes translating your ESG principles into a commitment to Diversity, Equity, and Inclusion (DEI). In doing so, aim to not only meet the expectations of investors but also uphold your core values.

Questions to consider:

• How do our recruitment and hiring processes ensure alignment with our values?
• Are we actively seeking out diverse talent pools to enhance our workforce’s diversity?
• What best practices have we implemented to prevent bias during candidate selection?
• How does our firm foster an environment where talent is recognized and promoted based on merit and potential, regardless of background or identity?
• How do we provide equal opportunities for all employees to progress within the organization?
• How is DEI integrated into aspects of our operations beyond HR processes?
• What comprehensive training and awareness programs have we implemented to prevent unconscious bias in our decision-making processes?
• How do our DEI initiatives contribute to our organizational culture and drive innovation?

Example from Flashpoint’s ESG Statement

Promoting diversity, equity and inclusion (“DEI”) in the workplace.

DEI is embedded at the core of our organization across all our levels. Flashpoint’s goal is to be a leading and top performing European technology investment platform that contributes meaningfully to a better future. Flashpoint is an equal opportunities employer and we respect the diversity of our people. Our employees come from different countries and cultures, have different educational backgrounds and experience in international organizations, which allows us to benefit from good practices and experience spread around the world in different industries and organizations. Flashpoint creates equal opportunities for every person, notwithstanding the gender nor origin.

Our aim is to attract, motivate, develop and retain a diverse and talented group of people while also providing a working environment that promotes both inclusion and equality. We have an inclusive culture and practice open sharing of information, transparent decision making and provide an accessible environment for all. Twice a year, we run employee surveys to help us identify areas for improvement, track employees’ progress and act on change. Flashpoint diversity initiatives are applicable also to the ongoing development of a work environment built on the premise of gender and diversity equity that encourages and enforces respectful communication and cooperation between all employees.

3. Regulatory and Compliance Awareness

In the realm of ESG considerations, it is important for funds to maintain a robust understanding of the regulatory landscape and compliance efforts. By addressing these aspects comprehensively, you will not only ensure adherence to legal requirements but also contribute to a more sustainable and responsible investment environment.

Questions to consider:

• How can we provide a comprehensive overview of the current regulatory landscape relevant to our ESG investments?
• How does our firm stay up-to-date with evolving ESG regulations?
• What are the regulatory frameworks you have decided to follow?
• What are the consequences of not following the guidelines?

Example from Flashpoint’s ESG Statement

For us, governance factors are not just about the company’s values, standards, board composition or share structure. Flashpoint has zero tolerance for exploitation, circumvention of laws, bribery and corruption and other detrimental and/or illegal practices. We also prioritize matters such as transparency, proper reporting as well as legal and regulatory compliance (including sanctions). We unconditionally demand the same from all our stakeholders.

4. Resource Allocation

Resource allocation is essential for the successful execution of ESG initiatives. Funds should provide a comprehensive view of how they allocate resources to support their ESG commitments, demonstrating their dedication to responsible investment practices.

Questions to consider:

• How can we offer a clear overview of the resources dedicated to our ESG initiatives, including budget and personnel allocation?
• How can we specify the budget allocated for ESG initiatives and how it is distributed among different activities and projects?
• How does personnel allocation demonstrate our recognition of the importance of human capital in driving ESG initiatives?
• Who will be responsible for drafting policies, keeping them up to date etc.?
• What are our plans for improving our ESG commitments over the coming years?

Example from Kibo Ventures

Resources and team dedicated to ESG

At Kibo Ventures we understand that in order to be able to respond effectively to the commitments undertaken as a responsible investor, it is necessary to have an appropriate ESG governance structure, as follows:

1. We provide annual ESG training to investment teams.
2. The Board of Directors has established an ESG Committee and a Responsible Investment Committee (IR Committee).
3. We employ the services of an external consultant who works closely with ESG managers and investment teams to incorporate ESG factors into the investment process.
4. We have included the consideration of sustainability risks as a mandatory internal process in the remuneration policy.

The ESG Committee is composed of one founding partner, one partner from the investment area and two people from the operations and business area, and has the following functions:

• Develop and update the Responsible Investment Policy.
• Lead the implementation of our ESG practices.
• Monitor sustainability risks and propose measures to reduce or eliminate them.
• Promote the necessary improvements in our internal practices to ensure our progress in the incorporation of best practices.

