E329| Henry Philipson, Ashley Brown (Atomico)⁠, Antonia Whitecourt⁠ (Seedcamp) & Grace Savage (Molten Ventures): Roundtable discussion on ESG becoming a core part of doing business in Europe

0:00All right, everyone, welcome back to another episode of the European VC podcast. Today, we are talking about ESG and VC, and we're doing that because ESG and VC, the organization, recently published its analysis of ESG data collected from 587 stocks backed by leading VC firms, including Atomical, Molten, Beringia, and Seedcamp, all of who are represented on today's podcast, and also Oxford Science Enterprises and Estonaut. They delivered this report in collaboration with BVCA and Marriott Harrison, so big shout to them for helping produce this type of work. And what they did in the report was that they really did a deep dive analysis of performance of startups against standardized metrics spanning environmental, social, and governance issues.

0:44In this episode, we're diving into where the value in ESG is for startups, how VCs are working with founders to drive forward the sustainability agenda, and what the future of ESG is in European venture. And of course, also the backlash that ESG and D &I is experiencing and how VCs, like the ones we have on today's podcast, is talking about that and mitigating it. And as always, we have super comprehensive notes on the European VC podcast website, which is u.vc. And there you can both get links to the individual reports as well as see some of the reflections from today's guests. So let's dive into a great episode.

1:24I will not introduce each of the guests here now because they will all do so in the beginning. And just before we start this episode let me just come to you with one big message we have just introduced the euvc insights section our community source newsletter and platform on eu.vc that is the place where we want to amplify your message 100 directly to the european venture community so submissions are open now go in there if you have some thought leadership piece some analyses your own investment thesis or something that you think that the european vc community would benefit from getting, I would very much love to see you submitting that on the platform.

2:04Here's a few words from our beloved sponsor. This episode is brought to you in partnership with Zero 100 Conferences, which organises networking events connecting LPs and GPs in private equity and venture capital firms across Europe. This will be the fourth and final chance in 2024 to connect with investors from the largest firms worldwide following successful events in Vienna, Amsterdam and Prague. Their upcoming event, 0100 Conference Mediterranean, will take place in Milan from October 28th to the 30th at Palazzo Mezzanotte. Attendees will include major LPs and GPs like the European Investment Fund, Taikao Capital, Vencap, Arcano Partners, Armandi Alpha Associates, P101, United Ventures, Merseyside Pension Fund and many more.

2:52Yeah baby! Save the date, October 28th to the 30th at Palazzo Mezzanotte in Milan. This is a union of values. United and determined, we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. New beginnings. Let's start acting, acting, acting, acting, acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Everyone, welcome to this episode. We're going to dive deep into EST, a topic we maybe talk a bit too little about on the European VC podcast, but here we are dedicating a full conversation to it.

3:49So everyone, let's just run around the table here, making sure that you've introduced yourself so everyone knows who they're listening to. Great. Thanks, Andreas. and thanks so much for having us all here today. My name is Henry Philipson. I am Director of Marketing and Communications at a venture capital firm called Beringia. We manage about$900 million across our funds in the UK and in the US. We have a portfolio of about 60 companies. We're pretty generalist. We do quite a bit within retail and consumer, lots of B2B SaaS and a little bit of everything else in between. In my role, I do a lot of work supporting those portfolio companies in scaling up and through that over the last few years I've taken on the responsibilities of thinking about ESG for us as a firm.

4:33In turn I've also set up what's now known as ESG VC so look forward to telling you a little bit more about that organisation in this conversation as well. Hi my name is Ashley Brown I am the Sustainability Manager at Atomaco. So for those of you that don't know us, we are an early stage VC investing in European tech startups from Seed to Series B, generalist VC. We've got just over 4 billion assets under management. Hi, hi, everyone. My name is Antonia and I am one of the directors at Seedcamp. And I think the best way to describe Seedcamp is that we were one of the first early stage investors in Europe.

