More often than not, responsible investing (RI) is associated with “patient” capital and sustainable development. Venture capital (VC), by its objectives to invest in projects with very high returns and exit quickly the market, is rightly considered as “impatient” capital, and as such, it is a less likely candidate to contribute to sustainability. This chapter advances the argument that VC can indeed contribute to sustainability, should it adopt the ESG factors into its investment criteria. This is illustrated using the case study of a Canadian VC firm, the Cycle Capital Management (CCM). The latter uses strict ESG criteria and rigorous decision-making mechanisms in the screening, evaluation, and the choice of highly lucrative and innovative projects with the aim to contribute to the Canadian economy's sustainability through its efforts to reduce the environmental footprint of its investments. Policy makers and regulators should develop policies that promote the growth and development of venture capital, should they care about sustainability and value creation.
TopIntroduction
Environmental, social and governance (ESG) considerations, the so-called responsible investing (RI), are increasingly becoming an important concern for businesses, consumers, governments and many special interest groups. This awareness has repercussions on the actions and behavior of all economic agents and more particularly on corporations and their decision-making processes in the evaluation of investment projects and the impact of the latter on sustainable development (Eccles and Klimenko, 2019). Researchers and business analysts are actively developing new measures to gauge the impact of RI on ESG factors as well as on other key economic, financial, ethical and gender variables.
Theoretical studies (Ogachi and Zoltan, 2020; Brin and Nehme, 2019; Latapí Agudelo et al., 2019; Gentzoglanis, 2019) examine the reasons why corporations are interested in responsible investment. Many empirical studies (Gbadamosi, 2016; Kim and Kim, 2014; Karagiorgos, 2010; Van Beurden, Gössling, 2008; Waddock, Graves, 1997) are interested in knowing whether socially responsible firms, i.e., the ones that respect the ESG factors, perform better than “non-responsible” ones, using both usual and new financial and economic performance criteria. Both types of studies concern the ESG behavior and performance of industrial firms and/or investment funds but none of them deals with venture capital (VC) and how it may contribute to sustainability by investing “responsibly”.
Admittedly, VC is generally perceived as “impatient” capital or short-term capital, i.e., capital aiming at realizing very high financial returns in very short periods and as such it is hardly associated with sustainability. By contrast, the so-called “patient” capital or long-term capital, i.e., capital with no expectations to realize a quick profit, does contribute to long-term growth and sustainability (Sharma and Sharma, 2019). The distinction between patient and impatient capital is important because the dominant view of patient capital is that it is more tolerant to risk and more willing to forgo high financial returns for social impact than impatient capital (Ivashina, 2021; Kaplan, 2018). According to the dominant view, investing patient capital in socially responsible firms does create economic value and contribute to real economic growth and sustainability (Lam and Tansey, 2019). Nowadays, patient capital is gaining momentum as an increasing number of individual investors and investment funds are now willing to invest in projects that are long to bring the financial returns that could justify the initial investment (HSBC, 2020).
Venture capital (VC) is generally categorized as impatient capital because normally invests in short-run projects with abnormal expected returns. Therefore, according to the current dominant academic thinking, VC can hardly contribute to long-run growth and sustainability. Put it simply, VC is different from responsible investing. Nonetheless, casual observation and ad hoc experience may suggest that VC is not necessarily incompatible with responsible investing (Carter, 2020). The purpose of this chapter is to investigate whether such a relationship exists and evaluate explicitly this link by analyzing the decision-making processes of a Canadian venture capital firm, Cycle Capital Management (CCM).
To the best of our knowledge, there are no studies in the literature establishing a link between venture capital (VC) and responsible investing. Although our analysis is limited to one single VC firm, it does shed more light to the debate and helps to understand better the role of VC in a sustainable economy. This study is useful for investors and other parties interested in RI, in their strategies to embrace sustainability in VC projects and for policy makers interested in the design of VC investment promotion policies and sustainable finance.
Section 2 of this chapter presents the characteristics of venture capital and examines the conditions for VC to become an active agent of responsible investment contributing thereby to long-term growth and sustainability. In addition, it makes the link between venture capital and responsible investment and argues that the strategy of venture capitalists to finance activities that respect ESG principles is compatible with the risk-return relationship and sustainable development. Section 3 briefly reviews the theoretical and empirical literature on CSR and performance. Section 4 analyzes the case of Cycle Capital Management (CCM) in order to illustrate the points developed in the previous sections. Finally, section 5 summarizes by concluding the research and offers policy recommendations. It also points out the need for further research and some of the limits of our study.