Dr. Helmut Kraemer-Eis

Head of Research & Market Analysis

Chief Economist, European Investment Fund (EIF)

Social Impact Investments, Rome, 05/06 December 2019

ESG considerations in

VC fund managers’ and Business Angels’

investment decisions

Dr. Antonia Botsari

Research & Market Analysis, EIF

2

European Investment Fund, EIF:

background information

OBJECTIVETo support smart, sustainable

and inclusive growth for the

benefit of European SMEs.

HOWBy offering a wide range of

targeted products to support

SMEs and mid-caps, ranging

from venture capital to

guarantees and microfinance.

WHEREWorking with financial intermediaries

across the EU-28 and EFTA

countries, candidate and potential

candidate countries.

Shareholders

▪ 58.7% European

Investment Bank (EIB)

▪ 29.7% European

Union*

▪ 11.6% 32 public and

private financial

institutions

Strong capital

baseof EUR 4.5bn

AAA-rated

by the three major

rating agencies

Over 20 years

of market experience

in SME financing

*Represented by the European Commission

3

Overall commitments*

▪ EUR 10.1bn (2018)

▪ EUR 9.3bn (2017)

▪ EUR 9.45bn (2016)

▪ EUR 7 bn (2015)

▪ EUR 3.3bn (2014)

Partners

▪ 600 private equity

funds

▪ 400 banks, guarantee

and promotional

institutions

Leveraged volumes*

▪ EUR 43.7bn (2018)

▪ EUR 35.4bn (2017)

▪ EUR 42.7bn (2016)

▪ EUR 26.9bn (2015)

▪ EUR 13.9bn (2014)

SMEs supported

▪ over 1.5 million since

1994

▪ 280,000 in 2018

▪ 2.8m jobs supported in

2018

*in equity, guarantees, securitisation and inclusive finance

EIF: activity

Resources and

mandators

▪ European Investment

Bank

▪ EIF own resources

▪ European Commission

▪ Member States/regions

▪ Managing authorities

▪ Public institutions

▪ Other third parties

Intermediaries and

counterparts

▪ Fund managers

▪ Commercial banks

▪ Development and

promotional banks

▪ Guarantee institutions

▪ Leasing companies

▪ Corporates

▪ Business angels

▪ Microfinance

institutions

micro-

enterprises,

SMEs

and small

mid-caps

4

EIF: Support for different development stages

via intermediated business model!

Source: EIF

SME Development Stages

DEVELOPMENT

HIGHER RISK LOWER RISK

Technology Transfer

Microcredit

VC Seed & Early Stage

PRE-SEED PHASE SEED PHASE START-UP PHASE EMERGING GROWTH

Impact Investing

Portfolio Guarantees & Credit Enhancement

VC Funds, Lower Mid Market & Mezzanine Funds

Business Angels

Debt Funds

Why?

• Aspects of impact, ESG, sustainability, SDG, etc. are gaining

importance, not only in niche areas.

• “Impact goes mainstream” – in all areas of

SME financing.

• Impact is key for us, but we need to know

more about our intermediaries’ perception

and behavior.

5

✓ EIF VC Survey (2018 & 2019)

✓ EIF Business Angel Survey (2019)

✓ 2020 in preparation

EIF VC Survey 2019: Focus areas

6

Market

sentiment

Policy

recommendations

EIF product & mandate

development

ESG & impact

investing

VCs’ socio-economic

characteristics

EIF Survey 2019: Sample overview

7

Largest survey on venture capital

26

USAEurope

774Asia

17

Rest of World

20

High response rate and coverage of European GP population

Responses mainly from senior people within the VC firms

Anonymised approach

EIF Business Angels Survey 2019:

Focus areas

8

Market

sentiment

BAs’ views

on public support

Added value of

EIF activities

under the EAF

ESG & impact

investing

BAs’ socio-economic

characteristics

and experience

Characteristics of

BAs’ activities

EIF Business Angels Survey 2019:

Sample overview

9

BAs supported through the European Angels Fund (EAF)

High response rate of 65% and coverage of EAF population

Anonymised approach

response rate

responses

50%

7

55%

6

63%

5 77%

33

56%

5

50%

4

Respondents’ profile

10

Age

Avg. years of

experience

% holding a

postgraduate

degree

% of former

entrepreneurs

56%

business/

economics

on average

48 years

85%

Main field of

education

11

65%

37%

STEM

BAsVCs

1 in 2 between

45-54 years

87%

48%

business/

economics

37%

STEM

12

87%

Are ESG considerations part of the

investment decision process?

