Entrepreneurs and investors play an important role in building a more inclusive, sustainable and egalitarian economy. ESG indices refer to three key factors in measuring the impact of investment: Environmental, Social, and (corporate) Governance. ESG criteria help investors better assess a company’s future financial performance, both in terms of return on investment and in terms of risk.<\/p>\n\n\n\n
The practice of ESG investing began in the 1960s, when certain investors decided to exclude entire types of stocks or sectors from their investment portfolios, such as tobacco production, arms trade, or involvement in the apartheid regime in South Africa.
These issues are more relevant than ever. Climate crisis challenges such as rising sea levels and flood risk, fake news issues, privacy and data security, demographic change and regulatory pressures, are giving rise to new risk factors for investors. As companies face increasing complexity on a global scale, investors must reshape traditional investment approaches.
This is not a passing trend but a real paradigm shift. In 2018, Larry Fink, CEO of BlackRock (the world’s largest asset management group currently managing more than eight trillion dollars) published a letter to the CEOs of public companies explaining that companies that do not adopt ESG considerations will not receive investment from BlackRock. It is estimated that a third of the financial assets currently managed in the United States are responsible investments, which are managed according to ESG criteria, and the issue continues to gain momentum, in Israel as well.<\/p>\n\n\n\n
So far, the prevailing perception has been that ESG considerations are the domain of large companies that can afford to target resources to focus on future risks or corporate responsibility. Is ESG relevant to startups at their early stages?
Last December, Startups500, a VC fund from Silicon Valley that specializes in pre-seed investments, published a survey among portfolio companies. At the same time PitchBook published a survey on sustainable investments among venture capital funds. The findings show that startups understand the business benefits inherent in responsible investments and a growing number of VC investors are adopting ESG indices, motivated by various reasons ranging from risk management to reputation building. The question is not “if”, but “how” to assimilate and how to measure them.<\/p>\n\n\n\n