5:16And, And, you know, we've been fortunate enough to back and support as well more than 500 companies over the last 17 years from the get go. And so many of those companies actually, you know, have the potential to dramatically influence the way we all consume and, you know, interact. um so so the way we think about esg is really to to encourage our founders to to think about you know the potential that they can have they can have on the communities around them and also on on the world as they grow and to sort of identify those risk risks early on and then to sort of lay the foundations right um from the get-go just to make sure that's not something they sort of have to do retrospectively because it's very hard to change culture and processes yeah the way we think about it um is really about good intention and and and about embedding that sort of esg consciousness from the start uh hi everyone i'm grace savage i'm esg lead at more conventions uh so we are a london-based listed generalist cc uh we invest across the uk in europe in tech uh predominantly enterprise, consumer, deep tech and health tech.

6:33We have£1.8 billion AUM and we generally invest in Series A+. So we have a very broad and unique portfolio of a total range of companies all with very different ESG credibilities. So I would say that the kind of management of these portfolio companies with regards to their ESG agenda is just a total range. And as Antonia said, we very much see strong ESG performance as a commercial opportunity for these companies and something that will actually make them more valuable assets. Beautiful. Okay, so now let's ask the most obvious question just to make sure that everyone understands why this is important.

7:18Antonia, maybe you would tell us a bit about what's driving the rise in interest that we've seen around ESG over the past years, Just to everyone that's listening in after that, we'll also talk about the backlash that's come a bit in the face of ESG initiatives. Yes, I mean, I feel ESG has always been a topic. It's just that now we're labeling it ESG wrongly or rightly. We can discuss that a bit further on. You know, responsible investing has been around for decades. I think everyone agrees that the benefits of building a sustainable business has been known for a long, long time. It's just that now sustainability is mainstream.

8:00And that's, you know, especially post-COVID. And I think that's a positive thing. And we should, you know, we should ride that wave. And there's a real sort of momentum going on. I feel that, you know, talent is looking to work more with companies that have a purpose and a mission. customers are scrutinizing sustainability and investors are obviously having more and more you know regulatory pressures and realizing that non-financial risk can really can really affect company performance so you know ignoring the larger topics like economic uncertainties and all the challenges we're facing I think there's also all of these emerging challenges around cybersecurity, you know, there's phishing attacks are immensely on the rise and around data protection, etc.

8:47Like these are super important and why it's why it is so essential to focus on ASG. And I mean, that's something at Seacamp we think about on a daily basis, right? Do we have all our governance in place? Do we have all the controls in place? And these are the insights we share share with our founders yes she does have a difficult brand and part of that comes down to a I think a misunderstanding of what it means within a startup context so if we sort of take a step back and look at the history of this ESG has probably sort of been around for a couple of decades in various forms but it's really had its biggest impact in public markets where people are investing in ESG related investment products where they want to channel their money into investments that do good for the planet or society.

9:37I think within the context of startups, ESG tends to mean something different. I mean, we can sort of talk about this a little bit more, but I certainly think most people are not necessarily using ESG as an investment strategy. They're using ESG to underpin their investment processes. So that includes thinking about due diligence, how we support our portfolio companies, even how we think about exits and engaging with LPs. And so really, it's quite an operational point rather than necessarily a strategic one. And I think that's a really important distinction to make, which helps partly to clarify what we're thinking about when we talk about ESG within a startup and venture capital context.

10:19I think it's also very important, right, that we just add on it that we now, you know, we take this momentum and we cut the noise we simplify it especially for early stage founders and companies like it is a journey and it's a long term and we're all on it right and so i think that's where we as investors and industry experts and euvc and regulators can really really assist yeah and that's definitely something we should talk about because there's of course an impact on the startup level um when you have different measurements that either because the fund decides to be whatever article, whatever regimen you as a fund need to then live up to, that of course impacts the startups.

11:03And I think that there's an important conversation to be had there, whether you want to be an Article 9 fund or you don't and the reflections on that, whether it's working well or not. But maybe before we go to that conversation, let's just dive a bit into that headwind that I mentioned just before the backlash. And you said it well, I think you said noise, Antonia. And this is definitely one of the parts where there's noise around ESG right now, which I think is super counterproductive. Like my view has kind of been, this is something that happens a lot in the US. It's something that's driven heavily in the US.

