Climate issues in portfolio investment decisions: a comparison of Private equity and venture capital

ABSTRACT

Private equity (PE) and venture capital (VC) firms increasingly consider climate issues in their portfolio investment decisions. However, what are the underlying motives and which exact consideration strategies are employed? Based on the responses of 479 VC and 215 PE fund managers from two large surveys carried out in 2021, four motives emerge: ethical responsibility, responding to external stakeholders, product differentiation, and portfolio performance. Responding to external stakeholders and portfolio performance motives matter more to PE firms, while the product differentiation motive is more important for VC firms. No difference is found with respect to ethical responsibility as a motive. Regarding climate consideration strategies, screening strategies (positive and negative) are the most popular. Differences between VC and PE firms exist, and the motives to consider climate issues have an impact on the strategies employed. The implications for policymakers and the entrepreneurial finance sector are discussed.

KEYWORDS:

• Climate finance
• sustainable finance
• entrepreneurial finance
• private equity
• venture capital
• ESG
• climate investment motive
• climate investment strategy

1. Introduction

Sustainability has gained importance in entrepreneurial finance. Environmental, social, and governance (ESG) criteria increasingly matter, and entrepreneurial finance research has started to pick up on this topic (e.g., Cumming et al. 2024; Mansouri and Momtaz 2022; Siefkes, Bjørgum, and Sørheim 2023). Within this area, a dedicated literature stream deals with climate issues and climate metrics in entrepreneurial finance investment decisions (Daugaard 2020; Dhayal et al. 2023) and the resulting ecological impacts (Hua, Sun, and Zhao 2023; Maiti 2022). However, many unanswered questions remain. In their recent overview, Manigart and Khosravi (2024), write that we need to know more why and how venture capital (VC) and private equity (PE) investors set up specialized impact investment or ESG funds and to what extent the movement towards considering ESG and sustainability issues is driven by regulatory issues and reporting obligations.

A number of reasons exist why entrepreneurial finance investors may care about climate issues in their investment decisions. First, climate metrics may predict fund and portfolio firm performance (Hartzmark and Sussman 2019), particularly when the information contained therein is financially material, positive, and unexpected (Serafeim and Yoon 2022). Environmental technologies and cleantech investments may constitute (financially) attractive investment opportunities. Second, dealing with climate issues may be part of a broader risk management strategy accounting for climate and regulatory risks (Basse Mama and Mandaroux 2022; Cappucci 2018; Crifo and Forget 2013) in their portfolios. Third, considering climate issues may also be needed for fundraising from certain limited partners (LPs), particularly pension funds, foundations, family offices, and ESG mutual funds (Bian et al. 2023; Eccles, Kastrapeli, and Potter 2017; Lange and Banadaki 2023). Fourth, entrepreneurial finance investors may care about their own carbon footprint and simply consider climate issues for ethical and/or climate impact reasons. Yet, so far, we lack a detailed understanding of the actual importance of these reasons for entrepreneurial finance investors. Little empirical research exists that considers in a holistic way all possible reasons and asks entrepreneurial finance investors directly about their underlying motivations to care about climate issues in their investments. Our study aims to close this gap comparing PE and VC firms. The following research questions are pursued: What are the underlying motives for entrepreneurial finance firms to consider climate issues in their portfolio investments? How do PE and VC firms differ in this regard? Filling this gap is important, because without profound knowledge about investors’ motives for considering climate issues, it is difficult for policymakers to design an effective climate policy framework integrating the entrepreneurial finance sector.

Next to understanding the underlying motives, it is also important to take a process perspective. How are climate issues, in fact, integrated in the investors’ investment strategies? It can be distinguished between screening (negative or positive), active ownership, thematic investments, integration into valuation and impact investing. Hence, we ask: Which climate consideration strategies do entrepreneurial finance investors employ and what role do the underlying motives play in this regard? How do PE and VC firms differ in this regard? A better understanding of the actual strategies employed provides a realistic picture of the degree of professionalization of the entrepreneurial finance sector regarding climate issues. This information is important for policymakers, professional service providers, and education institutions supporting the entrepreneurial finance sector.

We proceed in three steps: we first identify the important motives and strategies for incorporating climate considerations in the investments of entrepreneurial finance investors. Subsequently, we compare VCs and PEs, and investigate potential differences in their motives and strategies for considering climate investment criteria. Consequently, we address the call to appreciate the heterogeneity of investors in the context of sustainability (Abhayawansa and Mooneeapen 2022). Finally, we link the motives for climate considerations and the respective consideration strategies pursued and analyse how the motives impact the strategies employed.

The context of our study is the European entrepreneurial finance sector. In 2021, 138 billion € were invested in the entire European PE market,¹ including 20 billion € of VC investments in 5,334 portfolio firms and nearly 29 billion € of PE mid-market² buyouts in 580 portfolio firms (Invest Europe 2022). Commonly, VC and PE investors provide both capital and management expertise to portfolio firms that are private or become private. Their goal is to increase the equity value of the portfolio firm and perform an exit (e.g., Caselli and Negri 2018; Kaplan and Sensoy 2015). VCs typically invest in young portfolio firms that are in the pre-seed to the expansion stage and that often have innovative concepts and high growth potential, but also substantial risk and low liquidity. PEs typically invest in more established portfolio firms in growth and expansion or buyout stages. These mid-market portfolio firms are characterized by a proven concept and lower growth rates. However, they also take fewer risks and have stable cash flows.

Using survey data from a European sample of 215 PEs and 479 VCs, our study analyses the motives and strategies for incorporating climate considerations into entrepreneurial finance investment decisions. Combined, the two surveys are among the largest of their kind in Europe. As such, they constitute a unique source of information that offers insights beyond the archival information available in existing databases. Our results indicate that entrepreneurial finance investors rank ethical responsibility the highest among all motives for climate investment considerations. However, PE investors respond significantly stronger to external stakeholders and portfolio performance considerations, while VCs are particularly motivated by product differentiation considerations. Moreover, entrepreneurial finance investors favour screening strategies as a tool to implement climate considerations in their investment decisions. While the climate consideration strategy of active ownership is significantly more prevalent among PEs, the opposite is true for impact investing. Finally, we draw a connection between the motives for considering climate investment criteria and the actual consideration strategies applied.

Our study differs from previous sustainability studies (e.g., Alareeni and Hamdan 2020; Serafeim and Yoon 2022) in terms of investment type (private vs. public equity) and data source (survey vs. archival data). In this way, we contribute to a growing stream of academic research that has developed around sustainable and climate investments (e.g., Amel-Zadeh and Serafeim 2018; Daugaard 2020; Dhayal et al. 2023). At the same time, we show that PE and VC investors both apply climate consideration strategies, but they do so based on different motives. The latter insights can help policymakers design more effective interventions in the entrepreneurial finance market, which is subject to major uncertainties regarding sustainability. On the one hand, regulatory initiatives should set frameworks also applicable for small and mid-market portfolio firms; on the other hand, public institutions need to play a leading role in setting standards and best market practices. Moreover, insights into how climate issues influence the selection criteria and investment strategies of VCs and PEs can benefit (sustainable) start-ups and mid-market portfolio firms and help them to increase their chances of obtaining funding.

2. Literature about ecological issues in VC- and PE-investing

The literature on the relationship between ecological issues and entrepreneurial finance has been growing steadily over the last years. Dhayal et al. (2023) provide a bibliometric review of the literature on VC investments and (green) sustainable development. We briefly summarize some of the contributions of this literature stream that are relevant for our study.

