Cultivating a Commitment Around ESG & Impact in Portfolio Management

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In the previous chapter, “Integrating ESG & Impact Into The Investment Process,” we shared why and how we made ESG & Impact an explicit part of our investment process. This includes how we find, pick, and win investments, as well as how we maintain accountability in our daily operations.

In this post (#4), we explain why the investment process should be complemented by a portfolio support model around ESG & Impact. We discuss how investors can drive ESG & Impact initiatives, outline our main framework, describe our methods for measuring and reporting, and share some key lessons we've learned.

This will be structured into six sections:

1. Integrating ESG & Impact into the portfolio management model: Investors can drive the ESG & Impact agenda in three ways: a) Active Engagement, b) Information Rights, and c) Voting Rights.
2. Streamlining ESG & Impact management by setting clear focus areas: Founders have minimal time and resources, and investors need to prioritize clear focus areas for ESG & Impact.
3. Anchoring joint goals for ongoing improvement: Setting clear metrics and goals helps everyone understand what to aim for and offers a clear roadmap for progress.
4. Developing a portfolio support model to encourage responsible growth: Investors can help startups grow responsibly by building a support model around ESG & Impact - e.g., by using their connections, market knowledge, and practical experience to offer customized support, resources, and connections.
5. Implementing a data-driven approach to ESG & Impact management: Regular measurement and reporting keep us accountable and help us improve by tracking and evaluating how our portfolio is doing.
6. Four pitfalls when implementing a portfolio management framework: Common mistakes to avoid in portfolio management are collecting too much data, relying on generic ESG questionnaires, setting inflexible expectations, and overwhelming portfolio companies with constant requests.

(1) Integrating ESG & Impact into the portfolio management model

The investment process sets the direction and baseline - but the fruits will be harvested during the active ownership period. Startups are constantly faced with dynamic market conditions, and their unique strength lies in quickly adapting to these.

As Investors, we can help founders and their employees with key challenges. Just like we offer operational support in areas such as product, fundraising, and growth, we can help them with ESG and impact-related topics. Especially because becoming ESG-compliant and building an impact company is not always straightforward. Therefore, it needs to play an active role during the ownership period and build upon the insights gained during the investment process. This spans the strategic, tactical, and operational levels. 

VCs can do this in three main ways:

• Active Engagement: Offer help for implementing responsible business practices through advice, resources, and connections.
• Voting Rights: Raise and vote on important ESG & Impact-related topics in board meetings.
• Information Rights: Add ESG and impact provisions in contracts to ensure ongoing accountability.

Of course, the support model has to match a fund’s existing investment strategy, especially its current level of involvement and influence. 

(2) Streamlining ESG & Impact management by setting clear focus areas 

Time is the main limited resource for early-stage companies. Therefore, investors need to focus on where we can help startups move the needle and which topics gain relevance in later stages—and should, therefore, be deprioritized in the early days. For example, in the beginning, it is much more about establishing the right key habits and building a solid foundation for later on.

As a generalist early-stage tech VC, it’s usually best to keep it simple - especially because we can’t specialize in every area. 

A company’s social and environmental footprint comes from both what they sell (i.e., product impact) and how they run their business (i.e., responsibility or so-called operational impact). Therefore, we've chosen to build upon two widely recognized standards to manage these across our portfolios: ESG for the “operational impact” of our portfolio companies and the Sustainable Development Goals (SDGs) for their “product impact.”

When we started putting together a list of possible ESG topics and KPIs to track, it became clear the list was too long. To stay true to our mission of being pragmatic and focused, we nailed down four focus areas within the broader ESG theme framework that are highly relevant across our entire portfolio. This also means that we chose not to track themes like biodiversity and traditional shareholder governance—not because they are not important, but because we had to make some tough choices.

