BDC Capital 2023 DEI and ESG portfolio metrics
In December 2022, BDC Capital underscored its commitment to promoting diversity, equity and inclusion (DEI) in the Canadian venture capital (VC) and private equity community—we published our inaugural report on metrics gathered from our portfolio of external and internal funds via the DEI reporting template for Canadian GPs.
We have followed up this year with another first, launching an Environmental, Social and Governance (ESG) reporting template for Canadian GPs, which we released to the market in January 2023.
BDC Capital created these templates with the objective of not only preparing GPs and VC-backed companies to meet more rigorous reporting requirements as they scale, but also to start a data-informed conversation within the industry, leading to better managed ESG-related risks, and more sustainable long-term value creation.
Although these are two separate templates, the reporting exercises happen at the same time, so that key data for both can be shared in a summary deck and in this blog.
Our portfolio data covers 72 managers and 1,1921 portfolio companies, which amounts to roughly 63% of all active venture capital (VC) funds in Canada. As a result, it can serve as a market proxy for both general partners (GPs) and portfolio companies looking to benchmark themselves against their peers.
We are also sharing stories and insights of Canadian leaders who have successfully integrated DEI and ESG practices in their business. VC firm Inovia Capital and FLO, a Quebec-based electric vehicle charging company, have made significant strides in implementing DEI and ESG measures. These case studies underscore the fact that DEI and ESG integration doesn’t happen overnight. It is a journey that must begin internally to reflect the unique values and culture of each firm.
2023 DEI metrics for BDC Capital’s portfolio
This year’s DEI findings are in line with last year’s results, with measured progress on certain metrics. We have also added new insights by breaking down data by sector and size of portfolio company.
We continue to listen to feedback from the industry, which has been pointed particularly at privacy concerns given the sensitive nature of DEI data. Among other things, we have developed an internal data privacy notice to address concerns about how this confidential data is handled.
We are proud to report that participation increased both at the GP and portfolio company levels. GP participation was five percentage points higher than last year (85% vs. 80%), while portfolio company participation rates edged up slightly (52% vs. 49%). We believe this increase is partly due to the increased attention we’ve placed on this exercise, as well as additional reporting requirements for new GPs in our portfolio, including by proxy their portfolio companies.
Diversity continues to fall short in senior ranks
While diversity at the senior levels of the private asset industry remains low, we believe this could change over time as diverse and female-owned VC firms continue to enter the market.
There was a marked YoY improvement in the percentage of GPs with investment committees (ICs) that had at least one female member (73% vs. 63%) or visible minority member (68% vs. 55%).
The proportion of GP firms where women and visible minorities make up at least half of employees also grew YoY (31% vs. 21% for women and 17% vs. 9% for visible minorities), which we see as a positive step for the industry.
However, employee retention rates (especially among women) remain a constant challenge. Data shows that at least half (50%) of departures were female at 59% of GPs, whereas gender parity is found at only 31% of GPs.
Portfolio company board and management-level diversity remains an issue
In line with 2022 data, only around 20% of reporting companies have gender parity in the management team. Almost half (44%) of reporting companies have a board of directors that is composed entirely of men, and 50% do not have a visible minority on their board.
However, 38% of GPs said they have diversity targets for portfolio company boards or management teams, which is an improvement over the 30% who said the same a year earlier. This suggests it is becoming an area of focus, which should lead to future improvements.
Additional information by sector and company size at the portfolio company level
Data gathered this year shows that life science companies tend to have greater gender balance in their employee base and management teams. Diversity in other forms seems consistent across sectors.
The percentage of companies with gender or racial balance at the board level remains low across sectors. Information and communication technologies scored the highest for gender balance (10% of firms), while “other” sectors (including niche, generalist industry companies) scored highest (19%) for racially balanced boards.
Improving data gathering in the VC community
One learning for us was that the VC community needs a better understanding of how to undertake robust collection of employee data.
For example, the percentage of GPs who enabled self-reporting (meaning their employees willingly provided DEI data) scored lower at 77% compared with 93% the previous year.
We asked more details about data collection methods in year two of our survey, which led us to discover that respondents who thought they were carrying out self-reporting were in fact allowing managers to complete DEI information based on their knowledge of team members.
Self-reporting is generally done through employee participation in an internal or third-party survey, or via employee input into a human resource information system.
This key learning will prompt us to put more focus on survey methodology in future years to build up the quality and robustness of data collection over time.