2.1. Motivations for VC and PE firms to consider ecological issues

Previous research has gained some insights into the motivations of VC and PE firms to consider ESG and ecological issues in their investments. These motivations can be categorized. The first category of motivations concerns financial motivations. Amel-Zadeh and Serafeim (2018) find that investors use ESG data mainly because they are financially material to investment performance. Comparing a sample of VCs and business angels (BAs), Botsari and Lang (2020) show that VCs tend to care more about ESG issues than BAs. Comparing the motives, they find that the financial relevance of ESG criteria is a stronger motive for VCs, while BAs are driven by social responsibility considerations and social impact. The second category of motivations concerns risk management. Crifo and Forget (2013) identify socially responsible investing as a risk management tool for VCs and buyout funds. In a global survey of institutional investors, fostering a long-term investment mindset and cultivating better investment practices are identified as the main reasons to integrate ESG criteria into investment decision making (Eccles, Kastrapeli, and Potter 2017). In a similar vein, Cappucci (2018) argues that the most effective strategy for risk-adjusted and long-term success is the full integration of ESG information into the investment process, hence using ESG to reduce risk and create value at the same time. Finally, Garel and Petit-Romec (2021) show that firms with environmentally responsible strategies experienced better stock returns in the COVID-19 crisis, which can be interpreted as a sign of strong resilience of such firms in difficult and uncertain times. The third category of motivations is about the growing demands from the funds’ stakeholders and LPs. Prior research shows that in particular large VC or PE firms are driven in their ESG considerations by growing client, LP and stakeholder demands (Bian et al. 2023; Eccles, Kastrapeli, and Potter 2017; Lange and Banadaki 2023), sometimes even leading to specific and tailored investment products. In this regard, Crifo and Forget (2013) show that socially responsible investing can be a way for PE funds to differentiate themselves from other PE funds – an attractive option particularly for independent PE funds that need to attract investors. A fourth category of motives concerns ethical responsibilities. Bocken (2015) argues that sustainable VCs or PEs are driven by practical idealism and disagreement with the status quo. As impact-oriented investors, they prioritize sustainable development goals (SDGs) over financial performance. Finally, corporate VCs as a separate group are driven by the ability to learn and explore entrepreneurial opportunities, building legitimacy for the core business and getting access to important technological knowledge (Hegeman and Sørheim 2021).

We argue that differences in the underlying motives are related to differences in the investment approach and investment goals of the respective investors. Certainly, more structural characteristics such as assets under management or experience of the respective investor on firm and/or respondent level may also play a role (Franke et al. 2008; Moritz et al. 2022). We aim to account for these aspects in our empirical analyses by including control variables.

2.2. Integration of ecological issues into the investment process

Prior research shows that different approaches and criteria exist how PE and VC firms include ecological issues into the selection and valuation of their portfolio firms. Crifo et al. (2015) conducted a field experiment and showed that PE investors applied a valuation discount to target firms with disclosure of bad ESG practices. Yet, the disclosure of good ESG practices did not lead to a strong positive valuation premium. Mrkajic et al. (2019) use a sample of Italian high-tech ventures to test whether running a business based on green technologies or being active in a green sector influences the likelihood of obtaining VC financing. They find that the two criteria in isolation do not have an effect but if both criteria apply, there is an effect. They further show that contingencies exist relating to the education of the founder(s), being an academic spin-out, and the presence of corporate shareholders as equity investors. Bellucci et al. (2023) use a dataset that matches information on equity transactions, patents, and financial performance. They show that ventures with green patents are more likely to receive VC funding as compared to other types of equity funding. Block et al. (2021) conduct a conjoint experiment to analyze the screening criteria of impact investors in the DACH-region, among them several philanthropic VCs. They find the authenticity of the founding team, the importance of the societal problem targeted by the venture, and the financial sustainability of the venture are important investment criteria. Similarly, analyzing a sample of impact-oriented VCs, Croce et al. (2021) show that ventures are selected “with negative profitability results but interesting growth patterns” as well as established ventures “with profits but a reduced prospect of growth”. Hence, impact-oriented VC investors seem to diversify and look for a balance between risk and opportunity in their venture portfolios. Finally, investigating the preferences of wealthy private impact investors, Paetzold et al. (2022) find that such investors have a preference for SDGs that are associated with high financial returns. Hence, both impact and attractive financial returns are expected.

Next to discussing the importance of ESG issues or ecological criteria as decision-making criteria for VC or PE firms, one can also take a process perspective and investigate how climate issues are in fact integrated into the decision making of entrepreneurial finance investors (Agrawal and Hockerts 2021). More passive investors typically use a negative screening approach to find out whether certain investment targets violate the ethical or sustainability values of the fund and its stakeholders. Such a negative screening is often pursued by large investors (Amel-Zadeh and Serafeim 2018; Eccles, Kastrapeli, and Potter 2017). More active investors instead use a positive screening approach to invest primarily (or only) in those ventures that score high according to certain ESG or ecological criteria. Such an approach is often pursued by impact-oriented BAs and VCs that regard social or sustainable value creation as part of their mission. Finally, next to the use of screening, one could also factor in ESG or ecological issues into the financial valuation of the target firm (Crifo, Forget, and Teyssier 2015). Such an approach can be considered as an integration of sustainability issues into a “traditional” (financial performance oriented) investment approach. It is certainly more complex and requires more experience than the approaches of positive or negative screening discussed above.

2.3. Ecological effects of climate investments by VC and PE firms

When assessing the green effects of climate investments, two literature streams and research areas can be distinguished.

The first literature stream is concerned about the positive externalities resulting from green technology investments. In this literature stream, a few studies have analyzed the positive impacts of VC- or PE-funded firms on the natural environment either directly by the use of their innovations and product offerings or indirectly by contributing to the development of green sectors and technologies. Using country level data, Maiti (2022) finds that early-stage VC activities increase the share of environmental related technology innovations and renewable energy supply as well as the CO2 productivity of a country. On a regional level, using data from China, Hua et al. (2023) show that VC activities significantly reduce local air pollution. They further show that this effect is higher for cities characterized by more stringent environmental supervision and a better business environment. Also, innovation incentives seem to have a positive moderating effect.

The second literature stream that has developed concerns the ecological footprint of investors and how it relates to financial performance The focus is on carbon emissions. Anquetin et al. (2022), for example, investigate the performance of carbon-based portfolios of listed firms in Europe and the US accounting for Scope 1, 2, and 3 emissions. Their results show that carbon emission intensities can be “cut in half at least with virtually no loss in Sharpe ratio for reasonable levels of the carbon constraint”. Hence, investment managers seem not to face a dilemma of sacrificing financial returns and risk-adjusted performance for ecological performance. In a similar vein, Cheema-Fox et al. (2021) analyze the role of different climate risk measures and develop a rules-based investment framework for financial analysts. Basse Mama and Mandaroux (2022) use data from the European Union Trading Scheme (EU ETS) to investigate the relationship between firm market valuation and carbon emissions. They find that there exists a concave relationship between carbon emissions and firm market valuation. A certain level of emissions seems to be essential for production processes leading to a valuation premium. Yet, this premium decreases and becomes negative with increasing levels of emissions due to potential regulatory and transition risks. While this literature stream is already developed regarding listed firms, we could not identify academic studies that deal with the ecological footprint of VC or PE investments.³

2.4. Ecological policies and entrepreneurial finance investments

VC investments in cleantech differ from other VC investments as they are typically very capital intensive and may face appropriation problems as a result of positive externalities to society (Morales et al. 2022). In an empirical investigation of US ventures active between 2000 and 2021, Van den Heuvel and Popp (2023) identify reasons why VC investments into clean energy have been relatively unsuccessful compared to other VC investments. They refer to lackluster demand and a lower chance for substantial outperformance as compared to investments in ICT or biotech ventures as the main reasons. As a result, without appropriate framework conditions and support, VC investments in cleantech may be lower than into other technologies and certainly lower than socially optimal.

To reduce potential funding gaps, governments around the world employ different forms of ecological policies comprising feed-in tariffs, tax credits, loan guarantees, climate funds, development banks, and sustainable finance taxonomies (Bhandary, Gallagher, and Zhang 2021; De Angelis, Tankov, and Zerbib 2023). In a recent paper, Croce et al (2024) compare such policies and regulatory frameworks across Europe and find that they indeed have an effect on the birth and growth of cleantech ventures. Bürer and Wüstenhagen (2009) surveyed VC and PE professionals about the effectiveness of different types of ecological policies to stimulate VC investments into clean energy technologies. They found that feed-in tariffs are perceived as the most effective policy. Croce and Bianchini (2022) use a sample of 21 countries to investigate the relationship between the stringency level of ecological policies and VC investments in cleantech companies. Their findings show that ecological taxes and market-pull mechanisms (e.g., R&D subsidies and feed-in tariffs) promote institutional VC investments whereas governmental VC investments are driven by a government’s commitment to reach ecological goals. Criscuolo and Menon (2015) further show that for such environmental policies to be effective long-term policy stability, sustainability and credibility are needed. The study by Hofman and Huisman (2012) analyzes how the 2008–2009 financial crisis changed the popularity of environmental policies and VCs preferences to invest in cleantech. Their findings show that the financial crisis decreased the popularity of environmental market-pull policies. Despite this setback, growth on the European greentech market has been stronger than growth on the overall PE/VC market in recent years, resulting in a strong increase in the greentech market share relative to the aggregate EU PE/VC market, from approximately 6% in 2017 to more than 25% in 2023 (Krämer-Eis et al. 2023). Next to ecological policies, other factors also play a role as drivers of VC investments into cleantech. Cumming et al. (2016) show that oil prices as well as legal and cultural institutions also play an important role.