11:43And obviously, because in venture, we all listen to US media. We take over some of the views. But I kind of have at the same time the feeling that it doesn't necessarily translate too well to what's going on in the ESG world in Europe and D &I world in Europe. Let's be clear about this. I think the conversation in the US is very different to the one taking place in the UK and Europe. But I don't think it's different in terms of the substance of what we're actually doing. I think, as Antonia said, there is a lot of noise around ESG. And in the US, certainly there are some big and influential LPs that would not take kindly to seeing GPs talk publicly, at least, about ESG.

12:33But from people that I speak to based in that ecosystem, there's still a conversation around responsible investing, for example. And I think that comes down to this fundamental point, which I think both I and Antonia have been stressing, which is there are a whole bunch of non-financial issues within startups. And any investor wants to take those seriously because they see the impacts that it can have either on growth or the risks that may develop for a company as they scale, you know, the big blow ups of the last few years. This is not to say that FTX wouldn't have kind of gone up in a puff of smoke had they'd been thinking about ESG, but certainly they were not taking account of the different risks building around the business.

13:18And so I think that shows the value in what we are trying to say, which is let's just build well-governed, responsible businesses. And a lot of that comes down to thinking about what is happening outside of the finances of a company, how you build your team, how you look at its environmental footprint, how you think about the future issues that may develop with data. and artificial intelligence and say, let's just build something that is much more sustainable and responsible. And I think therefore, the kind of noisy, difficult political debate is, in my view, just a distraction. Let's put that to one side and focus on what we're trying to do, which is to build healthy, robust, commercially sustainable businesses.

14:00That's the point. Yeah, I do agree with that point. And I think it's interesting how much attention the kind of like semantics of it has received in that you call it ESG and there's huge backlash and people don't like it. But as soon as you, as you said, Henry, call it commercial sustainability, or, you know, building strong companies with good governance, then it's actually, oh, no, that does make total sense. And so I think whether or not we see an evolution, and obviously it was once CSR, now ESG, responsible investing, obviously for a time ago, conscious scaling, whatever you want to call it, I think it is all still just about building good companies that are well run.

14:42and you know whether or not you say I want to do an assessment of ESG performance or I want to do an evaluation of board effectiveness they they are interchangeable and they are the same things and often even for us internally talking to our investors it is about just saying chances are you are already looking at these things you're just not calling them ESG and you're not thinking of it under that umbrella term. I mean I can jump in here I think for us like ESG sustainability is just good business and it's kind of like the framework that we use to ensure that we're protecting and creating value in order basically to build a business that's built for the future and it's built to last and if you think about sort of you know one of Atomaco's mission and very much kind of our values is to help shape and scale the European tech ecosystem make sure it's prosperous in order to do that we have to partner with companies that are still going to be here in 10, 15 years time.

15:39And so if sustainability is what it is that we're aiming to achieve, then ESG is essentially the framework for how you get there. Doesn't matter what it's called, it's just good business. There's two things that I'd love to just understand your perspective on a bit more, because you're working with this every day and you're being exposed thus also to the criticism that might be. So my first question is, the pushback that we are seeing in the US around ESG and DNI, is that something that you see at all in Europe? Or is it actually the contrary? Or is it, and if you see it in Europe, is it from specific pockets?

16:20Meaning, is it specific profiles of LPs? Is it specific profiles of founders? Is it specific profiles of people in the media? Is it Just something that the politicians are saying. I'd love to just understand how you, as four of the leading VCs in Europe that care about ESG and really work with this on a day-to-day basis, are experiencing the current dialogue around ESG in Europe. Particularly over the last couple of years, there's been sort of a lot of talk about how can you continue to push the agenda on ESG? And perhaps not so much kind of focusing on what is it that we're actually trying to achieve.

17:04And so, for example, with DEI, I mean, I certainly have this conversation with some of our founders. It's like, what is it that you're actually trying to achieve here? It's not that you're targeting a particular number or you're in competition on the data with some of your competitors. what you're trying to do is build a team with real top tier talent and you want to be able to you know retain that talent and so sometimes I think if you can take a step back and just remind ourselves like why we are doing this why is it important to measure your um your environmental emissions well so it's so you understand what your footprint is and you know you can keep you can keep check on it and as you continue to scale you can ensure that you keep it low and it protects you against you know any potential future taxation on carbon emissions it's not for you know for some companies obviously you know in the impact space it might be to actually kind of have an impact on the environment but for most of the companies it's really just to ensure that their environmental footprint is sustainable and so that's the way that we try to frame it particularly with our founders it's like take it back let's just focus on what it is that you're actually trying to achieve why are you doing this and then you know how is it how is it material to you as a firm antonia you're meeting a ton of lps as well so you're very much if if anyone would be you know you face that type of uh conversations in the day-to-day do what what's the dialogue what what's the feeling that you feel there yeah i think it's a very important and also timely question because we obviously met a whole bunch of our LPs in Berlin last week.

