“How am I supposed to make this [big LP] reporting framework relevant for my early-stage tech portfolio? How am I supposed to adapt it for my own work as a VC investor?”
We have heard these questions thousands of times over the last four years from the investors we have been meeting around the world. The frustration is palpable and understandable. In boardrooms from Silicon Valley to Singapore, early-stage tech investors are wrestling with ESG frameworks designed for mature public companies. They are trying to force-fit them onto pre-revenue startups and growth-stage businesses that bear little resemblance to the corporate entities these standards were built for.
Reporting frameworks are often too big and don’t work; tools to ‘translate’ them into investment decision making, such as SASB/ISSB, aren’t asset class specific. Many LPs might not provide guidance beyond their due diligence questionnaires and disclosure exercises, leaving GPs to interpret broad mandates through the lens of early-stage realities. The result is often a mismatch between what gets measured and what actually drives value creation.
But here’s the reality. Regardless of how sophisticated you are when it comes to your processes or at what stage of your integration, the answer always has to be: focus on your material issues, focus on the stuff that matters.
The key is understanding that “materiality” isn’t monolithic. In our work with 500+ investment managers globally, we’ve identified three distinct types of materiality that drive responsible investing and ESG integration in early-stage investing.
The oldest (and strongest) materiality: Bottom up
The recent PRI value creation study is just the latest piece of evidence in a string of studies that make the case for ESG and sustainability integration for private companies. There is growing evidence of correlation between ESG and financial value. This is particularly true in B2B business models, where many corporates have increasingly strict procurement criteria on fair working conditions and labour rights, diversity, and environmental sustainability. The evidence for this correlation is in line with much earlier studies from the public market context.
This bottom-up materiality is perhaps the most intuitive for investors because it directly connects to revenue, returns and costs. When enterprise software companies lose deals because they lack adequate cybersecurity frameworks, or when consumer brands face supply chain disruptions due to poor labor practices, the financial impact is immediate and measurable. Smart investors are increasingly recognising that what appears to be “ESG compliance” is often fundamental risk management and competitive positioning.
Pressure also comes from the side: Other investors
With companies and investors increasingly integrating responsible investing considerations into their M&A strategies, a second type of materiality emerges: it’s worthwhile cleaning up your sustainability practices to increase the likelihood of a successful exit. In their 2024 report, KPMG found that a majority of surveyed investors are willing to pay a premium for assets with high ESG maturity and that 45% have encountered a significant deal implication as a result of a material ESG finding. Corporate CFOs (still) really look at a company’s ESG credentials in M&A, a recent EY survey confirmed.
This lateral materiality is becoming increasingly sophisticated. Strategic acquirers are conducting deeper ESG due diligence, not only to avoid reputational risks but to identify companies that align with their own sustainability commitments. For venture-backed companies, this means ESG preparation is more than the current business, it’s about positioning for big B2B contracts, future funding rounds and eventual exits.
But top down often gets the ball rolling
Without LPs (and in Europe, regulators) pushing GPs and their portfolio companies for sustainability disclosures, many would not be realising the value creation and exit-opportunity benefits. In our LP surveys from 2023 and 2025, we captured this pressure from institutional asset owners as a key driving force.
What we saw sweep through the VC industry since 2020, when the Sustainable Finance Disclosure Regulation was pushed forward, provides strong evidence of that. Regulation got investors thinking, and LPs got them moving. Many of the largest European LPs — governments and pensions — were pushing the hardest. They have also increasingly started to make their ESG requirements more asset class-specific, including for venture capital.
Beyond Europe, we’re seeing similar pressure emerge globally. Canadian pension funds, Australian superannuation schemes and even some US universal asset owners are implementing increasingly sophisticated ESG requirements for their alternative investment allocations. This regulatory and LP-driven materiality creates its own logic: some ESG factors may be material for a GP to focus on partly (or purely) because an LP is interested or concerned about it. This is starting to bite properly now with LPs, especially in Europe, where poor ESG performance has been a factor in LPs discontinuing a relationship with asset managers, including VCs.
So why do the materialities matter?
We believe that getting the three ‘materialities’ above clear in any situation is incredibly important to answer a key question: why are you doing this?
The answer determines everything from resource allocation to the right measurement frameworks. It may not be material to the value of a small software SaaS company to be measuring their GHG emissions; however, it might be material for a global LP to track the total GHG emissions of their portfolio. Therefore, it becomes material for the investor in the middle.
Understanding which type of materiality you’re addressing allows for much more targeted and effective ESG integration. Bottom-up materiality demands sector expertise and a value creation focus. Lateral materiality requires market intelligence and helps with exit preparation. Top-down materiality needs compliance systems and stakeholder management.
The most successful investors we work with identify which materialities apply to their specific situation and build systems accordingly. The result is ESG integration that actually works: driving value, enabling exits, and satisfying stakeholders without overwhelming early-stage companies with overly burdensome requirements.
Oliver Nixon is research lead at VentureESG and Dr. Johannes Lenhard is co-director of VentureESG and researcher affiliate at the Minderoo Centre for Technology and Democracy at the University of Cambridge at VentureESG.