3. Data and methods

3.1. Survey design

Our dataset is derived from two extensive pan-European surveys of PE and VC fund managers/general partners, namely, the 2021 Private Equity Mid-Market Survey and the 2021 Venture Capital Survey, conducted by the European Investment Fund (EIF). To the best of our knowledge, the two surveys combined represent the largest regular surveys of general partners in Europe. The two surveys were conducted online, and anonymized responses were received in July and August 2021.

While the PE and VC surveys targeted distinct groups of recipients, they shared a similar questionnaire design. Each survey participant answered a total of up to ninety-three questions in their respective questionnaire. These included single-choice, multiple-choice, and ranking questions, as well as free-text inputs. For this paper, we primarily draw on the survey questions focusing on climate considerations of fund managers’ investment decisions. Additionally, the dataset includes rich information on the demographics of the PE and VC fund managers, as well as their respective firms. More information about the EIF PE and VC surveys can be found in Botsari et al. (2021a, 2021b), Krämer-Eis et al. (2022a, 2022b), and Krämer-Eis and Croce (2023a, 2023b).

3.2. Sample construction

The surveys originally targeted 3,528 PE and 5,222 VC fund managers representing 1,668 distinct PE and 2,579 distinct VC firms.⁴ The list of PE and VC firms, as well as the details of the relevant contacts within each firm, were obtained from Pitchbook. Moreover, the VC sample was enriched by contacts provided by Invest Europe.

The headquarters of the PE and VC firms were predominantly in the twenty-seven countries of the European Union (EU).⁵ The vast majority of the respondents held the position of a CEO or a managing or general partner in their respective firms. Therefore, having this sample of senior decision makers increases further the relevance of our findings. The dataset contains completed responses⁶ from 215 PE fund managers (representing 188 distinct PE firms) and 479 VC fund managers (from 379 VC firms) for response rates of approximately 6% and 9%, respectively. These response rates are comparable to those of other email-distributed academic surveys addressed to entrepreneurial finance investors (e.g., Amel-Zadeh and Serafeim 2018; J. Block et al. 2019). To analyse the motives and strategies for incorporating climate considerations in investment decisions, we reduce the initial sample of 694 fund managers for two reasons. First, we drop the 190 fund managers who responded that they do not (11 PEs and 62 VCs) or do not yet (26 PEs and 91 VCs) consider climate criteria in their investments. As seen in Table 1, there is no significant difference between investors who do and do not consider climate in their investments. More specifically, the investors do not differ in terms of gender, age, experience, firm age, or the number of funds that they manage. However, climate-conscious investors do generally invest at a later investment stage compared to non-climate-conscious investors, and they do have a greater amount of assets under management. Second, we drop the responses of 36 fund managers in firms active in both the PE and the VC market to clearly differentiate between the two investor types. Accordingly, our final sample includes 468 observations, comprising responses of 163 PE fund managers (from 148 PE firms) and 305 VC fund managers (from 253 VC firms).

Table 1. T-test for differences between non-climate and climate investors.

Variable	Non-climate Investors			Climate Investors			Diff.
	N	Mean	SD	N	Mean	SD
Male	189	0.84	0.37	497	0.87	0.34
Age	189	4.03	0.93	502	3.93	0.97
Experience	190	12.97	7.63	504	14.13	8.56
Female partner %	185	0.14	0.18	487	0.13	0.19
EU-only investments	190	0.64	0.48	504	0.72	0.45	**
Firm age	186	12.47	8.43	494	12.35	8.38
Key investment stage	190	2.85	1.17	504	3.33	1.26	***
Total assets	190	2.71	1.50	504	3.23	1.53	***
First-time team	186	0.37	0.48	496	0.29	0.45	**
Number of funds	190	3.58	7.50	504	3.25	3.41

This table reports the mean values and standard deviations for investors who consider climate in the investment decisions and investors who do not. The “Diff”. column reports the results of a t-test of the null hypothesis that the mean values for climate and non-climate investors are equal to each other. Significance levels are: ***p < 0.01, **p < 0.05, and *p < 0.1.

3.3. Sample description

3.3.1. Demographics

Table 2 shows the selected sample demographics for the entire sample of 468 fund managers, as well as for the separate groups of PEs and VCs. Considering the full sample, the average survey participant invests in early-stage portfolio firms (26%), manages between 200 and 499 million € in total assets (25%), has headquarters in South (Europe)⁷ (19%), and invests in portfolio firms active in communications, computer, and electronics (ICT) sectors. When considering the VC and PE investors separately, however, we can observe distinct differences.

Table 2. Sample characteristics.

Variable	Full sample	VC	PE	Diff.
Key investment stage
Pre-seed	8.8%	13.4%	0.0%	***
Seed	19.7%	30.2%	0.0%	***
Early	25.6%	39.4%	0.0%	***
Later/Growth	23.9%	17.1%	36.8%	***
Buyout	22.0%	0.0%	63.2%	***
Total assets under management (million €)
<50	17.3%	23.3%	6.1%	***
50–99	16.7%	19.0%	12.3%	*
100–199	22.0%	22.3%	21.5%
200–499	25.0%	22.6%	29.5%
500–999	9.2%	8.2%	11.0%
≥1000	9.8%	4.6%	19.6%	***
Headquarters location ^1
Benelux	14.3%	16.7%	9.8%	**
CESEE	11.8%	10.2%	14.7%
DACH	16.5%	19.0%	11.7%	*
France	11.8%	10.5%	14.1%
Nordics	10.7%	12.5%	7.4%	***
South	19.2%	14.8%	27.6%	**
UK & Ireland	13.5%	13.4%	13.5%
Other	2.4%	3.0%	1.2%
Key industries of investment ^2
Biotech and healthcare	44.0%	46.9%	38.7%	*
Business products	31.4%	23.9%	45.4%	***
Business services	46.8%	37.4%	64.4%	***
Chemicals and materials	15.2%	15.1%	15.3%	***
Consumer goods	26.5%	14.4%	49.1%	**
Consumer services	30.3%	27.2%	36.2%	***
Energy and environment	31.4%	36.1%	22.7%	***
Financial and insurance services	25.0%	32.5%	11.0%
ICTs	55.8%	61.0%	46.0%	***
No clear sector focus	14.1%	8.9%	23.9%	***
Observations	468	305	163	–

The “Diff”. column reports the results of a t-test of the null hypothesis that the respective percentages for VCs and PEs are equal to each other. Significance levels are: ***p < 0.01, **p < 0.05, and *p < 0.1.

¹Benelux: Belgium, Luxemburg, Netherlands; CESEE: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovenia, Slovakia, Turkey, Ukraine; DACH: Austria, Germany, Switzerland; Nordics: Denmark, Finland, Iceland, Norway, Sweden; South: Cyprus, Greece, Italy, Portugal, Spain.

²Is a multiple-choice question.

Concerning the key investment stage, nearly 83% of VCs invest in (pre) seed and early-stage portfolio firms, while PEs invest only in later/growth (37%) and buyout (63%) stages. These results mirror the market practice whereby VCs tend to invest in younger portfolio firms, while PEs focus on more established portfolio firms (e.g., Fenn, Liang, and Prowse 1997). Furthermore, the VCs in our sample are smaller than the PEs. On average, the VCs fall within the third asset-size class, ranging from 100 to 199 million € of total assets under management, while the average PE falls within the fourth asset-size class, managing between 200 and 499 million € of total assets. The percentages of VCs and PEs for the first and last size classes significantly vary from each other. Moreover, the two groups of investors differ in terms of the headquarter location of their respective firms. In the VC sample, most firms have their headquarters in the DACH⁸ region (19%) and Benelux⁹ countries (17%) – both percentages are significantly higher compared to PEs. In contrast, the PEs in our sample are mainly located in the South (28%) and the CESEE¹⁰ countries (15%). However, a significant difference compared to the comparison group only exists for the South. Regarding the key industries of investment, 61% of the VCs invest in portfolio firms active in the ICT sector, followed by investments in the biotech and health care industry (47%), and business services (37%). The latter constitutes the most frequently selected industry of the PE survey participants (64%), followed by consumer goods (49%), and ICT investments (46%). Significant differences between the two investor groups exist for most investment industries. VCs significantly invest in energy and the environment, financial and insurance services, and ICT, whereas PEs predominantly invest in the business products and services, consumer goods, and consumer services industries, or do not have a sector focus at all.

