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ESG a competitive advantage in venture capital: BDC Capital

Survey shows Canadian VC and private equity behind on climate, environment

Alison Nankivell, the senior vice president of fund investment and global scaling at BDC Capital. (Courtesy Business Development Bank of Canada)

Most of Canada’s general partners and portfolio companies in venture capital and mid-market private equity have room to grow on their ESG journeys, according to a survey by Business Development Bank of Canada (BDC) Capital.

Its first examination of ESG in its portfolio of 72 managers and 1,192 portfolio companies explores the corporate framework in Canada’s venture capital and private equity ecosystems. BDC Capital’s portfolio data covers approximately 63 per cent of active venture capital funds in Canada, according to the Crown corporation.

The results of the survey indicate most general partners are not publishing annual ESG reports on their fund’s portfolio. Less than a quarter of portfolio companies have ESG policies in place.

Alison Nankivell, the senior vice-president of fund investment and global scaling at BDC Capital, told Sustainable Biz Canada the survey is intended to start a conversation about ESG in venture capital and show the importance of integrating ESG to keep up with the shifting landscape.

“We as investors who work with colleagues across different jurisdictions, this is top of mind. We knew this is coming. The way we decided is, let’s see what we can collect, let’s see where the pain points are.”

Getting ESG on the radar

Of BDC Capital’s portfolio, 79 per cent of general partners and 44 per cent of companies responded.

The majority of responses addressed qualitative questions on policies, while only 33 per cent of general partners and 17 per cent of companies responded to quantitative questions related to categories like energy consumption and greenhouse gas emissions.

BDC Capital was pleased with the overall response rate and knew the quantitative data would be a challenge, as many venture capital and private equity firms still lack the resources or expertise to engage on ESG, Nankivell said. The main purpose of the survey was to “put on their radar that these are the kind of things that people are going to start asking about in the future.”

Overall, 22 per cent of portfolio companies reported having an ESG policy in place (a “surprise,” according to Nankivell), while 31 per cent track and report ESG metrics.

Though 95 per cent of the general partner firms have an exclusion list to identify clear areas of investment restrictions and 78 per cent have an ESG policy and/or ESG specialist, the numbers were not as strong on other ESG actions.

For example, 45 per cent have an ESG mission statement and/or commitment to ESG standards, 33 per cent provided training to staff on recognizing ESG-related risks and opportunities, and 15 per cent incorporate ESG objectives into management’s performance reviews and compensation mechanisms.

There were positive signs in the tracking of general partners’ ESG metrics and risks, such as 67 per cent who reported board-level oversight on ESG-related matters in portfolio companies.

But less than half (49 per cent) track and report on ESG metrics against targets and/or benchmarks. Only four-in-10 produce an annual report on the fund’s portfolio which includes ESG key performance indicators.

Environmental policies appeared as a major blind spot in comparison to the social and governance aspects of ESG.

One-in-five (21 per cent) general partner firms measure and report the greenhouse gas emissions associated with portfolio companies, while 18 per cent have a third party or expert that tracks carbon emissions. Only five per cent of portfolio companies have a carbon neutrality pledge in place.

ESG as a competitive advantage

With the growing focus on ESG, particularly around the environmental impact, companies cannot continue to ignore the framework, Nankivell said. Potential customers, regulators and investors want to know about the greenhouse gas emissions of their business partners, especially with new and more stringent regulations coming into force.

Even in an industry like software, which is not perceived as a large polluter, a substantial environmental impact can emerge, Nankivell added. Her example was generative AI, which consumes significant amounts of water and energy for one conversation, and is becoming embedded into other technology fields.

She called ESG a “competitive advantage” which shows a company is mitigating risk, increasing the likelihood of being acquired or drawing in customers. Putting ESG on the back burner means Canadian innovation-focused companies are put at a disadvantage, Nankivell warned.

The survey, she hopes, will show there is a community to support venture capital firms on their ESG journeys — that they don't have to go it alone.

To provide solutions, BDC Capital launched its first sustainability framework as a guideline for its actions and targets across ESG. It also released webinars to explain the fundamentals of ESG data collection.

“Think of it as another set of skills that will allow you to have a level of competitive strength that wouldn’t be possible if you don’t build some of these learnings and capabilities into your tool kit as you try to grow as a company or general partner," Nankivell said. 

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