Integrating ESG & Impact Into The Investment Process

In the previous two chapters, we explained why responsibility and impact are crucial for investors and how this shapes our fund’s positioning. We also shared the thinking behind our approach and how we turned it into a clear strategy with tangible KPIs to ensure accountability.

In this post (#3), we explain how we integrate our fund’s ESG & Impact priorities directly into the investment process. We’ll break down how we’ve woven these principles into the way we assess and select startups, as well as ensure accountability on a day-to-day basis.

The article is structured into four main sections:

1. Embedding the positioning choice into the investment process - ESG & Impact should be evaluated alongside financial considerations - either with a separate category or within existing ones.
2. Codifying the investment framework by defining an ideal investment profile - The investment framework needs to be translated into an Ideal Investment Profile (IIP) to create a unified understanding of what good and bad look like. 
3. Complementing the investment process with ESG & Impact best practices - ESG & Impact are key considerations across every stage of our investment process - from finding and picking to winning deals. 
4. Refining existing processes with ongoing measurement and reporting - Measurement and reporting are levers that ensure accountability on a day-to-day basis. 

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(1) Embedding the positioning choice into the investment process

The positioning choices need to be reflected in day-to-day operations. The investment process is one of three steps to operationalize it - but it’s key to start here as it influences the design of the portfolio management and internal operations. Most VCs have a solid process and framework for evaluating teams and business ideas using traditional criteria, such as market, team, product, and traction. Fewer have built a corresponding evaluation engine for ESG & Impact (beyond compliance checklists). 

However, it’s key to assess the risks and opportunities of each deal and ensure they are thoroughly addressed. It, therefore, needs to be embedded in the investment framework and evaluated alongside financial considerations. There are two ways to go about this:

1. Create a Separate Dimension: Develop a separate category explicitly focused on ESG & Impact.
2. Embed in Existing Dimensions: Consider ESG & Impact in an existing category (e.g., Team, Technology, etc.).

At byFounders, we chose a combination of the two:

• We added an 8th T to our investment framework - Tomorrow. Under this criterion, we ask: How is your company contributing to a better tomorrow, and what are the potential negative consequences? This forces us to systematically analyze a company's ESG/impact philosophy from the outset, consider it in every investment decision, and get a deeper understanding of its intentionality beyond growth-related metrics. 
• We incorporated further aspects across the other 7Ts. For example, under Team, we also consider the ethical and responsible behavior of founders.

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(2) Codifying the investment framework by defining an ideal investment profile

The investment framework has to be translated into an ideal investment profile (IIP), which can guide day-to-day decision-making for every investment. It’s key that the whole team has a unified understanding of what a “good” investment looks like and create a joint language for evaluating deals.

We have designed ours through these four steps:

‍Step 1: Defined underlying criteria for each dimension to secure a unified understanding. The dimensions of the investment framework (i.e., our 8Ts) are just ‘Headlines.’ We also need additional sub-criteria that offer more detail on what good/bad looks like for each dimension. For example, one of our 8Ts is Team. People can have different interpretations and biases on what to look for. More specific considerations include track record, educational background, and complementary skills. However, it also goes further to include integrity - e.g., being honest, transparent, and deliberate. The point is that different things will be considered and weighed into the decision depending on how you define it.   

Step 2: Set single decision thresholds for each dimension of the investment framework. These are make-or-break guidelines for each dimension, independent of the startup's performance in other areas. This is similar to the “Red Zone” thinking we introduced in our previous post. It’s where you step away from an investment based on the outcome of a single dimension, irrespective of the performance of others. In our case, one dimension that always needs to shine is Tomorrow. As a practical example: if a startup excels across the board but its business model is inherently unethical (e.g., exploits vulnerable populations, such as payday loans), we will not invest. Similarly, we don’t invest in startups if founders are not responsible.

Step 3: Created measurable decision scales to ensure comparability and force a proper assessment. Scores translate qualitative factors into quantifiable data. This allows us to make more objective and consistent evaluations across different investment opportunities. For example, at byFounders, we use a 5-point scoring system to assess each dimension of our 8Ts. However, we only use these scores to guide the discussion, and they are not the final make-or-break criteria. It is, therefore, more of a tool to unify our internal language and understanding of what good/bad looks like. 