Table 3 shows further variables included as controls in the regression analyses of this paper. The table reports the mean values for each investor type, as well as the results of the two-sample t-tests to unveil additional differences between the two investor groups. Compared to VCs, PEs manage significantly larger total assets,¹¹ are older, have been incorporating climate considerations in their investments for a longer period, and are more likely to only invest in portfolio firms located in the EU. PEs also have a lower share of female partners in their respective firms, and the surveyed fund managers are generally older¹² and more experienced.

Table 3. T-tests of control variables (investor and respondent characteristics).

Variable	VC			PE			Diff.
	N	Mean	SD	N	Mean	SD
Total assets under management	305	2.87	1.44	163	3.86	1.47	***
PE/VC firm age	300	11.26	8.35	158	14.14	8.28	***
Female partner %	293	0.15	0.20	160	0.08	0.15	***
EU-only investments	305	0.63	0.48	163	0.88	0.33	***
Long-term investor	292	0.24	0.43	161	0.33	0.47	**
Male	301	0.84	0.37	161	0.90	0.30	*
Respondent age	304	3.81	0.98	162	4.14	0.86	***
Respondent experience	305	12.15	7.72	163	17.50	9.14	***
First-time team	299	0.31	0.46	163	0.25	0.44

This table reports the mean values for both investor types, for the control variables included in the regression analyses of this study. The “Diff”. column reports the results of a t-test of the null hypothesis that the mean values for VCs and PEs are equal to each other. Significance levels are: ***p < 0.01, **p < 0.05, and *p < 0.1.

3.3.2. Key investment selection criteria

To gain a deeper understanding of the general investment behaviour of the fund managers in our sample, we focused on survey participants’ indications of their key investment selection criteria out of a predefined list of eighteen items. Table 4 presents the related results for both the entire sample of 468 fund managers and the two subsamples of PEs and VCs. The management team of a potential portfolio firm is the most important investment selection criterion for all survey participants, selected by 90% of respondents. Other important criteria for the entire sample include the exit potential (63%) and the scalability of the business (62%). ESG considerations rank fifth, selected by 54% of respondents.

Table 4. Key investment selection criteria.

Investment Selection Criterion	Full sample	VC	PE	Diff.
Total addressable market	39.3%	51.5%	16.6%	***
Scalability of the business	61.5%	64.9%	55.2%	**
Valuation and deal terms	53.0%	50.2%	58.3%	*
Exit potential	63.5%	64.6%	61.4%
Technology/product’s value proposition	58.8%	76.1%	26.4%	***
Past performance/track record	27.1%	23.0%	35.0%	***
Management team	89.5%	92.5%	84.0%	***
Business model	48.3%	46.6%	51.5%
Our ability to add value	45.9%	39.0%	58.9%	***
Profitability (potential) of business	35.7%	24.6%	56.4%	***
Revenue-generating capacity/potential	30.6%	29.5%	32.5%
Cash-generating capacity/potential	26.5%	13.8%	50.3%	***
Industry	25.0%	21.0%	32.5%	***
Strategic fit in investment portfolio	35.5%	39.7%	27.6%	***
ESG considerations	54.3%	52.1%	58.3%
Diversity & inclusion considerations	16.5%	21.0%	8.0%	***
Referral by other GPs/investors	10.3%	14.8%	1.8%	***
Other/s	15.2%	22.0%	2.5%	***
Observations	468	305	163	−

This table reports responses to the multiple-choice question “Considering your firm’s overall activity in the PE mid-market/VC market, what are the most important investment selection criteria?” The “Diff”. column reports the results of a test of the null hypothesis that the percentages of VCs and PEs are equal to each other. Significance levels are: ***p < 0.01, **p < 0.05, and *p < 0.1.

A comparison of both subsamples shows that 92% of the VCs selected the management team as a key investment criterion, 76% considered the value proposition of the technology or product, and 65% considered the scalability of the business. These percentages are significantly higher than those of PEs. In addition, VCs are considerably more interested in the strategic fit of the potential portfolio firm, rely on referrals by other investors, and consider diversity aspects and the entire addressable market. The management team of a potential portfolio firm is the most important investment selection criterion for PEs (84%), followed by exit potential (61%) and PEs’ ability to add value (59%). However, only the latter is significantly higher for PEs than for VCs. In addition, PEs place a high emphasis on past performance or track records, profitability, and cash-generating potential, as well as industry sector when considering an investment. The insights into the general investment selection criteria are helpful for interpreting the findings related to the motives of VC and PE investors for implementing climate considerations in their investment decisions. As described above, ESG issues are the fifth most important investment selection criterion for entrepreneurial finance investors. The goal of our study is to understand why climate issues (which are an important part of ESG issues) matter and how this is implemented into the investment strategy.

3.4. Model specification

Given that the research questions focus on the motives (why) and strategies (how) of entrepreneurial finance investors related to integrating climate considerations into their investments, we divide our analyses into two parts. First, a descriptive examination of the most important motives and strategies for climate considerations in investments, for the sample as a whole and separately for PEs and VCs (Sections 4.1.1 and 4.2.1). Second, a multivariate analysis to address the potential differences in the motives and strategies for PE and VC investors and the interplay between the motives and the strategies (Sections 4.1.2 and 4.2.2). Therefore, we run binomial and ordered logit regressions for the motives for incorporating climate considerations into investments, as well as for the climate consideration strategies. In the following sections, we describe in detail the variables included in the regression analysis. Additionally, Table A1 of the Appendix provides a summarized variable description.

3.4.1. Dependent and independent variables

3.4.1.1. Climate consideration motives

We use two sets of dependent variables to address our research questions. The first part of the analysis focuses on the motives of entrepreneurial finance investors to consider climate issues in their investments and, therefore, uses the survey participants responses to the question “What are your motives for incorporating climate considerations in your investments?”. The answers include the investors’ ranked choices (out of a predefined list of eleven items) by order of importance.¹³ We conduct a factor analysis to unveil the underlying interrelations and superordinate dimensions between the motives for implementing climate considerations in investments. The nine motive variables are in an ordered form, where each respondent ordered the nine motives based on their importance. To perform the factor analysis, we transform these ordered motives into nine binary variables that take the value of 1 if the respective motive is selected by a respondent and 0 otherwise. The nine binary variables are the ones included in the factor analysis, producing principal component factors. Our factor analysis identifies four specific factors; and based on these four factors, we construct four dependent variables as the row means of the underlying binary items of the factors. These factors are external stakeholder, product differentiation, portfolio performance (all ordered), and ethical responsibility (binary). Section 4.1.1 describes in more detail the factor analysis and the resulting four dependent variables. Additionally, these motives serve as independent variables in the second part of the analyses examining their impact on the climate strategies chosen by investors. In the remainder of the paper, we use the term climate consideration motives to refer to the four superordinate motives.

3.4.1.2. Climate consideration strategies

The second part of the analysis covers the strategies applied by entrepreneurial finance investors to incorporate climate considerations in their investments. Toward this purpose, we use the survey participants’ responses to the question “How do you incorporate climate considerations into your investments?” and their choices¹⁴ among six offered strategies, namely, negative screening, positive screening, integration into valuation, thematic investments, impact investing, and active ownership. Consequently, we construct six binary variables that take the value of 1 if the respective strategy is selected and 0 if not, and which we refer to as climate consideration strategies. In the case of negative (positive) screening, investors exclude (seek to include) portfolio firms that fail to meet (perform well in terms of) the selected climate criteria. Active ownership refers to the support and value-adding services provided to portfolio firms to improve their climate performance. Integration into valuation means including explicit climate-change criteria into firm valuation models or financial forecasts. By undertaking thematic investments, investments in climate themes or assets (e.g., in clean energy or sustainable agriculture) take place along with other non-climate investments. Finally, a climate-focused impact investing strategy (e.g., launching a climate impact fund) seeks to generate a purposeful, positive, and measurable impact on climate, alongside a financial return.