18:44And it is definitely on the agenda and it's on everyone's mind. We're talking about it more than we did last year. I think the nice thing about it, and that's one of the positives about the sort of startup and VC ecosystem, is that people aren't pretending that they have the answer for everything. Everyone knows they're on their own journey and they want to collaborate as well right gps lps startups like we we want to understand how we can really have help and support and for this not to become a tick boxing exercise yeah i think that's that's the beauty of it and but we do need to act now because obviously all these regulations and requirements are coming in and so if you know that's what we've been doing over the years right with esgvc is sort of let's ensure these frameworks are relevant let's and show our support is relevant.

19:36So I think that's the most important thing. As a summary question on this point, just want to ask you all, you said CSR before. It was called CSR before, now it's called DSG. Do you think that we will have to shift to another nomenclature once again because it's getting so heated? Or don't think so. This will pass over. I probably don't think we will at this point. I think let's put the US to one side for a moment and just focus on Europe as the geography that most of us focus on here today. I think ESG is firmly embedded within the European ecosystem now. We actually ran a survey recently, ESGBC, in partnership with Marriott Harrison, looking at processes and policies that VC firms have now adopted on this.

20:3291 % of the firms that we surveyed have an ESG policy now. 70 % of them include sustainability clauses in their term sheets. 45 % include clauses around D &I. I think it just speaks to the fact that this is now just part of what we do. And for all of the sort of broader conversations that may be taking place, I think when you look at it, certainly from the perspective of, as Antonia has been sort of speaking to, the dialogue between GPs and LPs, this is now just part of how we interact. I think there are challenges and sort of managing the relationship with founders and ensuring that they understand that this is sort of an important part of the future of their company.

21:18But I think fundamentally, if we look at this from the perspective of the asset managers and asset owners within the ecosystem, this is just now a core part of doing business. And I think it's unlikely that people are going to rip up those policies overnight because of a sort of shift in political focus. I mean, look, I'm not, I don't have a crystal ball. Yeah, so that was absolutely not my question, right? Because no doubt about ESG is fundamentals. It makes sense. But the question was just, are we going to find another three-letter acronym or what are we going to do? In an ideal world, we maybe wouldn't have any letters for it, right?

21:51Because then I think it'd be the easiest thing to explain. Which might be where we, it should be where we end up. Okay, let's get directly into then talking a bit about you at Atomico, Ashley, because you have for the first time put out a report that's focused on sustainability. I'd love to ask you a bit about why have you been at the forefront of sustainability and why has it always been important at Atomico? We were definitely early adopters of ESG or we know that we called it ESG back then. I've actually been with the firm for eight years. And so even when I first joined, we were kind of talking internally about what was, I suppose, the first iteration of this idea of conscious scaling, which is by extension ESG and then by extension sustainability.

22:40But I think I kind of alluded to this before. We're early adopters because it's just such a core part of our mission and values. We've got kind of complete 100 % senior buy-in from our leadership team. Everyone is kind of is behind ESG or sustainability when it comes to how important it is for the companies that we're working with to adopt it and that the earlier that these companies start to adopt ESG the better you know when they're small companies they're flexible they're able to kind of adapt some of their existing initiatives to kind of just ensure that it's like factoring in ESG once you're much bigger it's you know you're much less maneuverable you have to kind of rewrite or redo a lot of your initiatives you need to retrain your team.

23:28So the earlier you can do it, the better. And, you know, like I said, I think if a company adopts ESG, they are building themselves or setting themselves up for the future. They're setting themselves up to last. And so, you know, it will help them achieve sustainability in like the truest sense of the word. Henry, you very much led the process of doing this year's research. Maybe you would just talk a bit about the core findings from the research? Yeah, sure. So just also to briefly mention, because I don't think we've explained this in too much detail. So ESG VC is a network of VC firms around the world.

