| dc.description.abstract | Sustainable investing has garnered increasing popularity in both public, and more
recently, private markets, with the promising potential of “doing good while doing
well.” Studies on VC impact investing have shown mixed results, potentially due
to their willingness-to-pay for their dual mission. However, within VC, little
research has been done on how to incorporate ESG concerns to reduce risk and
improve financial performance. Therefore, we aimed to understand to what extent
funds investing in companies with greater ESG scores would have better financial
performance, and how VC firm level factors, such an impact-focus strategy or ESG
expertise, affect this relationship. Furthermore, we assessed the link between impact
companies and fund-level returns. Using Preqin’s VC fund performance data, we
found that company-level ESG scores were not associated with net IRR, even when
excluding impact-focused funds. However, ESG scores were tied to lower
IRR:TVPI, both when including and excluding impact-focused funds. Additionally,
a greater proportion of impact companies was associated with lower fund financial
performance, as measured by IRR:TVPI. Finally, ESG expertise alone showed no
association with financial performance, but after excluding impact funds, the
interaction term between ESG score and ESG expertise showed a negative
relationship with IRR. Overall, even when accounting for an impact-focused
strategy, we did not find evidence for a link between higher company-level ESG
scores and greater fund-level financial performance. The practical implications of
these findings do not support a strategy of greater implementation of ESG in VC
for greater financial performance. Future research should investigate these
relationships using alternative metrics of fund performance, impact fund
designation, and assess the effects of ESG on startup survival.
Key Words: venture capital, financial performance, portfolio company, impact
investing, ESG expertise, ESG score, IRR, TVPI | en_US |