3.4.1.3. Investor type

We construct a binary variable named PE investor that takes the value of 1 if the respondent is employed in a PE general partner/management firm, and 0 if employed in a VC general partner/management firm. We include the variable as an independent variable in all regression models to examine the impact of PE and VC investors.

3.4.2. Control variables

To account for structural differences between PEs and VCs in our dataset (see Section 3.3.1) and to account for individual respondent characteristics (Franke et al. 2008; Moritz et al. 2022), we control for several variables on the investor and respondent level. First, at the investor level, we include total assets under management as an indicator of firm size, ranked on a six-item scale. The variable ranges from less than 50 million € to more than 1 billion €.¹⁵ PE/VC firm age specifies the number of years since the VC or PE firm was established. We calculate female partner % as the number of female partners divided by the total number of partners in the firm. Prior research show female presentation on VC committees matters (Xu et al. 2024). To gain insights into investment behaviour and to distinguish between firms investing only in the EU and firms with a broader geographical investment focus, we use the binary variable EU-only investments. Furthermore, we calculate the binary variable long-term investor to identify firms which have implemented climate considerations for five years or more. We suggest that domain specific experience and in particular climate literacy and knowledge about climate issues play important roles in how climate issues are accounted for in investor decision making. Finally, on the investor level, we include a set of binary variables addressing the different investment industries and which indicate whether or not the firm invests in a particular industry.¹⁶ Please note that we do not control for differences in the investment approach between the two investor types as this is part of our explanation for the differences that we hope to observe. Moreover, the investment approach is rather homogenous within the respective investor type but differs across the two investor types.

At the respondent level, we control for gender through the variable male, which takes the value of 1 if the respondent is male and 0 if female. Second, we use respondent age, ranked on a six-item scale and ranging from 18‒24 years to 65 years or older.¹⁷ The variable respondent experience indicates the respondent’s total years of experience working as a fund manager. Finally, with the binary variable first-time team, we control whether the most recent fund raised by the firm was also the team’s first-ever fund raised.

4. Results and discussion

The subsequent sections follow the structure of our two sets of research questions. The starting point of each subsection is a descriptive analysis of the motives and strategies of entrepreneurial finance investors to consider climate issues in their investments, followed by a multivariate analysis of how VC and PE fund managers differ in these motives and strategies. Finally, we conduct a multivariate examination of how the motives for climate considerations affect the climate investment strategies applied. It is important to note we do not use the PE/VC dummy as a dependent variable. This would mean that the motives and strategies to consider climate issue predict whether a firm is a PE or VC firm. However, our argument is just the other way round. Certain motives or strategies are more prevalent with PE or VC firms controlling for structural investor characteristics.

4.1. Climate consideration motives

4.1.1. Descriptive analyses

The survey participants indicated their motives for incorporating climate considerations into their investment decisions. Table 5 shows the ranking of these motives for the combined sample of 468 VC and PE fund managers. Ethical responsibility was the most frequently stated motive for nearly two-thirds of all survey participants, followed by the growing demand by LPs or (other) stakeholders (56%) and the importance of climate issues for investment performance (46%). Lower in the ranking but still selected by approximately one-third of the survey participants are risk management and regulation.¹⁸ Fund managers also ranked the selected motives by order of importance. More than one-quarter of investors considered ethical responsibility to be the most important motive. Incorporating climate considerations as part of the investment product or strategy was the central motive for 21% of the respondents, followed by the importance of such considerations for investment performance (15%).

Table 5. Motives for incorporating climate considerations into investments.

Motives	% of respondents selecting the motive (multiple selection)	% of respondents ranking the motive as most important
Ethical responsibility	65.2%	25.9%
Growing demand from LPs/stakeholders	55.6%	9.2%
Importance for investment performance	46.4%	14.7%
Part of investment product/strategy	45.1%	20.7%
Relevant initiatives	34.8%	6.6%
Reputational benefits	34.8%	3.6%
Innovation and portfolio differentiation	34.0%	6.0%
Risk management	32.5%	7.9%
Regulation	32.3%	4.1%

This table reports responses to the question “What are your motives for incorporating climate considerations in your investments?” for the full sample of 468 fund managers, showing the percentage of investors that selected each motive and the percentage of investors that ranked the respective motive as most important.

Table 6 showcases the descriptive statistics of the investors’ motives for incorporating climate considerations into investment decisions. The means of the different motives confirm the key motives presented in Table 5 – incorporating climate considerations as part of the investment product or strategy, ethical responsibility, and importance of climate considerations for investment performance were most frequently chosen as the key motives (average rank of just over 2). On the other hand, reputational benefits were frequently ranked as a low importance motive, with the lowest average rank of 3.6.

Table 6. Descriptive statistics of the motives for incorporating climate considerations.

Motives	N	Mean	SD	Min	Max
Ethical responsibility	305	2.29	1.38	1	8
Growing demand from LPs/stakeholders	260	3.00	1.62	1	9
Importance for investment performance	217	2.40	1.42	1	9
Part of investment product/strategy	211	2.19	1.51	1	10
Relevant initiatives	163	3.22	1.75	1	9
Reputational benefits	163	3.61	1.68	1	8
Innovation and portfolio differentiation	159	3.02	1.56	1	8
Risk management	152	2.76	1.50	1	7
Regulation	151	3.32	1.70	1	9

Descriptive statistics of the investors’ motives for incorporating climate considerations. Each investor ranks the motives based on its importance for them, with the value of 1 signifying the motive to be the most important to the investor. Only those selecting each particular motive are included in this table.

To unveil the underlying interrelations and superordinate dimensions between the nine motives for implementing climate considerations in VC and PE investments, we conduct a factor analysis.¹⁹ We apply a principal-component method and use the nine binary variables. The results of the factor analysis presented in Table 7 reveal three underlying factors. Factor one includes four motives: growing demand from LPs or stakeholders, reputational benefits, regulation, and relevant initiatives.²⁰ Hence, the first factor builds an outside perspective of the firm, as it encompasses pressure from external parties (LPs and policymakers), as well as its outward representation (reputation and initiatives). We refer to this factor as the external stakeholder motive. The second factor, subsequently called product differentiation motive, includes two motives, namely, incorporating climate considerations as part of the investment product or strategy as well as for innovation, and portfolio differentiation. Therefore, factor two entails an internal perspective encompassing the strategic orientation and investment portfolio design of the investor. Factor three also takes an internal perspective, but with a focus on financial and risk parameters, namely, the importance of climate considerations for investment performance and risk management. We call this factor portfolio performance motive. The ninth item, ethical responsibility (i.e., making investment decisions based on ethical principles while also considering possible harmful consequences), cannot be included in any in the factors and, therefore, remains a separate variable and motive for the following analyses.

Table 7. Principal-component factor analysis.

	Variance	Difference	Proportion	Cumulative
Factor 1	162.7	0.39	0.18	0.18
Factor 2	123.6	0.13	0.14	0.32
Factor 3	111.0	.	0.12	0.44
468 observations. Chi-squared (36) = 161.7. Prob>chi-squared = 0.00. Kaiser-Meyer-Olkin measure of sampling adequacy = 0.58.
Factor rotation matrix
	Factor 1	Factor 2	Factor 3
Factor 1	0.95	−0.31	−0.05
Factor 2	0.30	0.82	0.50
Factor 3	−0.12	−0.49	0.87
Rotated factor loadings (pattern matrix) and unique variances sorted
	Factor 1 External stakeholder	Factor 2 Product differentiation	Factor 3 Portfolio perform.	Uniqueness
Growing demand from LPs/stakeholders	0.65	−0.11	−0.16	0.54
Reputational benefits	0.63	0.02	0.04	0.60
Regulation	0.58	0.01	−0.10	0.65
Relevant initiatives	0.53	0.16	0.20	0.66
Part of investment product/strategy	0.02	0.75	−0.03	0.44
Innovation and portfolio differentiation	0.00	0.67	0.15	0.53
Ethical responsibility	0.33	−0.39	0.23	0.69
Importance for investment performance	−0.24	0.17	0.70	0.43
Risk management	0.17	−0.12	0.69	0.49

Table 8 reports the mean values of the four motives identified in the factor analysis, as well as the results of two-sample t-tests between the two investor groups. Significantly higher means for the external stakeholder and portfolio performance motives are observed for PEs, while a higher mean for the product differentiation motive is documented for VCs. In relation to ethical responsibility, we detect no significant mean differences between the two investor groups. These preliminary findings are further examined in the following multivariate analyses.

