The Business Development Bank of Canada’s venture capital arm is leading a push to standardize how Canada’s innovation ecosystem measures and manages its climate and social impact with a first-of-its kind survey of the country’s private-market companies. 

Through an annual survey, BDC—a federal Crown corporation and the country’s largest venture investor—will collect information on environmental, social and governance (ESG) issues from every venture capital firm it funds. BDC will ask the VCs to answer questions about carbon footprints, human rights policies in supply chains, and board independence, among other things, for both their own firms and the portfolio companies in which they have invested. 

The survey is the product of 18 months of consultations with venture capital investors on how to gather baseline sustainability metrics that are consistent across the industry, said Alison Nankivell, BDC Capital’s senior president of fund investments and global scaling. 

“There was no consistent approach that investors were able to take to say, ‘I’d like this data, how do I get it from my fund manager, who then in turn has to get it from their portfolio companies?’” Nankivell said. 

BDC’s push to collect ESG data will affect the majority of Canada’s venture capital and startup ecosystems, as BDC funds account for 62 per cent of all capital in the country’s market, according to the firm—creating a trove of valuable information for BDC and other Canadian VCs amid rising demand from investors, customers and regulators for strong ESG policies. 

The global push to improve transparency around companies’ environmental and social policies in recent years has spawned a barrage of ESG reporting frameworks for companies to choose from. But deciding which one to follow and what information to disclose can be paralyzing, particularly for startups and scale-ups that may not have the resources or expertise to comply with the standards. As The Logic reported in December, many private companies thus avoid the exercise altogether. 

A report from the U.S. management-consulting firm Bain & Company and CDP, a non-profit that operates a climate-disclosure framework, estimated that less than one per cent of private firms report information on their environmental impact and policies, compared to 4,400 public companies that represent 64 per cent of global public–market capitalization.

While most ESG regulations in the works focus on publicly listed companies, BDC is trying to arm private investors for possible regulations that could affect them down the road, and give them a tool to manage risk. 

“Environmental, social and governance issues pose material financial risk to company performance if not adequately identified and addressed,” the BDC questionnaire reads. “Therefore reporting on ESG demonstrates that thorough investee due diligence has been undertaken. Companies will also benefit from ESG integration in preparing them towards more rigorous reporting requirements as they scale.”

Scott Loong, a partner at Panache Ventures in Montreal, said that while his firm is increasingly hearing from limited partners—investors like BDC that finance venture capital funds like Panache—who want to collect ESG data from venture funds, providing the information isn’t always feasible. 

“The LP community is sort of struggling to figure out, ‘How do we put some rails on this?’” said Loong. He thinks BDC’s effort could help. “It provides some level of clarity on what general partners need to do to properly communicate our commitment to ESG and diversity.” 

Still, BDC is asking for detailed information that not all businesses may be able to provide. The questionnaire asks how much energy portfolio companies consume and how they prepare for potential disruptions from things like water pollution and drought. It also asks firms to break down their carbon footprint based on what they emit directly through their own operations, and, if possible, emissions across the company’s supply chain. 

“These are good principles and firms should be angling for them, but the full integration will take time, especially for a startup,” said Benjamin Bergen, president of the Council of Canadian Innovators, a tech lobby group representing the interests of startups and scale-ups. 

“That onerous component may put some companies at disadvantages,” he said. “I think on balance, this is great … but implementation is often how things ultimately are determined in whether or not something is successful.” 

Loong said investors may also face practical limitations in accessing portfolio-company data BDC is requesting, such as when they lose the right to private information about a company if their equity is diluted as the company grows. He said investors also have to be mindful of how much work they’re asking startups to do to provide the data. “Every time we make an ask to our portfolio company, it’s using up a small fraction of our social capital with them,” he said. “We don’t want to make them feel like working with us will be an especially difficult lift.” 

BDC is asking all companies in its network to participate in the survey, even if they can’t provide all the information it’s requesting. Sandra Odendahl, senior vice-president and head of sustainability and diversity at BDC, said there will be no penalty for companies that don’t respond to the survey or that leave out certain details. At this stage, the tool is meant to create a benchmark for the industry. “The ultimate purpose is not to rate or rank reporting entities,” she said. “It’s really to make sure that we’re able to understand, ‘What’s doable, what’s not doable? What are people reporting? What are they not reporting?’” she said. 

Nankivell, meanwhile, said BDC is keeping its expectations in check for what information investors disclose in the first year. “We’ll see what the market gives us, and we’re going to have a fair degree of humility about what that data looks like,” she said, “but be able to take stock of that to understand how we then start working with the community to make it better.” 

Kim Furlong, CEO of the Canadian Venture Capital & Private Equity Association—an industry organization BDC consulted in creating the template—said there are benefits to companies using the tool, even if they can’t share all the information being requested. “ESG is not all or nothing,” she said. “If you ingrain this in your practices from the moment that you launch either a fund or you start a company, then it becomes part and parcel of your practices. You grow and evolve with it.”

BDC launched a similar benchmarking tool last year for diversity and inclusion. It plans to merge the tools in 2024. 

The Crown corporation plans to publish an annual report on the results it collects from. It will also provide investors with information about where they stand relative to other venture funds on ESG best practices, using aggregated and anonymized data.