Technology companies often mistakenly believe that they do not face serious ESG risks. However, this assumption is being challenged by increasing public scrutiny of how large tech companies are managing issues such as diversity, equity, and inclusion (DEI), data privacy , and ethical supply chain management. ESG is a significant concern for companies and investors of all types because, when left unmanaged, it can have significant financial and reputational consequences.
In Canadian business circles, ESG has become a pressing topic of conversation for management and boards. A recent survey by law firm Fasken found that 68% of companies listed on the S&P/TSX 60 Index tie CEO and senior executive compensation to the achievement of at least one ESG-related goal. At the same time, a growing number of publicly traded Canadian companies are now publishing some form of annual ESG reporting aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and other recognized frameworks.
Establishing Reporting Standards for Canadian Venture Capital
We know that awareness and willingness to act need to be increased. We believe BDC has a role to play in helping to address the environmental, social and governance challenges of our time. In venture capital, for example, BDC Capital can help maintain the competitiveness of the sector through disclosure and reporting standards.
In partnership with other institutional investors, BDC Capital has initiated a dialogue to promote greater transparency regarding ESG-related risks for the private companies in which we invest, both directly and through third-party fund managers.
Our initial focus was on diversity, equity and inclusion, leading us to launch a national diversity, equity and inclusion reporting template in March 2022. The goal was to provide standards for annual reporting on diversity, equity and inclusion practices for general partners and their portfolio companies. In undertaking this exercise, we promised to create a benchmark from which we could take stock of the state of diversity, equity and inclusion in the Canadian venture capital ecosystem and share our findings with the industry .
New tool for reporting on ESG factors in the Canadian venture capital sector
We are now taking our commitment a step further by launching a national ESG reporting model . Tracking and reporting on ESG actions is one of the most demanding, yet necessary, ways to address the greatest challenges of our time. This model builds on our current DEI measurement model by incorporating additional data requests to track ESG risks in aggregate, both quantitatively and qualitatively. Over time, we plan to merge the DEI and ESG reporting models into one.
In recent years, various global initiatives have contributed to doctor database significant progress in creating a more harmonized set of ESG reporting standards. These include:
ILPA ESG Factors Assessment Framework
ESG Data Convergence Initiative
IFRS Foundation
Work of the UN Principles for Responsible Investment for the Venture Capital Asset Class
That said, new software is simplifying the process for companies to produce ESG reports that comply with various globally recognized frameworks.
While the ESG reporting model created by BDC Capital is the result of a concerted effort to bring together common metrics across these various initiatives, we expect that global and national ESG reporting frameworks will continue to evolve as regulations governing publicly traded companies evolve.
Discover the model
Integrating ESG factors, a competitive advantage
We recognize that our new ESG reporting template may be challenging for smaller GPs and portfolio companies that do not have complex internal reporting systems. However, larger platforms and impact-focused GPs may find the mandatory section of the template too simple. That is why we have added an optional section for GPs with customized impact measurement frameworks to detail the more complex metrics and targeted outcomes they have established for their portfolio.
By inviting the general partner community to undergo an annual reporting exercise, we believe that all industry players will be encouraged to improve their approach and think more proactively about how they can progress their ESG journey, moving from a position of “mitigating risk” to that of “integrating ESG factors as a competitive advantage”.
As investors, we will maintain dialogue with general partners and portfolio companies to ensure that any annual reporting regime results in relevant observations that can be shared with industry participants.
As the most active limited partner in Canada, we believe this new reporting exercise for our portfolio will have a significant impact, as it will capture data on a broad proportion of the Canadian venture capital market. BDC Capital is a limited partner of private venture capital funds representing 62% of actively invested capital in Canada and over $ 20 billion in assets under management.
Shareholders who want to see greater transparency around their portfolio investments will only continue to push for more systematic ESG reporting over time. Canadian investors like BDC Capital are willing and able partners to help the venture capital ecosystem build its capacity to implement ESG measures. We hope to help address this challenge through this reporting exercise.