Step 4: Set overarching thresholds that weigh into the final investment decision. While the scores serve as a discussion guide, we also need to set a decision threshold for the startups as a whole. For example, do we look for companies that are slightly above average across the board, or do we need a top score and demonstrated excellence in a few dimensions? At byFounders, we are looking for founders that are extraordinary at a few things rather than slightly above average on many of them.

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(3) Complementing the investment process with ESG & Impact best practices

Our role as investors is to see, pick, and win deals. The investment team is responsible for actively considering and reporting on each investment's impact and ESG effects. The figure below shows a breakdown of the best practices we have implemented at byFounders to consider ESG & Impact at each stage of the investment process. 

Sourcing: Attracting & finding Impact-aware founders

Building a robust investment pipeline starts with intentional sourcing. At this stage, we have the power to influence the deal flow we attract and should consequently be accountable for the deals we see. This is a function of A) how effectively we communicate our positioning and B) the channels we use to source startups. 

To ensure that we both attract and find impact-aware founders, we focus on the following initiatives: 

• Impact-aware messaging: We build clear impact-aware messaging into our external communication and company branding to ensure we attract startups that share our agenda. This includes publishing our annual impact-awareness report and blog articles, as well as actively participating in various panel discussions around the topic of ESG & Impact.
• Thesis-driven: The investment team regularly dives into thesis work, which we publish on our blog. So far, we have had a positive bias towards impact, and we have explored topics like The Future of Healthcare, Energy Markets, and Protein Engineering. 
• Community engagement: To broaden our deal flow, we actively engage with diverse startup communities and events. For example, we participate in initiatives like Female Founders Office Hours.
• Website application form: To promote inclusivity, anyone—regardless of background or network—can apply for funding through our online application form.

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Screening: Prioritizing ethical products & industries

Screening helps us quickly filter out investments that don’t align with our investment thesis. In terms of ESG & Impact, we focus on investing in ethically responsible products/industries. For each opportunity, we ask ourselves:

• Do we consider the company’s product/industry ethical? 
• Are we confident that the company will not have a direct negative effect on people and the planet? 

This is also commonly referred to as socially responsible or values-aligned investing, where the primary purpose is to generate financial returns aligned with an investor's values. However, it’s also a great tool for managing business risks, as described in our previous article. You can see the full exclusion list in our website disclosures. ‍

Evaluation & Investment Committee: Systematically analyzing ESG & Impact

Most of the heavy lifting happens during the evaluation phase. This is where we do a deep dive into each of our 8Ts. The findings are then presented to the Investment Committee, which decides if the startup is a good fit for investment. Key initiatives during this phase include:

• Founder Reference Calls: We make reference calls to gather insights into the founders’ reputation and track record.
• Debiased Founding Team Evaluation: We use a debiased founding team evaluation form to A) standardize evaluation criteria across investors and B) focus on traits and qualities we like to see in founding teams (e.g., complementary skills, grit, etc.). This also includes an evaluation of founder integrity and founding team diversity.
• Impact & ESG Evaluations in the Investment Proposal: We include an ‘impact evaluation’ and ‘ESG evaluation’ in our investment proposal for IC meetings, which is captured under our 8th T - Tomorrow.

Deal Proposal: Winning trust & making a joint commitment

Once we have decided to invest, we need to win the deal and ensure that founders are committed to building responsible companies in the long term. To support this, we have implemented two key measures:

• Founder-Friendly & Transparent Term Sheet: We value transparency and want to build trust with founders from the very beginning. Therefore, we made our term sheet public, made sure that it is founder-friendly (e.g., our shares have the same rights as the founders' shares), and written in plain English - no jargon and no buzzwords. 
• Responsibility Clause: We added a ‘responsibility clause’ to our term sheet. It outlines both what founders can expect from us and our expectations regarding founder responsibility, ESG/Impact practices, and reporting. This includes genuinely caring about their effect on people, continuously striving to improve their responsibility efforts, answering an annual ESG survey, and tracking their employees' well-being to ensure a good and inclusive work environment. 
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Of course, winning a deal doesn’t just come down to our term sheet or responsibility clause - they are just two additional pieces that underpin our core values and help build a strong, collaborative relationship with founders. More broadly, we focus on two guiding principles:

• Respectful Behavior: We always treat founders with the utmost respect. This should hopefully shine through when founders make reference calls on us by calling up our portfolio founders.
• Pragmatic Approach to ESG & Impact: Many incredible founders today are scared of the administrative and reporting burden that impact investors place on them. For example, as an impact fund in the EU, the list of KPIs you need to report on is endless. We believe in a pragmatic approach - focusing on a few select areas and metrics that truly matter while streamlining the process to ensure founders aren’t overwhelmed.
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Due Diligence: Assessing ESG Maturity and Commitment

During due diligence (aside from legal aspects), we focus on three key areas: assessing the company's ESG and impact maturity, ensuring founders are committed to building responsible companies and diverse teams, and determining how we can best support them. To that end, we have implemented two separate "Impact & ESG questionnaires":

1. Founder Responsibility Survey: Founders complete a self-assessment of their ESG and impact practices. This gives us an overview of their current efforts and future goals while providing a baseline for tracking their progress over time and offering the right support.
2. byFounders ESG Perception Scorecard: The investment lead independently evaluates the company’s ESG standing to compare with the founder's self-assessment.

These surveys aren’t meant to identify material ESG risks. Instead, they help us understand where the company currently stands on ESG & Impact and where we can best support them. In short, they are tools to get the conversation started and align expectations - not to weed out companies based on “ESG success criteria”.

Implementing all these initiatives into our investment processes has been an ongoing development. Fund II is a natural extension of the values we implemented into Fund I, but it has a greater emphasis on ESG & Impact. In Fund I, amongst other things, we integrated initiatives such as tracking all-female founders in deal flow, negative screening, and de-biased team evaluation form, designed a founder-friendly term sheet, and published this for everyone to see. In Fund II, we are now proactively sourcing impact startups, have a clear impact-awareness strategy, have implemented an 8th T into our investment evaluation, have incorporated an impact pledge/responsibility clause into our term sheet, and conduct comprehensive assessments of companies' ESG/impact in our DD processes.

We are fully aware that our integration of ESG/impact considerations in our investment process may not be bulletproof. Biases exist, and it is very difficult to ensure they are fully addressed throughout the investment process. At the end of the day, we are humans. However, we can do our best to systematically address these biases, reduce them, and implement processes that improve our ability to invest in companies that are aligned with our ESG/impact vision.

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(4) Building a data-driven process for ongoing accountability and improvement

To ensure accountability on a day-to-day basis, we need clear KPIs and a system to track and report progress. This allows us to identify bottlenecks, improve conversation rates, and allocate resources where they are most needed. Ideally, it creates a virtuous cycle where data informs decisions, decisions drive impact, and impact measurement informs future decisions. 

Here is how we have approached it at byFounders:

Step 1: Defined “pipeline” metrics to quantify and measure progress. To determine our “pipeline health” and track our progress toward ESG & Impact goals, we focus on three core metrics:

• The proportion of deal-flow impact/diverse
• The proportion of lost impact/diverse deals
• The proportion of missed impact/diverse deals 

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Step 2: Set specific KPIs to turn ambitions into action. Building upon the KPIs outlined in the previous chapter, we’ve also set clear diversity targets across key stages of the investment process:

• Sourcing: As part of the Diversity Commitment, we aim to ensure that no more than 80% of startups in our deal flow have male-only founding teams. However, internally, our goal is to have 100% coverage of the New Nordics (i.e., Nordics + Baltics) for Pre-Seed through Series A deals. 
• Initial Investments (1/2): At least 23% of capital should be invested in female-founded teams (i.e., startups with one or more female founders). 
• Initial Investments (2/2): At least 23% of the total number of new investments should be in female-founded teams. You can find more information about this in our DE&I policy including how we chose these targets.
• Follow-on Investments: When evaluating potential follow-on investments in our portfolio companies, the “responsibility progress” is one of the key considerations for our decision-making. 

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Step 3: Adjusted data collection processes to capture relevant ESG and impact data in our dealflow and the broader ecosystem. Most of the data is collected daily as part of our regular investment process, but we have further deep dives on a quarterly and annual basis. Here are the main processes and tools we use to collect data:

• Daily Deal Tracking: We’ve updated our CRM system to include two new mandatory fields: one to mark if a startup has at least one female founder and another to specify the impact category (i.e., none, some, medium, high). Hence, it’s not possible to add a deal without completing both fields.