Here are the four focus areas we have chosen to prioritize:

1. Carbon Footprint: Reducing a company's carbon footprint is crucial for mitigating climate change and maintaining positive relationships with stakeholders. If a company has a significantly increasing carbon footprint, it can negatively affect its relationships with its employees, consumers, business partners, and investors. Given that we mainly invest in software-enabled startups, this is highly relevant because data centers and transmission networks account for 1% of energy-related greenhouse gas emissions. This is also the one category that we can measure with a common currency. 
2. People’s Wellbeing: The happiness and well-being of individuals at a company directly contribute to their productivity as employees. The greater the employee's well-being, the greater their productivity, and the greater the company's productivity. This applies to both employees at the startup and the founders, as they are under a lot of pressure (which is why it’s extra important for us to proactively identify distress signals and support them).
3. Diversity, Equity, & Inclusion: A more diverse tech ecosystem will result in better products and services as well as strengthened economic growth - i.e., a better society for generations to come. 
4. Product & Data Ethics: Product and data ethics (incl. regulatory compliance) are extremely important for startups - especially in tech! They help build customer trust, lower legal risks, and support long-term success in a competitive market.

By focusing on these key areas, we try to help startups build a strong foundation for sustainable growth and positive impact, while being mindful of the fact that founders have limited time and resources. 

(3) Anchoring joint goals for ongoing improvements  

After having articulated clear focus areas for ESG & Impact, the next tangible step is to translate these into quantifiable metrics and goals. In our case, this applies to both: 

1. Product Impact (i.e., What): The material positive effect on people and the planet that the startup’s product or service is trying to achieve. 
2. Operational Impact (i.e., How): The level of operational responsibility, which is mainly focused on measuring the reduction of negative outputs (e.g., reduction of carbon footprint and fewer privacy breaches) and ability to run ethical and inclusive operations (e.g., employee NPS score and diversity in leadership).

Product Impact

For our impact startups, we track the positive social and/or environmental impact of their products through 1-2 unique KPIs. These are specific to each startup and reflect the founders' vision for their company's impact.

It is important to us that the KPIs are chosen by the founders so they feel ownership and pride. But more practically: founders are often a lot more knowledgeable than us when it comes to their impact domain. Nonetheless, we recognize how difficult it can be to identify relevant KPIs, especially in the early stages. To support our founders in this process, we offer one-on-one calls to help them develop KPIs that accurately measure and reflect their impact goals.

Operational impact

For all of our portfolio companies, we track the level of responsibility (ESG performance) across our four focus areas. Within each area, we prioritize outcome metrics over process-based metrics. This ensures we capture the tangible results of their efforts and gain actionable insights for improvement. We also aimed to select as few metrics as possible that were highly relevant for measuring the key parameters within E, S, and G. 

We haven’t fully nailed down our approach to measuring product & data ethics yet. While we are tracking some valuable process KPIs, we are struggling to find optimal outcome metrics. It’s still a work in progress, so if you have any suggestions, please let us know!

(4) Developing a portfolio support model to encourage responsible growth

To help startups develop responsibly and progress within each focus area, investors can offer valuable support. Especially because VCs bring three main advantages to the table:

• Extensive network: We are well-connected across the startup ecosystem (incl. founders, investors, industry experts, corporate partners, etc.).
• Early market insights: We always stay up-to-date with the latest trends, technology, and regulatory changes.
• Wide-ranging operational insights: We work closely with many companies, giving us firsthand knowledge of what works and what doesn’t in day-to-day operations.

‍This can be a huge asset for founders because we can (A) introduce them to the right people, (B) build/provide practical resources (e.g., tools, workshops, etc.), and (C) offer advice based on what we’ve seen work at other companies. While this applies more generally, we also use these strengths to build a targeted support model around ESG & Impact. There are a few general things we do that are not based on a specific theme and more of general support, including:

• ESG onboarding workshop: We kick things off with a comprehensive "Responsibility Workshop" during onboarding. Here we review and discuss the DD survey they have filled in to identify key areas we can support them with.
• In-house expertise: We have hired an Impact Lead to support founders on ESG and impact-related inquiries.
• Impact& ESG Specialist network: We've built a network of experienced impact specialists, including Frida Siwe (impact and finance advisor), Ellen Kugelberg (hardware and impact expert), and Kristian Rönn (expert on AI ethics and carbon footprint) - all available to directly support our portfolio companies. 
• Impact & ESG workshops during key events: We host sessions on ESG and impact topics at our key events, such as Basecamp. These workshops cover anything from how founders can make a positive difference on people and the planet to building a strong company culture. 

In addition, we aim to support our founders in each of our four main focus areas, along with any impact-related topics. 

