Welcome to ESG in VC podcast. Join me and Henry Philipson in this latest episode.
Together with Henry, we discuss how ESG_VC have started and now has 150 firms across UK and Europe trying to build tools and consistent frameworks to use in venture industry, which is based on National Social Value (TOMs) framework. We also dive a bit deeper into how many funds have adopted ESG principles fully and the process they went through and why it is imporant to start as soon as possible.
Guest: Henry Philipson
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Welcome to the ESG in VC podcast. I'm your host Oksana Stowe. Today's episode continues with our quest to dive into ESG-related topics, exploring how investors, regulators, and founders try to build a more sustainable and inclusive society.
And today we will hear from Henry Philipson. Henry leads marketing and communications for Beringea in the UK, working closely with the investment and fundraising teams. Henry also led Beringea’s work on ESG, including co-founding ESG VC, an industry initiative to help portfolio companies improve their ESG performance. Let's jump right in.
Hi, Henry. Good to have you with us. You are one of the ESG VC founders, which is a venture-ready ESG framework. Could you tell us a little bit more about it, who is it designed for, and why you have started it?
First of all, thanks very much for having me on. It's really great to be able to talk about the work that we're doing with ESG VC. I think what I kind of wanted to start with is just addressing the elephant in the room, which is there's a lot of jargon out there. There's a lot of acronyms. We are one of many, so it's great to be able to talk about the work that we are doing, which is primarily focused on helping the portfolio companies of venture capital firms to measure, understand, and improve their ESG performance.
So I'll give you a brief history about the initiative and what we've achieved to date. So Beringia first started thinking about ESG a few years ago now, and we understood quite quickly what was really lacking for us was a clear way to work alongside our founders, across our portfolio companies to address both the strategic and quite tactical issues that they might face when it comes to being more sustainable, achieving better diversity, embracing better corporate governance practices. We needed some consistent tools and frameworks to do that.
We set out at the beginning of 2021 to try to start to build an initiative. Fast forward to now and ESG VC has a network of about 125 firms across the UK and Europe working together to build these tools. One of which is the ESG VC measurement framework, which is a really simple process for companies to go through, should take them about one to four hours to understand their ESG performance today, set some improvement targets, and then access resources to address issues that they may have found existing within their businesses when it comes to sustainability, diversity, and governance.
Understood. And just, if we elaborate a little bit about what you just said, how have you arrived at the specific framework and another question which I have asked in the past as well is when is the right time for a portfolio company to start thinking about it and how you specifically think about that? So yeah, a bit of a maybe deeper dive into how you arrived at those measurements, and then when is the right time to think about it?
Yeah, sure so there was a real process that went into building the framework itself, and it started with an initial meeting of a small group of funds. I think of four or five of us, essentially trying to pull together a straw man for an ESG framework.
We were fortunate that Beringea happened to have a portfolio company with Social Value Portal. They're a business that provides services to large organisations to understand what we call in the UK social value, which is broadly interchangeable with social impact. So large government organisations, banks, real estate firms use Social Value Portal to understand the social impact of their supply chains, their operations. It's typically used in tenders for large contracts to understand the social impact of that business.
What Social Value Portal had was a really great understanding of ESG and impact and expertise in measurements as well. What they lacked at that point in time was an understanding of how you would apply those principles to early-stage companies, who, as I think you've pointed out, don't quite know where to start and they don't know when to start.
So as that initial group of firms, we worked alongside Social Value Portal to start to pull together a basic framework that made sense for start-ups. It was, I think at first 30 or so metrics. We tried to understand what we would typically ask companies to achieve today and tried to put together a framework that made sense for them.
So over the subsequent six months, that initial straw man got pulled apart, interrogated, and tested out with a number of portfolio companies as well. Fast forward, six months later in the summer of 2021, and we had a framework that we believed was robust enough to test with a larger pool of portfolio companies. But by that point, I think we'd had conversations with something like 50 firms as to how it would be applied within their portfolio. We'd run it in practice with about 20 start-ups from Beringea’s portfolio and then from a wider network of funds.