• Quarterly Top Deals Review: Every quarter, we go through all the announced funding rounds in Dealroom and Crunchbase to see what deals have happened in the New Nordic ecosystem. We add details like whether it is a female-founded or impact startup, as this is a clear focus area of ours. Then, we compare this information with our CRM to find out which deals we missed and how to avoid that in the future, as well as which startups we turned down and whether we still agree with those decisions. 
• Founder Diversity Survey: Around January each year, we send out an anonymous diversity survey to new founders to capture diversity beyond gender in our investment process. This helps us to identify and work on our own biases and isn’t used for individual tracking or due diligence.
• Website Application Form: Founders are asked to specify if they are part of a gender-diverse founding team and whether they are building an impact startup.
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Step 4: Committed to measuring and reporting progress to gain full visibility into our operations. Some of the reports and discussions happen internally (e.g., deal-flow review, missed deals), but we are also committed to sharing our progress publicly. Concrete “deliverables” include:

• Internally
  • Missed Deals Review: Each quarter, we analyze all Pre-seed through Series A funding rounds in the New Nordics. This process includes A) Evaluating why we declined certain deals logged in our CRM and reassessing whether our reasons still hold and B) Reviewing deals we missed to understand how we can prevent any oversight in the future. Although we review every deal from the quarter, we pay special attention to impact startups and gender-diverse founding teams, as they are key to our fund’s thesis and investment targets.‍
  • Dealflow Funnel Analysis: Once per year, we do a funnel analysis to identify bottlenecks and issues across each stage of the investment process. This includes a dedicated analysis for both impact and gender-diverse teams. 

• Externally
  • Shape of the New Nordics: We publish a dedicated section on gender-diverse and impact startups in our “Shape of the New Nordics” - both on a quarterly and annual basis!‍
  • Impact Awareness Report: In our annual Impact Awareness Report, we transparently show the deal flow of our gender-diverse and impact startups, including the investment breakdown (i.e., in how many and how much we invested). ‍
  • Diversity Commitment: Each year, we share our investment and dealflow data on gender diversity as part of the Diversity Commitment.
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Step 5: Aligned incentives to encourage team collaboration. We have chosen not to tie individual bonuses to investments because we want to encourage the team to share opportunities internally and let the most suitable person run with them. Additionally, we want our investment team members not only to work on the deals but also proactively dive into thesis work. However, all team members have ESG & Impact tied to their bonus. We also actively celebrate investment team members who are role models in sourcing and leading impact and diverse investments. 

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(5) Recap

The investment process is the first key process to translate your strategic positioning into day-to-day practices. This especially poses the question of how to embed ESG & Impact along with other investment considerations. We have chosen to create an integrated framework as it is part of our core philosophy and don’t just see ESG & Impact as a “compliance checklist”.

Some of the main takeaways include:

• Ideal Investment Profile (IIP) as a decision tool: The IIP should act as a codified and guiding qualification framework for each investment decision. It’s a very transparent way to unify our internal language by a.) defining success criteria, b.) defining what good and bad looks like, and c.) clarifying how various factors should weigh into the final decision. This includes the weight of ESG & Impact related considerations vs. other factors that result in a strong investment decision.
• Connect the IIP to each stage of the investment process: We’ve divided our investment process into roughly five stages - a.) Sourcing, b.) Screening, c.) Evaluation & Investment Committee, d.) Deal proposal and e.) Due Diligence. Each stage has a different goal and, therefore, requires different screens. As we move through the stages, the analysis tends to become more and more granular, helping us narrow down and identify the best startups (as defined by our IIP).
• Clear metrics are a great way to ensure accountability and take decision bias out of things: We take a very data-driven approach to drive our agenda. This includes a.) defining clear pipeline metrics from top to bottom, b.) setting transparent goals for key infliction points in the funnel, and c.) adjusting our data collection & reviews to be able to track these. It is possible to go one step further and adjust the individual incentives of the investment team to incorporate ESG & Impact driven components. 
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In the next article, “Cultivating a Commitment Around ESG & Impact in Portfolio Management”, we will unpack how we work together with our portfolio companies on ESG & Impact related topics. 

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