Carbon Footprint

Getting started with tracking and reducing carbon emissions can be a hassle. It often takes a lot of time to find the right tools and decide where to begin (incl. what is expected of key stakeholders). Our goal is to make it easy to get started and save founders time. That’s why we focus on the following:

• Carbon footprint tool: Help startups find effective tools to track their carbon footprint at least once a year—at no extra cost. We recommend the free ‘Business Carbon Calculator’ from Normative, one of our portfolio companies. Our goal isn’t to achieve 100% detail and accuracy but to provide a practical approach that allows startups to compare their results over the years and understand their main carbon footprint.
• Research & inspiration: Provide examples of successful ways to reduce carbon footprints, helping startups see practical steps they can take. For example, we regularly update our Annual Responsibility Survey and ESG policy template with initiatives we've seen others implement (which has been well received by startups!).

People Wellbeing

Finding the right people is hard, and keeping them is even harder - especially if you don’t have the time and infrastructure to back you up. Rapid growth can easily overshadow culture, and the consequences can be severe. Some of the initiatives we take to support founders in this area include:

• Employee engagement tool: We have compared a bunch of tools for tracking employee wellbeing and shared the overview with our founders to help them choose the best option. We would love to make it more comprehensive, so if you can recommend any other fantastic tools (or even discount codes), we’ll happily add them to the list! Currently, Officevibe has the best feature and price combination, so it’s the most widely used tool.
• Code of conduct: Provide a template that founders can use to develop their own Code of Conduct (i.e., a document that outlines how to address violations of company values and helps ensure all team members feel safe and authentic at work). This includes an information page on how to develop and use this template.
• Culture workshops for founders: We offer deep dives into the company culture to help founders uncover what’s working well and what needs improvement. You can find more information about it here!
• People & culture workshops at byFounders events: We host workshops focused on people and culture at key events like Basecamp and our Summit. For example, during our annual summit in 2024, we hosted a session on the topic of "Culture and Employee Engagement in Startups: Motivating Teams, Providing Feedback, and Navigating Tough Times”, led by our collective members Mac Reddin, Mikkel Hippe, and Pernille Brun.

At the same time, we also want to ensure the well-being of our founders, who are under immense pressure - partly because of the growth expectations set by investors. The VC model often requires startups to triple-triple-double-double revenues in the first few years. This creates a pressure cooker environment, and when things get tough, the first impulse of founders is usually to work harder and longer. This usually doesn’t lead to the best outcome for founders or the startup. At byFounders, we recognize our role in this equation and want to build long-lasting relationships with our founders that go beyond financial backing.  One example of an initiative we have taken to support the well-being of our founders includes:

• Coaching program: Founders face unique challenges that we can’t always help them with. Therefore, we offer a 10-week coaching program designed to focus on personal and professional development. We’ve teamed up with an organizational coach and psychologist to design and facilitate the full program - primarily based on input from our founders. To ensure it’s accessible and that founders prioritize themselves, we cover the costs of this program. You can read more about our coaching program here.

Diversity, Equity & Inclusion

The majority of founders we meet recognize the importance of diversity, equity, and inclusion. Yet, building a diverse team is often tough for startups - especially in Europe. The tech industry has been struggling with diversity issues for years, particularly in the underrepresentation of women and minorities in key technical fields. For example, in Europe, only 21% of information and communications technology graduates are women. Since tech startups typically start by hiring engineers, this greatly influences team diversity. While we can’t fix the “pipeline” problem, we can guide founders on making diversity a priority and use our network to help with recruitment. Some of the initiatives we take include:

• ESOP support: Guide startups on how to share ownership fairly, ensuring that everyone has a chance to participate.
• Recruitment support: Help founders recruit diverse candidates for key positions, such as the management team, founder associates, or board members (if needed).
• Diversity, equity & inclusion policy provisions: To facilitate the right conversations internally in each portfolio company, we’ve developed an ESG policy template with a large DE&I section that the founders can use as a starting point for developing their own DE&I strategy.

Next steps: Cap table & ESOP guide for founders (incl. benchmarks), exclusive female engineer talent network, and tech startup board training. 

