Venture capital and sustainable finance

: clinical study on the integration of ESG criteria in the investment process

Abstract

The climate change and environmental degradation present existential threats to economic and social activities worldwide. The financial system has been assigned a central role in the sustainable transformation of the global economy, with Environmental, Social and Governance (ESG) considerations becoming widespread in the financial sector. The European Commission’s Green Deal initiatives aim to transform the EU into a modern, resource-efficient, and competitive economy, with entrepreneurship and innovation being key drivers of the sustainable development transition. This study investigates the extent to which Venture Capital (VC), recognized as a significant financial intermediary in entrepreneurial ecosystem, is funding the transition by examining the motivations of fund managers in integrating ESG criteria into their pre investment process. To uncover these motivations, personal interviews were conducted, supported by a structured questionnaire, administered to a sample of representatives of Portuguese VC funds. Participants incorporate ESG factors mainly in deal screening, but do not prioritize them, perceiving them as somewhat unimportant. This supports the hypothesis that VCs do not consider ESG integration a criterion factor, with no differences noted between UN PRI signatory and non-signatory firms. The positive perception of ESG’s impact on investment returns is inconsistent across the sample, and the results are insufficient to confirm a positive relationship between ESG considerations and investment returns. While the regulatory environment is not the primary driver for incorporating ESG, VC engagement with ESG factors is positively associated with policy and regulatory developments. The study highlights key barriers to ESG investing, such as excessive subjectivity, lack of clarity, and difficulties in quantifying ESG factors. This conclusion is aligned with the Comissão do Mercado de Valores Mobiliários (CMVM)’s recognition that management entities need to strengthen internal competencies to comply with the applicable regulatory framework. VCs also report that regulatory requirements, if disconnected from practical implementation, can lead to artificial processes and potential unintentional greenwashing. Despite recognizing the importance of sustainability topics, there is distrust due to the difficulty in measuring ESG impact, both in society and funds’ performance.

Date of Award	30 Oct 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	João Pinto (Supervisor)