Year-over-year data should be interpreted with caution
Some of the year-over-year (YoY) changes may also partly be driven by changes in sample size (i.e., some managers who responded last year didn’t this year, or vice-versa) or by individuals feeling more comfortable self-identifying. As a result, comparing YoY data should be interpreted with some degree of caution.
We hope that trends and more tangible conclusions can be identified once we have several years of reporting under our belts.
We expect diversity metrics to continue improving
Leadership at the board level and in the C-suite is critical for raising DEI as a priority. We believe investors such as BDC Capital play a critical role in reinforcing this message as we look to build more inclusive prosperity for Canada.
Inovia Capital is a Canadian-based venture capital firm that invests in B2B and B2C SaaS companies and marketplaces, partnering with founders to build global sustainable tech companies. Being deeply committed to DEI, Inovia’s leadership team is heavily involved in decision-making with regards to hiring and promotion decisions, as well as in reviewing quarterly DEI data. The firm opted to establish a cross-functional DEI committee rather than hire a single dedicated resource.
This, coupled with quarterly pulse surveys, helps ensure the organizational culture reflects Inovia’s vision, and that diverse perspectives shape its DEI strategy.
In the first half of 2023, Inovia also furthered its commitment by conducting a comprehensive DEI audit to identify areas for improvement, with actions set for the end of 2023 and early 2024.
Inovia's commitment to DEI extends to its portfolio companies, who often need help and guidance on instituting DEI practices.
In 2021, the firm introduced the notion of self-reported diversity (49% of portfolio DEI data was self-reported in 2022). Consequently, they developed a playbook on self-reported diversity for their founders and hosted roundtable discussions to emphasize the importance of the practice.
Additionally, Inovia encourages and facilitates collaboration between its leading portfolio companies in DEI and those seeking to enhance their strategies. Inovia believes that diverse teams and points of view inform stronger business decisions and drive better outcomes.
Companies with inclusive cultures attract and retain superior talent, and Inovia is committed to creating and providing inclusive and equitable access to high-quality career opportunities. The firm's dedication to inclusion serves both Inovia and the communities it interacts with.
The Inovia team (Photo provided by Inovia)
2023 ESG metrics for BDC Capital’s portfolio
We knew the launch of our inaugural ESG reporting would be challenging. We also realized the Canadian private asset industry would struggle to answer the quantitative questions relating to energy consumption and GHG emissions but felt it was important to prepare the industry to be line with emerging reporting standards by asking these questions.
Venture stage GPs and companies need time to develop ESG practices and to report on them to their stakeholders. Unlike DEI, which has been a topic of conversation for some years, ESG is a new and somewhat less comfortable subject for the VC industry—ESG, and particularly the “E” part, is often seen as irrelevant to their business.
And yet, media stories concerning the technology industry’s growing ESG challenges abound, including the energy and water use of large language models (e.g., one ChatGPT conversation uses 500ml of water), the stark geopolitical risks surrounding tech supply chains such as critical minerals, as well as growing unease around the ethical deployment of generative AI.
Our key focus this year has been to convey the importance of ESG risks and opportunities in all industries and stages; it is not only relevant to cleantech or public companies, but also to any company that is looking to scale sustainably and globally.
Overall GP participation was promising for the first year of ESG reporting
We received responses from 79% of our GPs, which is in line with results from the first year of DEI reporting (80%). The degree of responses to the qualitative questions was markedly better than the quantitative ones, with only 33% of respondents providing answers to the quantitative questions.
At the portfolio company level, 44% provided responses, but only 17% could answer the quantitative questions. As the methodology and resources to calculate GHG data mature and evolve, we expect some the quantitative data to improve over the coming years.
GPs and portfolio companies are just beginning to develop an ESG mindset
While 64% of GPs say they have requirements to report on ESG to their investors:
- only 40% produce an annual report on their fund’s portfolio that includes ESG metrics and case studies
- only 30% of GPs have a corporate policy to reduce air travel
- only one-third provide training for staff on recognizing ESG-related risks and opportunities
At the company level:
- 22% have an ESG policy in place
- 31% track some form of ESG metrics and report them
- only 5% have a carbon neutral pledge in place.
Not surprisingly, companies operating in the energy and climate technology space (ECT) are most active in tracking ESG results, with 52% saying they track these metrics.