Product & Data Ethics

In the early days, product and data ethics are often overlooked because founders are laser-focused on building and shipping products. Added to that, regulations are often overly confusing, so many startups might not fully understand their legal responsibilities. This can lead to serious problems down the road. Some of the actions we have taken to support founders include: 

• Compliance review (light): As part of our Founder Responsibility Survey, we review common compliance topics (e.g., if they have a privacy policy). We discuss these during the onboarding workshop and follow up in our Annual Responsibility Survey to monitor progress.
• Product & data ethics guidelines: We’ve expanded our ESG policy template to include a section on the ethical use of data and data privacy. This is in addition to other governance-related provisions aimed at ensuring responsible practices across the board.

Next steps: Governance and compliance handbook for startups. 

Impact

Managing impact comes with its own set of challenges - from developing a clear strategy to measuring and leveraging impact as a unique selling point. Given that we are not an impact fund, a lot of the support we offer is need-based and not built around a specific support program. Some of our initiatives include:

• Curating a list of existing resources: We put together a list of helpful resources that could benefit our founders. Some standout options include the “Founder Impact Playbook" (by ImpactVC) and “Building and Scaling Climate Hardware: A Playbook" (by Planet A, Norrsken VC, Speedinvest) 
• Impact Sparring: We offer one-on-one calls to help founders develop their impact KPIs. 

(5) Implementing a data-driven approach to ESG & Impact management

To ensure accountability on a day-to-day basis and drive continuous improvement, we continuously track, measure, and report on the progress of our portfolio. Here are some of our key initiatives and processes:

#1: Data Collection. We try to simplify things as much as possible. Our main rhythm is quarterly, as part of our regular KPI reviews, but we have further deep dives on an annual basis. 

• Quarterly KPI request: As part of financial KPIs, we collect the employee Net Promoter Score (eNPS) from startups with more than 15 full-time employees (FTEs).
• Quarterly Portfolio Review Form: Each quarter, the investment team fills out a “Portfolio Review Form” where they assess and score their portfolio companies on different financial and ESG developments. The goal is to find tangible action items for support - both on financial and ESG-related metrics. 
• Annual Responsibility Survey: Every year, we send a survey to our founders to collect information across our four focus areas.  
• Ongoing dialogue: This should not be forgotten! We have a lot of ongoing touchpoints with our portfolio companies, which we regularly share with the team. 

Each of these collection points informs concrete deliverables and is not collected for the sole purpose of compliance. For example, our Annual Responsibility Survey is one of the more resource-intensive exercises we perform once a year to drive ongoing accountability. We use it to identify key areas where we can support our portfolio companies and also publish all the good and ugly in our Impact Awareness Report. Similarly, our quarterly portfolio review holds investors responsible for actively considering their portfolio companies' responsible development and helping founders improve across key areas (e.g., board diversity, founder wellbeing, etc.).

#2: Automation. We try to automate things as much as possible to minimize the workload on founders and our team. Here are some of the things we have implemented:

• Pre-population of Annual Responsibility Survey: We pre-fill about 50% of the questions in our Annual Responsibility Survey using historical answers from either our founder responsibility survey or the annual responsibility survey, depending on how long the founders have been with us. This includes information that is unlikely to change but can be updated as needed (e.g., employee benefits, security practices, etc.).
• Automated Data Import for Quarterly Portfolio Review Form: We automatically import data from the previous quarter into our Portfolio Review survey, making it easy for our team to monitor progress and compare results.

#3: Analysis & Reporting. Some of these reports and discussions happen internally (e.g., quarterly portfolio review, LP reporting), but where it makes sense, we are committed to sharing our work publicly. Here are some of the concrete outputs of this process:

• Internal - our levers to ensure accountability in the team:some text
  • LP Reporting: Regular updates on portfolio performance and ESG initiatives (when relevant!). 
  • Quarterly Portfolio Review: Internal assessment of portfolio companies' ESG development (i.e., board & leadership diversity, developments in company culture, etc.)
• External - our contribution to open standards:  some text
  • Diversity Commitment: Public disclosure of gender diversity in deal flow and portfolio as part of the Diversity Commitment. 
  • Impact Awareness Report: Once a year, we showcase how byFounders and our portfolio companies are working towards a better tomorrow. This includes progress on each of our focus areas (including outcome metrics + a few select process metrics) and deep dives into our impact companies. 
  • Sustainable Financial Disclosure Regulation (SFDR): In accordance with SFDR requirements, we report on our portfolio's impact metrics annually. We will discuss this in more detail in Chapter 6.

