The future of Canada’s VC industry includes ESG
Venture capital (VC) is known for investing in next generation technologies and business models that aim to solve key challenges confronting business and society. While most venture-backed companies look to improve upon the status quo, start-up founders (and the VC firms who back them) have not always been at the forefront of incorporating environmental, social and governance (ESG) considerations into their value proposition.
Technology companies often assume incorrectly that they do not face any serious ESG risks. That assumption is challenged, however, by growing public scrutiny of “big tech’s” handling of issues such as diversity, equity and inclusion (DEI), data privacy and ethical supply chain management. ESG is a material concern for firms and investors of all types which, left unmanaged, can result in significant financial and reputational costs.
In Canadian business circles, ESG is becoming a pressing topic of conversation at the executive and board level. A recent survey by law firm Fasken revealed that 68% of companies in the S&P/TSX 60 Index link CEO and senior executive compensation to the delivery of at least one or more ESG objectives. At the same time, a growing number of Canadian publicly listed firms are now issuing some form of annual ESG reporting in alignment with the Task Force on Climate-related Financial Disclosures (TCFD) and other recognized frameworks.
Establishing reporting standards for Canadian VC
We know that more needs to be done to raise awareness and action. We believe BDC has a role to play to address the environmental, social and governance challenges of our time. In the VC space, for instance, BDC Capital can help the industry remain competitive through disclosure and reporting standards.
In partnership with other institutional investors, BDC Capital has engaged in a dialogue to promote greater transparency around ESG risks for the private companies we invest in both directly and via third-party fund managers.
Our initial focus was on DEI which led us to launch a national DEI reporting template in March 2022. The goal was to bring standardized annual reporting on DEI practices to both the general partners (GPs) and their portfolio companies. Our promise in embarking on that reporting exercise was to create a benchmark from which we could take stock of the state of DEI in the Canadian VC ecosystem and share our findings with the industry.
A new tool to report on ESG in Canadian VC
In 2023, we are taking the engagement one step further by launching a national ESG reporting template for Canadian VC and mid-market private equity funds to track and report on key ESG metrics at the firm, fund, and portfolio company level. Tracking and reporting on ESG action is one of the most difficult but crucial parts of tackling the biggest economic, social and environmental challenges of our time. This template builds on our existing DEI reporting metrics by incorporating additional data requests to track broader ESG risks from both a quantitative and qualitative perspective. The DEI and ESG templates will be merged into one next year.
Over the past few years, various global initiatives have been making significant progress in creating a more harmonized set of reporting standards for ESG. The initiatives include the:
- ILPA ESG Assessment Framework
- ESG Data Convergence Initiative
- IFRS Foundation
- UN PRI’s work on responsible investment in the venture asset class
At the same time, new software offerings are simplifying the process for companies to produce ESG reports in compliance with various globally recognized frameworks.
While the ESG reporting template created by BDC Capital represents a collaborative effort to draw together metrics that are common to all these various initiatives, we expect that global and national ESG reporting frameworks will continue to evolve in step with emerging regulations governing publicly listed companies.
Incorporating ESG as a competitive advantage
We recognize that our new ESG template will be a challenge for smaller GPs and portfolio companies that lack sophisticated internal data reporting systems. On the other hand, large GP platforms and/or impact-oriented GPs may find the mandatory reporting section of the template to be overly simple. This is why we include an optional supplementary reporting section to enable GPs with bespoke impact measurement frameworks to detail the more complex metrics and targeted outcomes they have established for their portfolio.
By shifting the GP community to an annual reporting exercise, we believe all industry players will be prompted to raise their game and think more proactively about how they can progress on their ESG journey from a position of only using metrics for “mitigating risk” to also “incorporating ESG as a competitive advantage.”
As investors, we will maintain a dialogue with both GPs and portfolio companies to ensure that any annual reporting regime leads to meaningful insights that can be shared with industry participants.
As Canada's most active limited partner (LP), BDC capital will capture the majority of the Canadian VC market with this new reporting exercise. We are an LP in private independent VC funds representing 62% of the capital being invested in Canada. These funds collectively manage $20 billion.
Shareholders seeking increased transparency about their portfolio holdings will only continue to push for greater consistency around ESG reporting over time. Canadian investors such as BDC Capital are able and willing partners to assist the venture ecosystem in building capacity in its ESG implementation. With the launch of this reporting exercise, we hope to take the first step in rising to that challenge.