How do Venture Capital Firms Incorporate ESG (Environment Social and Governance) Criteria into Investment Decision Making

• Main Authors: Goraya, Muhammad Imran, Usman, Sardar Muhammad
• Format: Others
• Language: English
• Published: Umeå universitet, Handelshögskolan vid Umeå universitet 2011
• Subjects: ESG (Environmental; Social and Governance); Venture capital; Private Equity; Social Responsible Investment; Screening process; Triple Bottom line; British Venture Capital Association; National Venture Capital Association; European Venture Capital Association; Swedish Venture Capital Association.
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-46644

The leaders of all countries of each sector and level of society are compelled to work together to address [social and environmental] challenges by maintaining sustainable human development and ensuring that the benefits of globalization are shared more widely. It is in the interests of businesses that these benefits continue both for companies and for others in society.   The Venture Capital is a financial capital provided to the startup firms in their early stages which has a high potential for growth but also entail high risk. The Venture capital firms typically look for new and small businesses with a perceived long term growth potential that will result in a high payout for investors. Venture capital is a subset of private equity of the firms. On other hand, Private equity is an asset class consisting of equity securities, which are not quoted in the stock market. An investment in private equity most often involves either an investment of capital in a mature firms as well as buyout firms.             The purpose of this study is to explore the gap between UK and U.S venture capital and private equity firms on the base of ESG criteria into investment decision making process. To find a relationship between venture capital and private equity firms mainstream investment with ESG criteria and also highlight new trends and the issues, which are potential barrier of ESG criteria implementation in UK and US firms. The authors used different academic literature, previous studies to find a gap and a relationship of ESG criteria into mainstream investment decision making process in UK and U.S firms.   The research is based on both primary & secondary data under descriptive nature of study. A technique with the name of content analysis was used to collect the quantitative data from the U.K and U.S Venture Capital and Private Equity firms. These firms are further categorized in the sample size under the umbrella of clean tech and non-clean tech. Total sample size is 120 firms (60 VC & 60 PE), where 56 are clean tech and 64 are Non-clean tech firms. The find a relationship between variables regression analysis technique is used through SPSS for verifying the validity and variability of collected Data.   We found that, an ESG criterion is on development stage, and there is no such technique and standards that are developed by the venture capital and private equity firms. We found, that firms are mostly focusing on responsible investment strategy; it is somehow same like whole ESG for purpose of their investment screening process. We found that ESG consideration in some UK and U.S venture capital and private equity firms exist, but vary from firms to firms. Some firms are considering just one factor while some other firms consider more than one.  Large firms have more focus on ESG as compared to small firms; due to the nature of business and size, and number of employees, focus is only limited towards investment options and development of strategies for the firm. The result of this study interpret that the U.S firms are focusing more on investment returns, and pay less attention towards ESG as compared to U.K firms, Where UK Venture capital and private equity firms results shows that, they are more focused towards ESG and feel free to incorporate ESG criteria into their investment strategies without incurring any cost in terms of risk and returns.