(6) Five pitfalls when implementing a portfolio management framework (aka. don’t overwhelm founders for the sake of compliance!) 

Implementing a portfolio management framework is an ongoing process. Through our discussions and some missteps, we’ve learned a few important lessons along the way. Here are a few pitfalls to watch out for:

‍#1: Overloading founders with metrics - Data shouldn’t be collected for the purpose of collecting it. Instead, every input needs to be mapped to an output. Otherwise, it just creates unnecessary work. When we first launched our annual sustainability survey, we went overboard (which did not sit well with our founders). The following year, we went back to the drawing board, mapped every question to a concrete outcome, and ultimately slashed the survey by more than 60%. 

#2: Using off-the-shelve ESG questionnaires - It’s tempting to use off-the-shelve ESG questionnaires, like the “ESG VC framework”, because it requires a lot less work. But there's a 90% chance it won't fit your specific needs because different technologies and/or industries have unique ESG footprints. They are great for inspiration, but the heavy work needs to happen internally. 

#3: Sticking to rigid expectations - A company with less than 10 employees has different needs, limitations, and priorities than one with 15+. For example, measuring the employee Net Promoter Score (eNPS) in a five-person team that mostly consists of founders will have little informational value. That’s why we have tailored our support model to the stage where founders are at. For example, we only expect companies to report their carbon footprint and eNPS once they reach +15 FTEs.

#4: Asking too much, too often - There is a natural limit to how much portfolio companies can progress on the ESG agenda each month, quarter, or year. We need to be realistic about when and how often it makes sense to collect this information. For example, we collect the eNPS score quarterly for companies with +15 employees but only ask for detailed information about social, environmental, and governance-related aspects on an annual basis. Based on feedback from our founders, we've gone even further and pre-filled a ton of information that doesn’t change frequently, so they have to spend less time on ESG reporting. 

#5: Approaching ESG & Impact as a one-way street - Always give more than you ask for. ESG & Impact quickly turns into a reporting and compliance exercise which founders don’t get a ton of direct value from. That’s why we focus on creating useful resources like templates (e.g., ESG policies), workshops (e.g., company culture), and guides (e.g., HR) - in addition to hands-on support. We also feature success stories from our portfolio companies that they can use for fundraising. These are the things that really move the needle for founders - plus, all of this will eventually show up in the metrics!

(7) Recap

As we often come in as the first institutional investor, we have the opportunity (and responsibility) to help our Portfolio companies prepare for consciously scaling their businesses. 

Some of the main takeaways include:

• Keep it simple & focused: Startups have limited time and resources, and it’s not our job to waste them. Therefore, it’s important to prioritize areas that really move the needle. In practice, this will probably look slightly different across VCs, depending on things like stage, sector, and geo focus. At byFounders, we concentrate on 1) startup-specific SDGs and 2) four specific themes within the ESG framework (i.e., carbon footprint, people’s well-being, diversity, equity & inclusion, and product & data ethics).
• Drive awareness & accountability via tangible KPIs: We agree on joint impact KPIs with our portfolio companies, complemented by a standard set of operational KPIs. Contrary to many impact funds, we don’t dictate impact KPIs. We want our companies to take pride in their chosen KPIs and recognize that they often have more expertise in their specific areas than we do. As a generalist VC, this also makes a ton of practical sense, given that we cannot specialize in every impact domain.
• Iterate & adapt the support model: Finding the right approach takes time. We keep adapting to deliver on our joint commitment to ESG & Impact. Besides access to our broad network, we developed some very tangible tools and support modules, including. e.g., expert workshops around topics like team culture, templates, guides, and many more.
• Find a fine balance & avoid typical pitfalls: Metrics overload, using off-the-shelf ESG questionnaires, rigid expectations and asking too much too often are four of the typical pitfalls we have encountered. The overarching theme is that you need to keep a tight focus on unlocking value for startups and to not overwhelm them for the sake of compliance (esp. when it comes to ESG and other regulatory aspects) - simplify it as much as possible!

In the next article, “Adopting ESG & Impact Principles into Internal Operations”, we’ll explore how we’ve aligned our own operations with the principles we promote, including our responsibilities as an employer and our commitment to the wider community.

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