Snakes in the ESG Garden: 5 Strategies to Make ESG VC More Effective

As is the case with the implementation of many principle-based goals, especially from the financial community, there seems to be some trouble between words and actions, as is the case with ESG. ESG stands for environmentalism, sustainability and governance. This means:

Environment: Are we doing what's good for the environment?

Sustainable: is what we do good in the long term?

· Governance: is what we do good for everyone?

DOES THE REALITY MATCH THE HYPE?

Bloomberg BusinessWeek (5/9/2022, page 22) notes that there are a few snakes in the garden:

· Some arms dealers, who do not understand ESG principles, manage to adapt if arms represent only a small part of their sales. So being a "small speaker" seems acceptable.

· ESG ratings are developed by index creators and the process is opaque. Even though the "G" stands for fair governance, a conflict of interest seems acceptable for those who make the rules.

· ESG seems to be measured in terms of the impact of a scarce resource on the business, not on consumers and the community. A company that uses a lot of scarce resources is acceptable if it controls enough scarce resources. Hoarding seems okay if artificial scarcity and rising prices hurt society, but not business.

IS VC CONSISTENT WITH ESG?

Environment: The most successful venture capital firms invest in high growth sectors, which are mainly emerging sectors.

The problem: are all emerging industries environmentally friendly? Can ESG-VCs succeed without subsidies if they invest in environmentally friendly industries?

Socially conscious or elitist: The most successful venture capital firms focus on financial returns, not social ones. High financial returns are often achieved by businesses started and run by entrepreneurs trained in the right skills, or by experienced entrepreneurs with excellent track records. Entrepreneurs who do not meet these high requirements are often replaced by experienced managers.

The problem: Can low-income community members with no recognized institution in their background obtain venture capital funds from the best venture capital funds? Can we teach unicorn skills to everyone to take off without VC?

Governance is not a key priority for VC. Poor governance principles haven't stopped venture capitalists from investing in companies. Mark Zuckerberg controls more than 50% of Facebook's voting rights but owns less than 30% of the company. Snap's founders are said to control more than 90% of its voting stock, even though they own far less. Both companies have secured venture capital funding. Verkada sells security tools, but there are questions about the company. According to TechCrunch, "boy, did investors have to look away from a lot of the so-called horrors."