Table 8. Two-sample t-tests of climate consideration motives.

Climate Consideration Motive	VC			PE			Diff.
	N	Mean	SD	N	Mean	SD
External stakeholder	305	0.35	0.30	163	0.48	0.28	***
Product differentiation	305	0.42	0.37	163	0.34	0.36	**
Portfolio performance	305	0.35	0.35	163	0.48	0.34	***
Ethical responsibility	305	0.64	0.48	163	0.67	0.47

This table reports the mean values for both investor types, for the four superordinate climate consideration motives. The “Diff”. column reports the results of a t-test of the null hypothesis that the mean values for VCs and PEs are equal to each other. Significance levels are: ***p < 0.01, **p < 0.05, and *p < 0.1.

4.1.2. Multivariate analyses

Table 9 shows a set of ordered logit and binomial logit regressions examining the differences in climate consideration motives for PE and VC investors. The four superordinate motives are the dependent variables, while the binary variable PE investor serves as the main independent variable. Compared to VCs, PE investors are significantly more likely to integrate climate criteria into their investments as a response to external stakeholders and due to portfolio performance. In contrast, product differentiation motivates VC investors in their climate considerations. Finally, the fourth dependent variable, ethical responsibility, does not reveal a significant difference between PE and VC investors. In the following sections, we discuss these findings in turn and provide plausible explanations for the documented patterns of results.

Table 9. Ordered and binomial logit regressions for climate consideration motives.

Variable	Ordered Logit						Binomial Logit
	External stakeholder		Product differentiation		Portfolio performance		Ethical responsibility
	(1)	(2)	(1)	(2)	(1)	(2)	(1)	(2)
PE investor		0.80***		−0.60**		0.81***		0.01
		(0.25)		(0.26)		(0.26)		(0.30)
Controls: investor and respondent characteristics
Totalassets under mgmt.	0.20***	0.16**	−0.09	−0.05	0.06	0.02	0.09	0.05
	(0.07)	(0.08)	(0.07)	(0.08)	(0.07)	(0.08)	(0.08)	(0.09)
PE/VC firm age	0.01	0.01	−0.03**	−0.03**	−0.00	0.00	0.01	0.01
	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)	(0.02)	(0.02)
Female partner %	0.13	0.42	−0.06	−0.00	−0.83	−0.55	2.10***	2.42***
	(0.52)	(0.58)	(0.55)	(0.59)	(0.54)	(0.59)	(0.67)	(0.76)
EU-only investments	0.044	−0.08	−0.25	−0.07	−0.14	−0.20	−0.14	−0.18
	(0.20)	(0.22)	(0.21)	(0.22)	(0.21)	(0.22)	(0.25)	(0.26)
Long-term investor	−0.95***	−0.97***	0.34	0.28	0.31	0.23	0.04	0.04
	(0.21)	(0.22)	(0.22)	(0.22)	(0.21)	(0.22)	(0.24)	(0.26)
Male	−0.30	−0.19	−0.35	−0.21	−0.13	−0.16	0.30	0.32
	(0.30)	(0.31)	(0.31)	(0.32)	(0.30)	(0.32)	(0.35)	(0.36)
Respondent age	−0.15	−0.17	0.11	0.11	−0.03	0.04	−0.12	−0.09
	(0.11)	(0.12)	(0.12)	(0.13)	(0.12)	(0.13)	(0.14)	(0.15)
Resp. experience	0.03**	0.03**	−0.01	−0.01	0.00	−0.01	0.02	0.03
	(0.01)	(0.01)	(0.01)	(0.02)	(0.01)	(0.01)	(0.02)	(0.02)
First-time team	0.16	0.20	−0.19	−0.22	0.18	0.06	0.26	0.30
	(0.22)	(0.24)	(0.24)	(0.25)	(0.24)	(0.25)	(0.27)	(0.29)
Industry dummies	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Observations	459	427	459	427	459	427	459	427
R-squared	0.06	0.07	0.07	0.07	0.03	0.04	0.06	0.06

Standard errors in parentheses. Significance levels are: ***p < 0.01, **p < 0.05, and *p < 0.1.

4.1.2.1. External stakeholder motive

PE investors are significantly more likely than VCs to integrate climate criteria into their investments as a response to demands from external stakeholders, which is line with prior research (Bian et al. 2023; Eccles, Kastrapeli, and Potter 2017; Lange and Banadaki 2023). More specifically, being a PE investor increases the log-odds of being highly motivated through external stakeholders by 0.80. An explanation for this could be the different degrees of institutionalization between the two investor groups. VCs are to a substantial extent financed by government agencies and corporate investors – both contributed 18% each to the total VC fundraising volume in 2021 (Invest Europe 2022). Institutional investors are less involved in VC financing in Europe. Pension funds, for example, accounted for only 6% of the total amounts raised by VC funds in 2021. In contrast, pension funds represent by far the largest investor group in PE, accounting for 18% of the volume raised by growth funds and 27% of the volume raised by buyout funds in 2021 (Invest Europe 2022). Consequently, PEs might face increasing pressure from the larger participation of institutional investors in their investor base, given that e.g., pension funds are themselves subject to a series of ESG risks, such as regulatory and climate risks (Sautner and Starks 2021).

External pressure might also come from the regulatory side at the portfolio firm level. In contrast to VC-backed start-ups and emerging portfolio firms, larger and more established portfolio firms (as PE-backed firms tend to be) are subject to greater regulatory scrutiny, also in terms of sustainability reporting (e.g., the Corporate Sustainability Reporting Directive), which is currently under review by the European Commission (2022). Corroborating this line of argumentation on size-related considerations, the results further show that the external stakeholder motive is even more relevant for larger PEs in terms of total assets under management. Furthermore, fund managers who have already been incorporating climate considerations in their investment decisions for at least five years are less driven by the external stakeholder motive. However, respondents with more experience as a fund manager are more driven by this motive.

4.1.2.2. Portfolio performance motive

The nature of the underlying investment portfolios might play a role in explaining why PEs are to a greater extent motivated by portfolio performance considerations than VCs. Specifically, being a PE investor increases the log-odds of being highly motivated through portfolio performance by 0.81. As discussed earlier, PEs invest in more established portfolio firms that provide performance measures for their ongoing operations and enable risk assessments due to better data availability. In contrast, VCs typically invest in small and emerging portfolio firms for which performance and risk measures are more difficult to calculate and, therefore, less likely to be used by VCs (e.g., Fenn, Liang, and Prowse 1997).

In addition to the impact of the investment stage, the size and number of VC and PE deals also involve different risk levels. A typical PE commits larger investment tickets in fewer portfolio firms, while VCs invest smaller amounts in a larger number of portfolio firms.²¹ Consequently, the positive performance of individual portfolio firms is of greater importance for PEs than for VCs, who rely on a more diversified portfolio base. Moreover, the syndication of investments reduces the risk of the single investor because more parties share the investment risk. Such investment partnerships are more common in the VC market, whereas PEs are less involved in syndication. For instance, Tykvová (2018) identifies thirty-five research papers published since 2011 focusing on the topic of syndication, thirty of which (i.e., 86%) refer to the VC market. Additionally, the VCs in our sample are significantly more likely to consider a referral by other general partners or investors when making investment decisions (see also Table 4). This is another indication that cooperation plays a key role for VCs. Apart from the reduction in financial risks, VC investors syndicate due to network effects and knowledge sharing (De Vries and Block 2011).

Furthermore, VC and PE portfolios differ in terms of the target industries and sizes of their portfolio firms and the related climate risks involved. PEs typically invest in mature portfolio firms in traditional sectors, such as manufacturing, where a potentially adverse environmental footprint arising from their operations is a relevant issue to consider. In the case of VCs, their portfolio firms tend to be smaller and are active in sectors where the potential climate impacts are lower. Hence, climate risks seem to be more important for PE-supported portfolio firms. Consequently, climate risk management is more relevant for PEs and needs to be implemented in a more intricate way. In a recent study of institutional investors, Krueger et al. (2020) examine the importance of climate risks and identify risk management and engagement as the leading approaches for addressing climate risks.