I looked a little bit into it as someone who preps for those conversations. I looked a little bit into the framework that you use, and as you said, it's based on one of your portfolio companies and also what it's called national social value or TOMs. And you yourself mentioned that it's very heavily geared towards the S element within ESG. How did you go about adding the E and G components? That would be quite interesting to explore a bit.
Sure. So maybe it's just to give you a bit of background about the TOMs framework and I'm sure that the Social Value Portal team could give you a much more detailed and thorough explanation of the framework, but I can give it a shot.
Sure, why not?
Exactly, presently there's about 150 or so metrics in the TOMs framework and it's been pulled together in collaboration with councils up and down the UK who need to understand social value within the various organisations that they interact with. It's an incredibly detailed, thoughtful, and structured process. But as I said earlier, it doesn't really take into account the lack of resources and data and information that start-ups typically experience when it comes to measuring impact or ESG.
So what it did provide us with, however, was a really simple, clear structure. So what TOMs stands for is Themes, Outcomes, and Measures. We applied that simple structure to our process for ESG measurement. For us, the themes are environmental, social, and governance. We have 14 outcomes that we're looking to achieve that might be reducing the gender pay gap, that might be mitigating carbon emissions, that might be enhancing diversity and inclusion.
Under each of those outcomes, there's then a series of metrics, which are actually the questions that we will directly ask the portfolio companies and together that all generates a score for the business of their ESG performance today. So clearly that's a neat and simple process that immediately got us to the position where we had something that would give us a good benchmark for ESG performance about our portfolio companies.
I think it's right to say that we did need to spend some more time building out the environmental and governance measures. However, the team at Social Value Portal do a lot on these issues, right? Sustainability is an incredibly important part, even on some of the social issues that we face today.
They had a really robust understanding of the work that we needed to deliver. It's also worth mentioning that Guy Battle the CEO of Social Value Portal used to be the lead sustainability partner at Deloitte. He's someone who had a lot of expertise across the S, G, and impact. It was a fairly simple process to identify the types of questions that we needed to deliver in order to build out both the E, S and G.
Understood. So you mentioned you have about 150 funds, right?
Yeah. There or thereabouts, it's always a bit of a growing number. We're having conversations with people every week.
So out of those 150, how many have actually implemented that framework within their portfolio companies? And maybe you can give an example of how it goes step-by-step. Do they do a sample of a few or do they roll it out across all of them?
I think the honest answer is that it's fairly fluid, the process. And I think just to maybe dive into that in a little bit more detail, one of the things that I've really learned through this whole process of building ESG VC is that everyone is on a journey, if that isn't a complete cliché, and for different funds, they need to be able to deliver different things today.
So for some people simply starting to educate themselves about ESG is the primary objective. They engage with our resources, they attend our events, they look at the framework and they're trying to understand how that could be beneficial to them.
On the other end of the spectrum, there are people who are in urgent need of an ESG framework. Say they are out fundraising, and they need to be able to speak to LPs in a robust way about the ESG performance of their portfolio companies. Those are typically the people who have done it immediately and implemented the framework across their portfolio. So today there's about 20 to 25 funds who are actively using the framework across their portfolio companies.
There's then many other funds who have tested this out with a handful of businesses to see how it might work for them. But we're in a constant evolution of where everyone falls across the spectrum. I think it's an issue that the industry is trying to resolve. What we hope to be able to provide is some level of standardisation so that people who are interested in this issue can pick up the framework, test it out, learn from that process, and hopefully roll it out across their portfolio companies.
I see, interesting statistic. And do you see that the pressure comes for funds to really take it seriously and it sort of comes to my next question is that there are a lot of stated intentions versus real actions. There are different points of time when funds actually pause and say, okay, well, I now have to take it seriously. What do you see as a main barrier of much wider industry adoption of ESG?