Likewise, the ESG Committee ensures compliance with the commitments of the management company as an entity, in relation to the environment (recycling and responsible consumption), in its relationship with its employees (active promotion of equality, promotion of work-life balance) and in its relationship with the community (corporate volunteering and collaboration with the educational community and the entrepreneurial ecosystem in Spain).

The RI Committee, composed of three investment managers, has the following functions:

• Perform an annual checklist of the evolution of the ESG aspects of the investee portfolio. In particular, the status and evolution of the sustainability risks identified in the due diligence phase.
• Attend, on a rotating basis, the ESG Committee, reporting on ESG progress in the investee portfolio, in particular communicating the status and evolution of sustainability risks.

Within the investees themselves, whenever we have a seat on the Board of Directors, we will make best efforts to ensure that (i) ESG issues are addressed in at least two of the annual Boards, (ii) an ESG officer is appointed to coordinate the implementation of ESG actions approved at the Boards, and (iii) sustainability risks are measured and managed.

5. Measure Progress

It is essential for investors to gain a deep understanding of the tangible progress of their ESG initiatives on internal activities and external impact. While setting reporting KPIs is something that will be defined in your Side Letters and LPA, linking your ESG objectives with tangible goals you want to set for the firm can help with accountability and to demonstrate the seriousness of your effort.

Questions to consider:

• What key performance indicators (KPIs) will we use to measure the impact of your ESG initiatives?
• Are the chosen KPIs specific, measurable, and capable of tracking progress effectively?
• Have we included historical data and benchmarks that portray the evolution and improvement of our ESG initiatives over time?
• Have we sought out third-party certifications, ratings, or assessments to validate the credibility of our ESG initiatives?
• What specific metrics and data points are we including that showcases the effectiveness of your ESG initiatives?

Example from Robeco

And performance can be measured in other ways, such as in having a portfolio which has a 20% lower carbon footprint than the benchmark. Several sustainability strategies invest in companies that are on a climate trajectory to align with the goals of the Paris Agreement, which requires their carbon footprint to be lowered by an average of 7% per year.

Key Components and Checklists

Align with Business Strategy

• Evaluate potential investment opportunities in alignment with your overall business strategy and long-term goals.
• Ensure that ESG considerations are integrated into your investment decision-making process.

ESG Investment Considerations

• Showcase how ESG fosters innovation and identify clear growth opportunities that resonate with investors.
• Ensure that it clearly articulates how your ESG strategy complements your business goals and contributes to long-term success.

Diversity and Inclusion Initiatives (DEI)

• Showcase your commitment to DEI and provide data and examples that illustrate its positive impact on your organization.

Regulatory and Compliance Awareness

• Highlight your commitment to compliance and outline your proactive approach to navigating ESG-related regulations.

Resource Allocation

• Clearly outline your commitment to allocating resources to ESG initiatives and provide a forward-looking perspective on resource allocation.

Measure Progress

• Define clear and specific key performance indicators (KPIs) that align with your ESG goals and initiatives.

Recommended Resources

To deepen your understanding of ESG and DEI, consider exploring these valuable resources:

• • https://www.15rock.com/blog/understanding-venture-capital-esg-impact-investments
  • https://thegiin.org/impact-investing/need-to-know/

In crafting your ESG manual’s “Responsible Investment Strategy” section, remember that it’s not just about compliance; it’s an opportunity to tell a compelling story about your commitment to sustainability, social responsibility, and ethical governance. Savvy investors are seeking companies that not only meet ESG criteria but also understand how ESG can drive innovation, growth, and long-term value.

By aligning your ESG strategy with your business goals, measuring your impact, showcasing innovation, addressing compliance, and highlighting inclusivity and diversity initiatives, you’ll create a persuasive section that appeals to investors.

In this ever-evolving landscape, companies that excel in ESG not only secure investment but also pave the way for a sustainable and responsible future. Cap Inclusive is here to support you on this journey, providing expertise, connections, and opportunities that can propel your ESG initiatives to new heights. Stay tuned for the next article, going into the restrictions and exclusions section.

Our partner Cap Inclusive is here to support you on this journey, providing expertise, connections and opportunities that can propel your ESG initiatives to new heights.

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.