Moreover, as shown earlier in the context of the key investment selection criteria (see also Table 4), PEs are significantly more likely to look at past performance or track record, as well as the profitability potential of a potential portfolio firm. Block et al. (2019) obtain similar findings in an experimental conjoint analysis of entrepreneurial finance investors by showing that growth and buyout funds place a higher emphasis on profitability as a key investment criterion than do VCs.

4.1.2.3. Product differentiation motive

The industry structure and the characteristics of the investment portfolios of VCs and PEs can provide valuable insights into why VC investors are motivated by product differentiation. More specifically, being a VC investor increases the log-odds of being highly motivated through product differentiation by 0.60. As mentioned earlier, VCs tend to invest in young portfolio firms from innovative sectors, whereas the portfolio firms of PEs do not typically operate in high technology sectors, but in more traditional industries, such as retail and manufacturing (Fenn, Liang, and Prowse 1997). Thus, PEs are more limited in the set of industries they target for investment. Our previous analyses on the key investment selection criteria support this argument, showing that PEs are significantly more likely to consider the industry of the potential portfolio firm (see also Table 4). In contrast, VCs focus more on the technology and the value proposition of a firm. This technological focus leads to a more diversified portfolio in terms of target industries for investment. Moreover, a large part of recent technologies and innovative business opportunities aims at solving climate issues. Hence, due to their technology focus, VCs are more likely to invest in innovative green portfolio firms and establish new markets (Crifo and Forget 2013). Potential portfolio firms truly developing green technologies, products, or services and positioning themselves in a green sector send strong signals to VC investors (Mrkajic, Murtinu, and Scalera 2019). Furthermore, as mentioned earlier, the more diversified nature of VC portfolios stems from the fact that VCs invest smaller amounts in a larger number of portfolio firms (see also Invest Europe 2022).

In addition to the diversification of their investment portfolio, VCs might have additional motives to differentiate themselves from one another. PEs usually execute large investment deals, where they are the lead investor and often acquire 100% of the portfolio firm (Kaplan and Sensoy 2015). Since the success of a portfolio firm or deal can be linked to the majority shareholder, this might already be sufficient to differentiate PEs from their peers. However, as already mentioned, VCs tend to syndicate investments and typically take a minority stake in their portfolio firms (Kaplan and Sensoy 2015). Therefore, the success of a portfolio firm or deal is perceived as the result of a collective effort rather than being attributed to an individual VC investor. Because they have greater difficulty differentiating themselves based on their track record, VCs might seek other ways to stand out, e.g., by pursuing a climate-focused investment strategy. Moreover, fund managers in younger firms are significantly motivated by product differentiation regarding their climate considerations.

4.1.2.4. Ethical responsibility motive

The final dependent variable does not differ between PE and VC investors’ investment decisions in the context of climate considerations. Given that this was the motive selected by nearly two-thirds of the survey participants, we cannot exclude the possibility of a socially desirable response behaviour in this respect. In Amel-Zadeh and Serafeim (2018), only 32% of institutional investors consider ESG criteria to be out of ethical responsibility. The different underlying samples (institutional investors versus PE/VC investors), our focus on the climate aspect of sustainability or even a shift in the importance of ethical responsibility in the last few years might explain the difference. Interestingly, the findings reveal that ethical responsibility is significantly more likely to drive climate considerations in firms with higher female participation at the partner level.

4.2. Climate consideration strategies

4.2.1. Descriptive analyses

Apart from the motives, we examine the most important climate consideration strategies of the entrepreneurial finance investors. In a multiple-choice question, the survey participants indicated the specific strategies they pursued to incorporate climate considerations into their investment decisions. Table 10 shows the ranking of these strategies for the combined sample of 468 PE and VC fund managers. Selected by 57% of all survey participants, negative screening is the most frequently mentioned way to incorporate climate considerations in investments. Positive screening (48%) and active ownership (37%) are next. Thematic investments (27%), integration into valuation (19%), and impact investing (16%) complete the ranking. Overall, entrepreneurial finance investors favour screening strategies as a tool to implement climate considerations in their investment decisions, particularly on an exclusionary basis during due diligence. Amel-Zadeh and Serafeim (2018) find that active ownership, followed by integration into valuation and negative screening, are the ESG strategies featured most prominently among institutional investors, while the results of Eccles et al. (2017) are more aligned with our ranking of climate consideration strategies.

Table 10. Strategies employed by investors for implementing climate considerations.

Climate consideration strategy^a	Full sample	VC	PE	Diff.
Negative screening	56.8%	52.5%	65.0%	***
Positive screening	47.7%	51.5%	40.5%	**
Active ownership	36.5%	26.2%	55.8%	***
Thematic investments	27.1%	16.4%	22.7%	*
Integration into valuation	18.6%	31.5%	19.0%	***
Impact investing	16.0%	21.0%	6.8%	***
Observations	468	305	163	−

This table reports responses to the multiple-choice question “How do you incorporate climate considerations in your investments?” The “Diff”. column reports the results of a t-test of the null hypothesis that the respective percentages for VCs and PEs are equal to each other. Significance levels are: ***p < 0.01, **p < 0.05, and *p < 0.1.

^aDefinition of climate consideration strategies: Negative (positive) screening: investors exclude (seek to include) portfolio firms that fail to meet (perform well in terms of) selected climate criteria. Active ownership: support of portfolio firms to improve their climate performance. Thematic investments: investments into climate themes or assets, alongside other investments. Integration into valuation: including explicit climate-change criteria into firm valuation models/multiples/financial forecasts. Impact investing: seeks to generate a purposeful, positive, and measurable impact on climate, alongside a financial return.

The table also shows how frequently a specific climate consideration strategy is selected by each type of investor and includes the results of two sample t-tests to unveil significant differences in these percentages between the two investor groups. Most PE investors apply negative screening (65%), followed by active ownership (56%) and positive screening (40%). The former two strategies are significantly favoured by PEs compared to VCs. In contrast, negative screening (52%) and positive screening (51%) are by far the most common strategies among VC investors, with integration into valuation ranking third (31%). Compared to PE investors, VCs are significantly more likely to choose the climate strategies of positive screening, integration into valuation, and impact investing. The remaining strategy of thematic investments does not reveal significant mean differences between the two investor groups. These preliminary findings are further examined in the following multivariate analyses.

4.2.2. Multivariate analyses

The six climate consideration strategies operate as dependent variables in the binomial logit regressions presented in Table 11, while the four climate consideration motives and the binary variable PE investor serve as the independent variables. Looking at model specification 2, the results indicate that PEs are about 2.5 times more likely to adopt an active ownership strategy compared to VCs. On the other hand, VCs are significantly more likely to perform impact investing than PEs – being a PE investor reduces the likelihood of performing impact investing by about 73%. This stronger tendency of VCs versus PEs to pursue impact investing is in line with prior research about impact investors (Agrawal and Hockerts 2021; J. H. Block, Hirschmann, and Fisch 2021; Croce et al. 2021). For the remaining climate consideration strategies, we find no significant differences between PE and VC investors.

Table 11. Binomial logit regressions for climate consideration strategies.