24:04We've got about 300 members now. And what we do is try and build resources to help startups to measure and improve their ESG performance. So a core part of that is that we've actually built a measurement framework for understanding ESG within startups. It's a set of metrics asking various qualitative and quantitative questions about their ESG performance, everything from do you measure your carbon footprint to what's the diversity of your leadership team. And so each year we publish a piece of research using the data that BCs have collected using that framework, which we deliver in partnership with the BBCA in the UK.

24:41And so this year we've published our latest and biggest piece of research, looking at the ESG data that we collected from roughly 600 portfolio companies backed by a really good cohort of some of Europe's top VC firms, including some of the people in the room today. And so it's been a really interesting step forward in that research, not least because we've got much more people contributing. The sort of pool of companies that we're analysing is much bigger. But also, I think we've seen some really important changes in the underlying performance of those companies. So just to pull out maybe four top takeaways for your listeners, and you can find it online through our website as well.

25:24So one item particularly to call out is that we saw a really marked improvement of the environmental performance of the startups that we were analyzing. so from last year which was effectively looking at their performance in 2022 through to what we analyzed this year in 2023 the proportion of companies measuring their carbon footprint almost doubled and for that for us that's like a really big jump forward and I think it speaks to a few themes which we may unpack a bit more in a moment but it also I think shows how well the industry is collaborating around a big issue namely the climate crisis and the extent to which us supporting our portfolio companies can have a demonstrable impact pretty quickly i.e within the 12-month period there are still though as a sort of second takeaway some big challenges that the diversity picture isn't actually improving within the leadership teams of startups that swiftly i think it's been a topic we've talked about a lot it's maybe just not quite actually sort of having the impact we wanted it to i think then as sort of two final points to maybe sort of leave with people we see that performance is quite mixed across different sectors which i think is an interesting point for vcs to reflect on in terms of what's what's the kind of material issue and by that we mean sort of what what's really actually critical to companies and how do we help them to think about that so for example sas businesses who make up a decent chunk of the the companies that we analyze struggle quite a bit with getting ahead on the environmental agenda but they're actually pretty good when it comes to thinking about responsible AI now that's kind of an obvious point to make right like people that are building tech may not see its environmental impact in the same way as people with large supply chains or physical products likewise they probably know that data and AI is going to impact their company in the future so they take it a bit more seriously but it's still an important point for us to mention and as a final takeaway I think we just also see some interesting divergence in how companies are performing different geographies so the european companies that we analyzed this year were a decent a decent way advanced on the uk companies that we analyzed in terms of how they think about their environmental agenda and then also the issue of responsible ai whereas companies in the uk were much more focused actually on how they support their teams so learning and development provision internships and apprenticeships, even mental health support for their employees.

27:57So those four items, I think, would be sort of important jumping off points maybe for a wider conversation both here today and then over the next 12 months for us at ESGVC. Yeah, maybe let's start on the question of why we're seeing this radical increase. I think it's fair enough to say 2x of startups that are measuring their carbon footprint. on a larger scale, because whether it's carbon footprint or whatever, they measure the uptick in how serious this is being taken out in the ecosystem. Maybe one of you could talk to why we're seeing that. Yeah, I mean, I suppose for us, I think, and as Henry touched on this, is sort of we think about this on the much broader scale.

28:40It is essentially us all doing our bit in tackling the climate crisis. And I think even just big milestones like zero by 2030 suddenly don't feel very far away. And it's very easy, I think, particularly for venture-backed companies to operate on much smaller timescales of, you know, two to five years maximum. But actually, these are things which are becoming more material and I think becoming a reality. And portfolio companies are starting to realize this. Can I ask you, though, because now you're saying we're each taking our part in fighting the climate crisis. But on the other hand, when we spoke about in the beginning, why does EST matter and where do you focus, then you all said, well, it's actually about competitiveness and the risk that's also associated to potentially having taxes put on your carbon footprint and so on.

