VC's DEI & Sustainability in the Era of Trump Redux: A Shakedown

Alright, folks, it's 2024, and we're back at a crossroads for sustainability in investing, with a side of political whiplash.

With Trump looming in the election, the promises of diversity, equity, inclusion (DEI), and sustainability seem to be hanging by a thread. What does that mean for venture capital, the so-called torchbearers of progressive investing?

“A Harris administration would be more favorable for the interests of ESG investors whereas a Trump administration would be antagonistic,” according to Morningstar Indexes’ head of strategy.

Let’s dig into the numbers—and the reality.

DEI: Dead or Just on Life Support?

According to the latest PitchBook survey, only 26% of respondents are managing or allocating to impact investments that genuinely consider DEI factors. And guess what? It seems Trump’s policies might just throw a wrench into the gears for the rest.

With the impending rollback on regulations—expectations are that companies will return to the Wild West days where DEI is optional, not mandatory.

The Sustainable Investment Survey from PitchBook shows that while DEI is a priority on paper, especially in the EU and among more liberal managers, the U.S. venture space lags way behind.

Investors have voiced growing concerns, with many, particularly in North America, claiming that DEI “distracts from higher-priority financial issues”.

Trump’s potential deregulation will likely amplify that sentiment, making DEI feel like a 'nice-to-have' rather than a real requirement.

ESG Under Threat: Greenwashing 2.0

Let's not even start on ESG. Actually, let’s!

From Trump’s rallying cries against "woke capitalism" to his promised revenge on environmental regulations, the ESG movement in the U.S. is heading into stormy weather. A large number of investors (64%) already feel ESG is virtue signaling, and 36% say it's a breach of fiduciary duty (Pitchbook, Sustainable Investment Survey 2024). With a Trump win, those numbers will grow as ESG becomes the poster child for "wasteful woke spending."

The survey indicates that 64% of respondents globally incorporate some ESG factors into their investment process, but the regional contrast is stark. In Europe, ESG is the baseline. In North America, however, it's about survival—managers are just trying to avoid lawsuits or Twitter rage. If Trump gets his way, a number of U.S. firms will be rebranding ESG as "responsible investing," dropping the focus on environmental and social governance entirely. Expect "carbon-neutral" to disappear from LinkedIn bios.

Money Talks: Impact on Fundraising and Cash Flow

Here's the thing —capital flow into these funds is already under pressure. From 2022 to 2023, there was a severe negative cash flow in the venture markets, as high as -$60B in 2023. However, 2024 brought some respite with a positive $18.2B in net flows, the first positivity since 2021(2024_Sustainable_Investment Survey Pitchbook). LPs are finally cash flow positive, and yet with Trump’s hostility towards sustainability-focused regulation, you’ve got to wonder—will LPs stick their necks out for ESG and DEI-focused funds or retreat to "safer," more Trump-aligned projects?

? ????????: Positive cash flows

—Capital Contributions: ($133.2B)

—Distributed: $140.6B

—Net: +$??.?????

????????: Severe negative cash flow

—Capital Contributions: ($98.9B)

—Distributed: $49.3B

—Net: -$????.????? ????????: Severe negative cash flow

—Capital Contributions: ($85.9B)

—Distributed: $25.9B

—Net: -$???????

????????: Positive cash flows

—Capital Contributions: ($22B)

—Distributed: $40.2B

—Net: +$????.????

Full shakedown post with comments here: https://shorturl.at/oeaT6

Zombie Funds and the Trumpocalypse

On top of this, the looming threat of Trump aligns eerily with the recent uptick in "Zombie Funds." These are VCs with no fresh capital who still cling to assets. They have extended fund terms, yet can’t exit or raise new commitments, much like trying to dance with the undead.

The current climate only adds another layer—Trump-era deregulations could mean the zombie apocalypse accelerates, as LPs shy away from anything risky, and DEI/ESG-focused initiatives come off as just that.

Expect a rise in the secondary markets for DEI/ESG-heavy funds as investors look to unload commitments before the regulatory support completely evaporates.

The biggest climate tech funding gap

The so-called "Valley of Death" is a major risk for climate tech startups that require substantial capital to reach commercial-scale operations.

"The evolution from science project to commercial outfit can be one of the hardest to pull off, especially in an economy where our capital stack was built for digital innovation rather than hardware advances."Chuka Umunna - JPMorgan Chase & Co.’s head of ESG and green economy investment banking for Europe and the Middle East

Where Do We Go From Here?

It’s a classic standoff between doing what’s “right” and what’s easy—and the market is signaling it’s going to opt for easy. Sure, European investors will keep up appearances; for them, ESG and DEI are still "table stakes." But here in the States? We could be entering a dark winter for progressive investing.

Globally, climate-tech companies raised roughly $10.3 billion in equity across public and private markets in the third quarter, putting full-year funding on track to fall about 50% this year, data from BloombergNEF show. Meanwhile, capital for AI has climbed, with startups in that space raising more than $21 billion in the quarter, Pitchbook estimates.

“AI has sucked all the oxygen out of the room,” said?Matt Eggers, a managing director at Prelude Ventures, which invests in climate startups. “It’s not like anything we’ve seen since perhaps mobile in 2010.”

So, what’s an emerging manager to do?

Triangulate your pitch. If you’re raising in the U.S., ESG might need a rebrand—don’t fight the market’s skepticism, lean into financial returns first and foremost.

If you’re in Europe or dealing with global LPs, lead with ESG and DEI, but make sure the financials are airtight. You’ll need to prove sustainability isn’t a concessionary proposition but an opportunity—especially with regulatory whiplash on the horizon.

The real question now: Will you pivot or persevere?

The outcome of the next election might just decide which approach works.

Read the full report here.