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How do you include ESG in your deal sourcing?

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ESG stands for environmental, social and governance criteria, which are increasingly important for investors and entrepreneurs who want to create positive impact and reduce risks. As a venture capitalist, you may wonder how to include ESG in your deal sourcing, or how to find and evaluate startups that align with your values and goals. In this article, you will learn some practical tips and best practices to integrate ESG into your deal sourcing process.

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1 Define your ESG strategy

Before you start looking for ESG-friendly deals, you need to define your ESG strategy and objectives. What are the key issues and opportunities that you care about? How do they relate to your investment thesis and sector focus? How do you measure and report on your ESG performance and impact? Having a clear and consistent ESG strategy will help you communicate your value proposition and expectations to potential portfolio companies, as well as to your limited partners and other stakeholders.

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Jose Kont

Executive Director at Cuantico ?? Driving Latin America with Research, VC & IPO Advisory
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LatAm is rich in resources crucial for achieving net-zero emissions, including significant reserves of lithium, copper, nickel, and water. At CAFI (Central America Angel Fund Initiative), we've crafted an investment strategy to support startups that tackle the region's major challenges and contribute to at least one Sustainable Development Goal (SDG). We've noticed that many startups lack ESG criteria in their strategies, reducing their global competitiveness. To address this, we've updated our evaluation processes to include questions about SDG contributions in our application forms. This not only aligns our investments with sustainability goals but also boosts the competitiveness of startups seeking our financial backing.

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2 Build your ESG network

One of the most effective ways to source ESG deals is to build your ESG network and reputation. This means engaging with relevant organizations, platforms, events, media and influencers that focus on ESG topics and trends. You can also leverage your existing network and ask for referrals and introductions from your portfolio companies, co-investors, mentors, advisors and peers. By building your ESG network, you can increase your visibility and access to high-quality deal flow, as well as gain insights and feedback on your ESG strategy and performance.

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Jose Kont

Executive Director at Cuantico ?? Driving Latin America with Research, VC & IPO Advisory
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To strengthen a support network that enhances the visibility of initiatives and efforts related to Environmental, Social, and Governance (ESG) criteria, it's crucial to highlight the success stories of startups and businesses that have implemented them. Additionally, it's essential to share data that underscores the importance of adopting these principles. Given that the majority of social media users are passive consumers of content, those who take the initiative to actively share relevant information about the evolution of the ESG industry tend to develop more extensive contact networks.

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3 Screen your ESG deals

Once you have a pipeline of ESG deals, you need to screen them according to your ESG criteria and standards. This involves conducting due diligence on the startups' ESG policies, practices and impact, as well as assessing their fit with your investment criteria and expectations. You can use various tools and frameworks to screen your ESG deals, such as ESG checklists, questionnaires, ratings, scores and indicators. You can also consult with external experts and partners who can provide you with ESG data and analysis.

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Daniele Viappiani

Venture Capital Investor @ GC1 Ventures | Former Civil Servant
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A good bar to set when screening ESG deals is to consider whether these companies are part of the future. If they are not part of the future, they are part of the past.

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4 Evaluate your ESG impact

After you invest in an ESG deal, you need to evaluate your ESG impact and value creation. This means monitoring and measuring the ESG performance and outcomes of your portfolio companies, as well as your own contribution and influence. You can use different methods and metrics to evaluate your ESG impact, such as ESG reporting, audits, surveys, case studies and stories. You can also benchmark your ESG impact against your peers and industry standards, as well as share your ESG impact with your stakeholders and the public.

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Victoria Kushpeleva

Startups Business Strategy Advisor | HealthTech | MedTech | AI Regulation | Venture Capital
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I have found that the implementation of ESG practices into the practices of the portfolio company is often overlooked. I believe VC should actively promote the integration of ESG practices into startups in order to achieve the stated goals of responsible investing (the portfolio companies should explicitly undertake to enhance ESG practices and VC experts should familiarize startup managers to ESG polices and practices. And the least but not last for me once VC incorporate ESG policy it should be equally applied to all portfolio companies and to VC management as well.

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5 Improve your ESG practices

Finally, you need to improve your ESG practices and learn from your experience. This means reviewing and updating your ESG strategy and objectives, as well as your ESG deal sourcing and screening process. You can also seek feedback and advice from your portfolio companies, co-investors, mentors, advisors and peers on how to improve your ESG practices and impact. By improving your ESG practices, you can enhance your competitive advantage and reputation, as well as create more value and impact for yourself, your portfolio companies and the society.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you include ESG in your deal sourcing?

1

2

3

4

5

6

1 Define your ESG strategy

2 Build your ESG network

3 Screen your ESG deals

4 Evaluate your ESG impact

5 Improve your ESG practices

6 Here’s what else to consider

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How do you include ESG in your deal sourcing?

1

2

3

4

5

6

1 Define your ESG strategy

2 Build your ESG network

3 Screen your ESG deals

4 Evaluate your ESG impact

5 Improve your ESG practices

6 Here’s what else to consider

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