The Black Lives Matter movement has reminded us of our collective failure to forcefully address systemic discrimination. The venture capital community is no exception. Women and minorities are woefully underrepresented as both entrepreneurs and funders. 

The Covid-19 pandemic is reinforcing disparities, with African-Americans and minorities disproportionately bearing the brunt. One example being access to adequate healthcare – especially in the U.S. Gig workers on the front lines, many of whom also belong to minority ethnic groups, lack health insurance and other benefits.   

As enablers of wealth and job creation, the venture capital industry is in a position to take a systematic approach to tackle societal issues from the ground up. At the very beginning of a company’s journey, we can start to encourage the actions that are necessary for the future wellbeing of our world.

We have the tools at our disposal. Institutional investors have already been integrating environmental, social and governance (ESG) policies into their decision-making process to limit the adverse impact of their investments on inclusive economic growth, labor practices or climate change. According to a comprehensive study of institutional investors across 21 markets by mutual funds giant Franklin Templeton, ESG ranks as a top priority, ahead of investment strategy and technology.

Another top asset manager, BlackRock, recently announced that it intends to double the number of its ESG exchange-traded funds (ETFs) to 150 over the next few years, placing sustainable investing front and center.

In a survey of U.K. wealth managers by the Financial Times and market research firm Savanta, almost nine out of 10 said the pandemic will actually increase interest in ESG investing. 

It is arguably tougher for VC firms to help fledgling companies implement ESG measures when they are still fine-tuning their business models, and even more so when they have a minority stake in the company and potentially less influence from a governance perspective. But startups in their formative stages should think hard about the long term impact of their actions as they outline their mission. The bigger they get, the costlier it is to make changes.

Some questions they should answer include: What is the percentage of female and minority representation that you have or plan to have on your management team with ownership in the company? Are you engaging in fair labor practices with contract workers? Have you taken the necessary steps to ensure data privacy? 

Falling afoul of ESG rules have caused unicorns and major companies significant issues they could have avoided with some forethought in a few areas:

Establishing good labor practices

Uber upended the taxi industry by facilitating on-demand rides, but that came at the expense of an army of gig workers. Last year, California’s governor signed into law a bill that could require the company and others to reclassify independent contractors as employees. If anything, the pandemic has demonstrated that they are essential. Had Uber applied ESG practices by paying fair wages and benefits, it wouldn’t be wrestling with regulators and facing protests today.

Improving diversity and inclusion

WeWork faced intense criticism for not having a woman on its board when it decided to go public. Startups and VC firms still have a long way to go when it comes to diversity, but VCs can take the first step by modeling diverse teams for their portfolio and setting gender and race-lens investing targets to ensure diversity in recruitment. Companies with a diverse executive team are more likely to outperform those with the least diversity.

Protecting user data

There have been some spectacular data breaches, from Target to Anthem and Equifax. These are just the high profile ones. The majority of cyberattacks target small and medium-size businesses. From day one, protecting sensitive customer information has to be a priority. Establishing policies to prevent breaches and complying with regulations, such as the E.U.’s General Data Protection Regulation and the California Consumer Privacy Act, can turn out to be cheaper than paying fines and risking reputation.

Mitigating environmental damage

Same day delivery is delightful for the consumer, however the impact on the environment is significant, with transportation overtaking power plants as the top polluter. Amazon, for example, relies heavily on freight vehicles and third-party vans for deliveries, many of which are not fuel-efficient nor completely full to optimize for speedy delivery. This has earned Amazon a spate of bad publicity. Last year, it set an overall goal of reducing carbon emissions to zero by 2040 and plans to have 100,000 new electric vehicles on the road by 2030. Startups should take notice. 

It’s never too early for VCs to help young companies adopt ESG, but it requires commitment and taking the long view. Imagine if today’s tech giants had applied those tenets at the onset; we might be living in a more inclusive and sustainable world.

 

500 Startups recently surveyed founders to find out how Black Lives Matter and COVID-19 are influencing inclusive, sustainable and equitable business practices at startups. You can find out survey results here.

To learn more about 500 Startups’ efforts at implementing ESG policy, please go to this page.