I think there's a few issues. I think historically there's obviously been a complete fragmentation of approaches to ESG. I think all of the initiatives that are springing up today to provide support to firms for ESG processes or policies within their organisations. They're all trying to drive us towards a similar point where we have a standard set of approaches that we can apply across that funds, across the portfolio companies. I hope that standardisation can be achieved and that it can deliver some meaningful progress to the industry because that's definitely been a significant problem for the past few years.
I think there’s certainly been challenges in trying to align people around a common set of goals or objectives. I think where often I've seen conversations fall down is when people are concerned about doing exactly the right thing. One of the principles that we've really set out with ESG VC was to try to build something that was implementable and achievable today rather than looking to achieve perfection, ultimately.
I'm sure there are many areas that we need to continue to work on and strive to improve at ESG VC, but we hope that we built something that's relatively pragmatic and that people can genuinely adopt and get meaningful information and impact out of. Because I think if we debate and discuss and interrogate the process too much, it's often to the detriment of making meaningful progress.
I think we really just believe that for portfolio companies, in particular, doing something is better than nothing. If this year you simply measure your carbon footprint, run a good quality D&I audit, and implement some new corporate governance policies, that's pretty good, right?
Of course, it’s a start.
Exactly. It's not about overhauling your business overnight. It's about identifying meaningful areas of change within your organisation. We don't want this to be a burden. We don't want it to be too concerning or disruptive to businesses that often are having to face much more pressing issues, whether that's winning new business, recruiting, there are many, many problems that a founder will face on their daily agenda. We don't want ESG to be a burden. We want companies to take it seriously. We want them to be incentivized, to think about how they can make progress today rather than being concerned about achieving some perfection.
Yeah, very good point. I couldn’t agree more. You have to start somewhere and I actually wanted to come back a little bit to the regulatory side. How do you see, or what role do you think regulators will play in all of this? Because there is so much going on. And even when I started, it was extremely confusing to even like, somehow it makes sense out of all of it, because there are public markets, private markets, and within private markets around 10 or even more than 10 different variations. So do you think that regulators will actually force some sort of audit and accountability around ESG frameworks? Because one of the problems I still see is that you take at a face value of what someone states essentially, and even B-Corp has run into quite a few problems because they kind of take it exactly at face value of what is stated.
Yeah. Look, I think it is a challenge. I mean, I don't have a crystal ball and I'm definitely not a regulation expert. All I can really say is that we have tried to align the work that we've delivered through ESG VC around the principles of the regulation that we're seeing today.
Whilst a fund using the ESG VC framework won’t necessarily get exactly the data that they need to report against with new regulation that's come into force, in Europe in particular, it hopefully starts to move themselves along to a point where they can start to report against the really important regulations that are coming through, particularly on the climate side of things.
I think we have taken a decision as a group of funds across the industry to try to put in place the processes and prepare us for future regulation. We don't exactly know what that's going to look like, but we think that the industry is at least starting to essentially do its homework and prepare for that eventuality.
Is really important and the same applies for portfolio companies, right? It may well be that many of those businesses will overtime be impacted by regulation. Again, probably in all likelihood on the environmental side of things, but we've already seen in the UK that we have regulation relating to more diversity, to gender pay gaps in large organisations. There's every possibility that that becomes a more widespread piece of regulation.
Those are exactly the types of questions that we are asking businesses through our work. It may not perfectly align with regulation, but certainly in terms of preparing companies for that eventuality, we hope that we’re gearing people up and encouraging them to think about what could come down the path, because we all know that retrofitting processes onto organisations that are much larger and complex is more difficult. So we think it's really important to start when companies are at a relatively early stage.
Yeah, agreed. And have you seen, and this is not meant to be a tricky question, but have you seen a lot of resistance from portfolio companies and a sense of fatigue when you send a request? How do we, once again, in order for the full ecosystem to function, you have to be excited about all of this not see it as, “oh my goodness, here we go, another pile of work to be done”.
