(HBR) The complex challenges the world faces today — climate change, the energy transition, and growing inequality just to name a few — have forced large, incumbent companies to take action, reinventing their business models in some cases or radically re-engineering their products, services, and operations in others. These actions are crucial to securing a sustainable future. But large companies can’t do this alone. Indeed, they shouldn’t. Young, fledgling ventures need to be part of these solutions, too.
Any hope of addressing society’s most pressing problems, however, critically depends on VC funding for such startups. As part of our research, we conducted 17 long interview sessions with 25 different individuals representing 15 investors, LPs and other market participants — including the European Investment Fund (EIF), FMO Ventures Dutch Development Fund, Balderton, Beringea, and Index Ventures — from 5 different countries. We learned that incorporating ESG objectives in the VC process, while becoming increasingly common, is still a new practice. It is also challenging: VCs need to evolve their selecting and screening capabilities, rethink their valuation models and redesign term sheets to incorporate ESG issues. Despite these challenges, VCs are more aware and more ready to incorporate ESG objectives than ever before.
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