Applying ESG Principles to Venture Capital

​Environmental, social, and governance (ESG) principles determine a company's impact on the environment, its relationships with stakeholders, and its internal management practices. They frame its long-term sustainability and ethical considerations. Ideally, following ESG principles doesn’t interfere with a VC firm’s bottom line. Instead, the firm alters existing procedures or creates new ones so investors can earn returns while also affecting positive change.

Venture capitalists can apply several ESG principles to guide their investment decisions. Prioritizing companies with sustainable methods and commitments to reducing their environmental impact aligns investments with the common good. Evaluating a company's social impact, including how it treats its employees, contributes to its community, and promotes diversity and inclusion both internally and externally, ensures investments support beneficial social change.

Because ESG measures skew investors’ decision making such that it tends to favor long-term growth, it can help them mitigate risk. It correlates somewhat with traditional portfolio diversification, where an investor purchases assets that combined perform well over either the short or long-term. However, prioritizing firms that implement ESG principles has been seen to shield investors from adverse economic, political, and ecological conditions more than traditional portfolio diversification.

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