So I'd probably break that down into two points. I think the first is that overall, the response has been incredibly positive and portfolio companies. These are broadly issues that entrepreneurs want to engage in, right?
They want to have a better environmental impact. They want to ensure that they're building organisations that take diversity and inclusion seriously. That said, they will express a concern that they are time and resource poor. So they don't want this to be a burden. One of the things that we really set out to do throughout this whole process is explain to companies that this is not going to be a burden.
For example, completing our measurement framework should take a company anywhere between one to four hours. What I typically say to entrepreneurs is, is taking any longer, you’re doing it wrong. You don't need to do it in that much depth. Think about it as a measurement of your performance today. And if you go away with notes on what you need to consider over the next 12 months, that's fantastic. That's exactly the type of behaviour that we're looking to encourage.
So we've always tried to accommodate that concern amongst businesses that said, I think my second point would be that we have seen differences in the capacity of companies to engage with the framework across the stages of venture capital fundraising.
So we ran a significant pilot in the autumn with a few hundred businesses. Essentially we broadly saw that companies were much more capable of completing the framework around series A/Series B and beyond that point that the adoption of the framework is much more significant. At pre-seed and seed, it proved more problematic.
I think we, as an initiative, as a steering committee, we’ve really thought about how to try to improve the process, to try and encourage early-stage businesses to complete it as well. To give you a bit of a sense of where we are today, the majority of our work with the framework has been delivered simply through spreadsheets.
Those individual spreadsheets are delivered by a VC firm. Companies report back to them. We then, as an organisation, take some of the anonymized data to try and pull together our own benchmarks. We understand that opening up an Excel spreadsheet, which the company may need to share across teams, is not particularly forward-thinking, but it was a practical solution to what we needed to be able to do at that point in time.
So one of the significant pieces of what we're doing at the moment is alongside making some small tweaks to the framework itself, bringing this whole process online because we believe that could be quite an important step to incentivizing some of those early-stage businesses to compete in the frame as well, because we constantly want to evolve what we're doing. We don't view this as a kind of finished article. It's something that we need to own and refine in order to continue to drive better adoption throughout the venture capital ecosystem
In those results were there any surprises?
I think the honest answer is no. There are a few things I'd probably pull out though.
The unsurprising answer is that companies struggled significantly with environmental metrics. Social and governance questions they found a little bit easier to respond to. Many businesses had in place some of the policies that we would typically be looking for them to have from a governance perspective. But many of the environmental issues were just not on their agenda today.
That's exactly the work that we tried to support them on through some of the events that we've been hosting over the last few months. I think one of the more clear stories is that software-focused businesses, particularly struggle with those environmental metrics. In comparison to their peers, who maybe have a physical supply chain, whether that's in e-commerce, manufacturing, life sciences, we find that those software businesses will typically perform worse against the environmental metrics.
We're hypothesizing at this stage because our data set is not vast and we're only at year one, but what we suspect is that when a company simply cannot sort of feel or touch their product and understand the environmental impact of their business through that experience, we think that means that some of those environmental considerations are just not as front of mind, because we typically see that e-commerce companies, for example, have already adopted many sustainability practices that we would like to see.
Yeah, thinking about interdependencies is always harder when it's a non-physical product.
Well, this was great. Anything else maybe you would want to add?
We're always very happy to hear from people who are interested in understanding ESG, whether you're a venture capital firm or a founder. So please do visit esgvc.co.uk.
Well, thank you so much, Henry, for being with us. That's great.
Thanks very much for having me.
You have reached the end of another great episode of ESG in VC podcast. If you want to learn more about ESG in VC, please follow us on LinkedIn or Twitter or visit our website. As some of you know, I'm Ukrainian and for me the current events are very heart-breaking. If you're interested in helping in any way, please drop me a line. I'm always around and look forward to seeing you at the next episode.