29:39And I kind of see those two things as two different things. One is, do you do it because you think it's important and you want to be part of it? And the other is, this is fundamental business. You need to, just as you need to make money, you also need to know how much you're emitting because that might become a liability in the future and so on and so forth. How do you balance those things? Do you see how much of it is, and I'm asking all of you in the startups that you're working with, how much of it is because of their blue eyes? and how much is because this is real business and that's also from your side as VC firms why you're pushing for it.

30:14It's not about, you know, we all like the planet and we'd love to be here, but it's really about it's sound business and for that reason we're doing it. Yeah, I think it very much does sort of speak to both the idea of the fact that we are trying to mitigate climate risks, which I think particularly for our companies will be more transitional risks to the decarbonization of the economy as opposed to physical climate risks, which are just so much more sparse across the UK and Europe. So I think it's both this look to the future of, as you say, how we're building companies which are resilient and we'll be able to, you know, when things like CSRD regulation come into play, which has output of 2 ,000 metrics, how are our companies ready for that, including things like carbon accounting and measuring their carbon footprint?

31:02But I think what we do at Moulton as well is really try to look to the kind of inverse and looking at climate actual opportunities, which the climate crisis are essentially presenting, not least through climate tech, but also things like access to capital. As Antonia touched on earlier, the fact that even prospective talent and customers and consumers are much more climate conscious now than they were five, 10 years ago. and you know one big one that we use is is even things like big corporate like the nhs and like many major banks so thinking for us which is fintech and health tech companies the nhs has a net zero target in place which means that in the very near future every single company in their supply chain also needs to have a net zero target in place so if any of our health tech companies you're ever looking to sell into the nhs they need to be able to have this strategy in place and that also will involve setting a baseline by measuring your carbon emissions so it's things like that it's also the sort of pre-empting the fact that if we are as you scale going to be looking to selling into these bigger corporates you need to be prepared from a climate point of view and be able to actually have that access and i think with carbon emissions and and measuring your footprint it very much does stem from you you have to measure before you can manage and that's really where it all starts and I think that's where we sort of set our portfolio companies up for but we do also very much have to factor in I think materiality and understanding where actually carbon accounting is probably too much for a small company and you know even as a process it is long and it takes time and effort and in many cases money yeah that's what we're experiencing very much at the early stage right most of our companies don't even have the metrics to to to have a sort of you know any performance on e and you know some of them are trying to become b corps but again it will take it's it's a it's a process that will take years so i think it's just an interesting point there because either you know the e is so individual led and again it comes to good intention and embedding it all into your sort of general you know dna of the company but ultimately i think it's also good for companies to realize that it is you know you will be performing better on the s and the g as an early stage company than the e and and that's just the sort of natural process.

33:44I think your question, Andres, is the right one. There is this sort of like lofty goal and idea that we're all contributing to the big societal challenges of our generation. But let's be realistic about this. Startups can't understand in their day-to-day reality how what they do today might impact that kind of broader goal, or at least if they do, then it's just sort of more of a branding point right it's how they speak to their employees customers etc but there is a really as grace has sort of pointed out there is a really commercial point to make here and that's what we're trying to facilitate through a lot of this work we're fundamentally saying like if you do this you will be able to if not win business then at least put yourself in the comp in the position to be able to say we're not ruling ourselves out right and it's just becoming that kind of basic level of corporate hygiene that isn't a sort of must-have for startups and i think that's what we're trying to help them to both understand and then also kind of ultimately act on yeah i think that's that's so important right because it like we all know that in our day-to-day we don't have time for lofty goals and and and yes we'd all love to do it bunch but really we're all under pressure to deliver i think it's so important that we've moved the esd debate from being virtual signaling and measuring random stuff, measuring things to actually being about business and making it fundamental to what we're doing.

35:16Okay, that makes a ton of sense. Then let's talk diversity. And I think you said something super interesting, Henry, which was that in the UK, you see the UK startups being on the forefront when it comes to initiatives about building up talent and having a broad recruitment base and so on. And I'd love to ask you all, do you think that that is something native to a focus in the UK? Or do you think it's something that has arisen because of a much larger competitive environment to get the best talent in the UK? Because that would be my thesis that I don't think you'll find a more competitive hiring environment than for tech startups in London.