11

Yes, 73%

No, 27%

Yes, 62%

No, 38%

BAsVCs

ESG considerations in VC investments by …

12

87%82%

78%75%

69%63% 63%

Nordics UK &

Ireland

France Benelux South DACH CESEE

% of respondents

consid

erin

g E

SG

Region (HQ of VC firm)

66%

76%80%

Seed Early Later/growth stage

% of respondents

consid

erin

g E

SG

Investment stage focus

70%

79%84%

Male dominated Gender balanced Female majority

% of respondents

consid

erin

g E

SG

Gender diversity in management team

54%

66%

73%77% 78%

73%

86%

<10 10-29 30-49 50-99 100-199 200-499 >=500

% of respondents

consid

erin

g E

SG

AUM of VC firm (in mEUR)

AUM of VC firm

What motivates ESG considerations?

13

75%

44.9%

44.5%

43%

39%

36%

32%

11%

81%

54%

30%

22%

27%

16%

0%

0% 20% 40% 60% 80% 100%

Ethical or social responsibility considerations

To encourage change towards responsible business

practices at investee companies

It is part of the investment policy

Positive reputational signal

Growing demand from LPs and/or stakeholders

Risk management

ESG criteria are important for investment

performance

Regulation or specific initiatives (e.g., UN PRI)

% of respondents

VCs BAs

How are ESG criteria incorporated into

the investment process?

14

50%

39%

29%

21%

18%

38%

62%

41%

16% 16%

0%

10%

20%

30%

40%

50%

60%

70%

Negative

screening of

companies

Positive

screening of

companies

Impact investing Direct

engagement with

investee

companies on

ESG issues

Full integration

of ESG criteria

into valuation

% of respondents

VCs BAs

Importance of various ESG strategies in the

next 5 years

15

50%

39%

29%

21%18%

70%66%

61% 61%

53%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Negative screening Positive screening Impact investing Direct engagement Full integration of

ESG criteria into

valuation

% of respondents

38%

62%

41%

16% 16%

67% 65% 65%

57%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Negative screening Positive screening Impact investing Direct engagement Full integration of

ESG criteria into

valuation

% of respondents

Currently engaging in … Somewhat/very important in the next 5 years

VCs

BAs

Is there a trade-off between ESG

considerations and financial returns?

16

33%

10% 8%13%

33%

43%

33%

47%

17%

17%38%

42%

27%

67%

17%10%

17% 13% 17%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Full integration

into valuation

Positive screening Negative

screening

Impact investing Direct

engagement

% of respondents

Significantly positive effect on performance

Slightly positive effect on performance

Neutral / Undecided

Slightly negative effect on performance

Significantly negative effect on performance

2%5% 6%

4%

41%

37%

37%31%

25%

31%

51% 38%

32% 46%

26%

12%18%

31%25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Full integration of

into valuation

Positive screening Negative

screening

Impact investing Direct

engagement

% of respondents

Significantly positive effect on performance

Slightly positive effect on performance

Neutral / Undecided

Slightly negative effect on performance

Significantly negative effect on performance

VCs

BAs

A formalised approach to ESG

incorporation still has way to go*…

17

Yes, 51%

We are in the process

of developing one,

23%

No, 23%

I don't know, 2%

Yes, 38%

We intend to

have one soon,

10%

No, 50%

I don't know,

3%

Yes, 27%

Monitoring

but not

reporting

externally,

34%

No, 37%

I don't know,

3%

ESG policy in place ESG expert in team

Monitoring & reporting

ESG performance

* analysis applying to VCs only

ESG still ranks low among investment

selection criteria

18

83%

57%

51%

36%

33%

12%

10%

8%

5%

4%

92%

57%

51%

24%

19%

19%

14%

8%

8%

5%

0% 20% 40% 60% 80% 100%

Management team

Technology / product's value proposition

Scalability of the business

Market size (actual or potential)

Exit potential

Valuation and deal terms

Strategic fit in investment portfolio

ESG considerations

Past performance

Referral by other investors

% of respondents

VCs BAs

Reasons for not considering ESG

19

32%

31%

30%

26%

25%

13%

10%

7%

7%

39%

26%

48%

9%

17%

9%

17%

4%

0% 10% 20% 30% 40% 50% 60%

Limited internal resources and expertise on ESG issues

Difficulties in quantifying ESG information

ESG criteria are not important for investment performance

Lack of adequate ESG disclosures from companies

Lack of attractive investment opportunities

Excessive costs for gathering and analysing ESG information

ESG criteria are not important for risk management

It would violate our fiduciary duty to our stakeholders

Integrating ESG criteria into the investment strategy negatively

affects returns

% of respondents

VCs BAs

Concluding remarks

• ESG considerations are here to stay

• Important mis-conceptions about ESG have been

surpassed

• But more needs to be done in terms of ….

• ‘Educating’ investors on how to identify material ESG-

related risks and opportunities

• Coming to a consensus on a methodology about how to

measure ESG performance

• Facilitating the development of ESG-related KPIs

20

Thank you

… for your attention!

For more information please visit:

http://www.eif.org/news_centre/research/index.htm