Companies are embracing the “social” and “governance” parts of ESG
Some of the positive findings included:
- 88% of companies have procedures in place to protect against cybersecurity risks and data privacy
- 57% conduct employee engagement surveys
- 55% report having an independent board member
However, we were surprised to find that:
- only 13% have an individual or board committee responsible for ESG oversight
- only 28% conduct due diligence on supply chain risks involving human rights
- only 26% conduct “know your client’’ screening on vendors to ensure they are sanction compliant
At the sector level, the “other” sector comprising niche and generalist industry companies (which includes the larger, private equity-backed firms in our portfolio) have the highest percentage of firms undertaking due diligence on supply chain risks at 44%. ECT firms were second at 33% of surveyed firms, while ICT and life science firms lagged at 25% and 19%, respectively.
ESG and climate risks can feel very far away from the traditional focus of GPs
Creating transparency around a firm’s environmental emissions is becoming an imperative. Customers, regulators, and investors seeking to make sense of their own GHG footprints are asking for this data from their partners. ESG accountability is quickly coming to all market participants. In addition, start-ups do not have an exemption simply because they work in the software space.
As the owners and operator of one of North America’s largest electric vehicle charging networks, Flo recognizes the importance of advancing its ESG practices. FLO operates in a highly competitive market where top customers are very motivated to have a positive impact. As such, the company learned early on in responding to request for proposals that having a crisp ESG story and a solid reporting framework can directly support sales objectives.
The development of FLO's ESG policy was a collaborative effort involving various stakeholders. The company leveraged the expertise of sustainability consultants to draft an ESG policy and then had key employees from different departments constitute an ESG steering committee to refine it. The policy gained approval from FLO’s legal team, leadership and quality team with the ultimate responsibility for overseeing the ESG policy residing with the board of directors.
The company views its ESG reporting system as a journey and didn’t aim for perfection in the first year.
It was as much about working with its business partners internally to understand what could and should be measured, and helping teams understand the data needed on a yearly basis, so they could update their record collection systems and get used to the reporting framework.
FLO also has sophisticated investors who are very interested in its ESG approach. Having a well-developed and centralized source of truth for its ESG activities and data helps to efficiently respond to investor information requests.
FLO understands that engaging in responsible business management practices is necessary to ensure FLO’s long-term sustainability and growth. The company’s vision as it scales is to continue to be a leader in this space, recognizing that its dedication to ESG principles not only benefits the planet, but also strengthens their competitive advantage in the market.
FLO’s EV Charging Station (Provided by FLO team)
New DEI and ESG resources for the industry
Last year, we noted that more sharing of tools and best practices is needed to emphasize the contribution that DEI and ESG practices can make to building stronger and more resilient companies.
To this end, we have built a new DEI toolkit that can be found on our website. The toolkit includes several policies and articles to help firms and GPs create more comprehensive and inclusive HR systems such as a bereavement policy template and a flexible work policy template.
At BDC, we also launched our first sustainability framework, which guides the Bank’s sustainability actions and targets across four pillars: economic, social, environmental and collective impact.
This is a moment for leadership in the Canadian private asset industry
We believe our DEI and ESG results can become foundational learnings to guide ecosystem initiatives. Over the next few years, we will look to grow the capacity of both GPs and portfolio companies to meet their customers’, stakeholders’ and investors’ requirements by developing and reporting on DEI and ESG practices.
We will also look for ways to work with the industry to build better DEI training programs, continue to furnish lists of ESG third-party service providers who can assist with GHG calculation and ESG data collection, and demystify various ESG guidelines to help the industry align with relevant best practices and emerging regulations (e.g., ISSB Standards2).
While the current macro-economic environment has focused companies’ attention on managing the challenges of sluggish growth and capital constraints, leaders cannot lose sight of the larger existential risks affecting us all. Climate change is a risk to the status quo of business that lurks very large and deep below the surface of our day-to-day challenges.
The June 2023 release of the IFRS S1 and S2 standards by the ISSB ushered in a new era of sustainability disclosures in capital markets. Canadian firms from all industries and of all sizes will need to prepare for greater accountability in their climate and overall ESG reporting. Global clients, institutional investors and regulators are pushing for greater transparency, and ESG-related mitigated risks are becoming an ever-greater factor in investment decision-making.
Let’s work together to build the capabilities to deliver on this.
1 Unique count of unrealized and partially realized assets in underlying portfolio (including U.S. assets) as of December 31, 2022.
2 The International Sustainability Standards Board (ISSB) officially launched its Global IFRS Sustainability Standards S1 General Requirements for Disclosure of Sustainability-related Financial Information and S2 Climate-related Disclosure on June 26, 2023.