Variable	Negative screening		Positive screening		Active ownership		Integration into valuation		Thematic investments		Impact investing
	(1)	(2)	(1)	(2)	(1)	(2)	(1)	(2)	(1)	(2)	(1)	(2)
Motives
External stakeholder		1.63***		0.34		1.61***		0.11		−0.42		−0.65
		(0.42)		(0.40)		(0.43)		(0.50)		(0.47)		(0.60)
Product differentiation		−0.78**		0.68**		0.65**		0.54		1.17***		0.89**
		(0.31)		(0.31)		(0.32)		(0.38)		(0.36)		(0.44)
Portfolio performance		0.87***		0.50		0.81**		1.07***		0.62*		0.08
		(0.32)		(0.31)		(0.33)		(0.38)		(0.37)		(0.45)
Ethical responsibility		0.37		0.32		0.13		0.71**		0.00		−0.04
		(0.23)		(0.23)		(0.24)		(0.31)		(0.27)		(0.33)
PE investor	0.20	−0.17	−0.18	−0.21	1.05***	0.88***	0.05	−0.05	−0.04	0.05	−1.49***	−1.32***
	(0.29)	(0.30)	(0.29)	(0.30)	(0.29)	(0.31)	(0.36)	(0.38)	(0.34)	(0.35)	(0.47)	(0.48)
Controls: investor and respondent characteristics
Total assets under mgmt.	0.14	0.09	−0.01	−0.02	0.16*	0.14	0.17	0.15	0.07	0.08	0.15	0.17
	(0.09)	(0.09)	(0.09)	(0.09)	(0.09)	(0.10)	(0.11)	(0.11)	(0.11)	(0.11)	(0.13)	(0.13)
PE/VC Firm age	0.00	−0.01	−0.02	−0.02	0.00	0.01	0.02	0.02	−0.02	−0.01	−0.06**	−0.06**
	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.03)	(0.03)
Female partner %	−0.05	−0.21	1.06	0.99	−0.10	−0.24	0.61	0.39	0.00	−0.04	0.05	−0.02
	(0.64)	(0.68)	(0.66)	(0.67)	(0.69)	(0.74)	(0.79)	(0.82)	(0.75)	(0.79)	(0.88)	(0.89)
EU-only investments	0.39	0.49*	−0.24	−0.20	0.04	0.13	0.28	0.31	−0.16	−0.15	−0.02	−0.09
	(0.25)	(0.26)	0.25	(0.25)	(0.26)	(0.27)	(0.32)	(0.33)	(0.28)	(0.29)	(0.34)	(0.35)
Long-term investor	0.09	0.37	0.22	0.22	0.09	0.25	0.14	0.07	−0.08	−0.19	0.95***	0.82**
	(0.25)	(0.27)	(0.25)	(0.26)	(0.25)	(0.27)	(0.30)	(0.31)	(0.29)	(0.31)	(0.33)	(0.35)
Male	0.16	0.19	0.40	0.44	−0.53	−0.48	−0.47	−0.48	0.06	0.04	−0.21	−0.24
	(0.35)	(0.36)	(0.36)	(0.36)	(0.37)	(0.38)	(0.43)	(0.44)	(0.41)	(0.41)	(0.49)	(0.49)
Respondent age	−0.24*	−0.21	−0.22	−0.23	−0.04	−0.02	0.37**	0.36*	−0.04	−0.07	0.00	−0.03
	(0.14)	(0.15)	(0.14)	(0.15)	(0.15)	(0.16)	(0.18)	(0.19)	(0.17)	(0.18)	(0.21)	(0.21)
Respondent experience	0.02	0.01	0.02	0.01	0.03*	0.03*	0.00	−0.00	−0.01	−0.01	0.04	0.05**
	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)	(0.02)
First-time team	−0.07	−0.18	−0.00	−0.01	0.14	0.12	0.49	0.46	0.23	0.29	0.16	0.20
	(0.28)	(0.29)	0.28	(0.28)	(0.29)	(0.30)	(0.35)	(0.36)	(0.32)	(0.33)	(0.40)	(0.41)
Industries	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Observations	427	427	427	427	427	427	427	427	427	427	427	427
R-squared	0.06	0.12	0.08	0.10	0.09	0.14	0.10	0.13	0.16	0.19	0.18	0.20

Standard errors in parentheses. Significance levels are: ***p < 0.01, **p < 0.05, and *p < 0.1..

As discussed earlier, PEs are usually the lead investor and often acquire 100% of the portfolio firm, while VCs tend to syndicate their investments and therefore typically take a minority stake in their portfolio firms (Kaplan and Sensoy 2015). Accordingly, PEs have the necessary power and preconditions to actively instigate changes in their portfolio firms and implement processes that improve their climate performance. VCs, as minority shareholders, may lack the power to influence corporate behaviour to this extent and are, therefore, less likely to pursue an active ownership strategy. PEs have not only the necessary power to actively initiate changes in their portfolio firms, but also a greater need to do so. Since PEs commit larger investment tickets in fewer portfolio firms, and VCs invest smaller amounts in a larger number of portfolio firms (see also Invest Europe 2022), the positive performance of an individual portfolio firm is of greater importance for PEs than for VCs. Moreover, as mentioned earlier, PEs invest in traditional sectors such as manufacturing (Fenn, Liang, and Prowse 1997), where environmental footprints are a relevant topic. These established portfolio firms need more assistance in enhancing the environmental footprint arising from their operations compared to VC-backed start-ups and emerging portfolio firms just starting their operations.

Impact investing, despite featuring last in the ranking of strategies, is still selected by more than 20% of VC survey participants. This strategy is significantly less relevant for PEs (by about 73%). Alongside a financial return, a climate-focused impact investing strategy aims at generating a purposeful, positive, and measurable environmental footprint. When considering an investment, VCs tend to focus on the technology and value proposition of a portfolio firm (see also Table 4). Solving climate issues may comprise many opportunities for recent technologies and innovative firms, including large potential for impact investments. Due to their technological focus, VCs are more likely to invest in innovative green firms and establish new markets (Crifo and Forget 2013). As impact investors, VCs select portfolio firms that already have a positive, pre-investment impact on the climate incorporated in their main products or business model. In contrast, PEs aim improve the climate impact of their portfolio firms post-investment, via active ownership.

We also examine the influence of climate consideration motives on the climate strategies pursued by entrepreneurial finance investors. Table 11 also includes the four superordinate motives as independent variables in the binomial logit regressions using the climate consideration strategies as dependent variables.

Investors motivated to consider climate as a response to external stakeholders are about five times more likely to do so via negative screening or active ownership. Improving the climate performance of a portfolio firm via active ownership reflects investors’ mindfulness of the externalities of their investments and their intention to mitigate the negative impact actively.

When motivated to consider climate issues in their investments due to portfolio performance, investors are about 2.5 times more likely to choose negative screening, active ownership, and integration into valuation. The motive at hand and the valuation strategy are clearly connected. Investors motivated by portfolio performance select portfolio firms based on performance and risk measures. Using such valuation models and financial forecasts for investment decisions, investors also tend to include climate change factors in valuation.

Climate considerations driven by product differentiation are about 95% more likely to be done through positive screening or active ownership, about three times more likely to be done via thematic investments, and about 2.5 times more likely to be through impact investing. On the other hand, climate considerations driven by product differentiation are about 50% less likely to be done through negative screening. Currently, an increasing number of start-ups address climate issues. In Germany, for example, 30% of start-ups in 2021 contributed to the ecological goals of the green economy (Fichter and Olteanu 2021). These young and innovative potential portfolio firms are worth considering for investors who intend to diversify their product portfolios. Motivated by this goal, investors undertake thematic investments or pursue impact investing to include in their investment portfolios firms addressing climate issues. More specifically, a climate impact fund seeks to generate a measurable, positive climate impact from portfolio firms as a direct result of the latter’s investment activities. In other words, the impact is not simply the result of a positive externality but of an intentional, positive change triggered by the business model of a firm. Impact investing typically goes far beyond the integration of ESG considerations in investing and can even be performed without necessarily considering the entire spectrum of ESG criteria (J. H. Block, Hirschmann, and Fisch 2021; Botsari and Lang 2020; Croce et al. 2021).

Finally, ethical responsibility is associated explicitly with integrating climate criteria into firm valuation models or financial forecasts. Climate considerations driven by ethical responsibility are twice more likely to be done through integration into valuation. Compared to other climate consideration strategies, such as negative screening, the integration of climate criteria into valuation is a more advanced way to incorporate climate aspects into portfolio investments. The real options technique has been suggested as a technique to incorporate climate risks into the financial valuation of firms (Tyler and Chivaka 2011). Such advanced valuation techniques are more likely to be adopted by investors intrinsically motivated by ethical considerations.

5. Implications and outlook

5.1. Main results and contributions

This study examines the motives behind and strategies for incorporating climate considerations in investment decisions by entrepreneurial finance investors. Using a unique dataset of two European surveys, we compare the distinct motivations and strategies of PE and VC firms. Table 12 provides a summary of the main results as well as out interpretation derived from a comparison of the characteristics of VC and PE firms. Entrepreneurial finance investors rank ethical responsibility as the most important motive for consideration of climate issues, followed by a growing demand of LPs or stakeholders, and importance for investment performance. Furthermore, our results suggest that PE and VC investors have distinct reasons for considering climate issues. Of the four superordinate motives identified in a factor analysis, PEs are to a stronger extent driven by demands from external stakeholders, as well as portfolio performance considerations, while VCs are motivated by product differentiation. Ethical responsibility is an equally important motive for both investor types. Explanations for the differing motives arise from the different investor characteristics of VCs and PEs, their portfolios, and the corresponding markets in which they operate. Regarding our second research question, entrepreneurial finance investors favour screening strategies as a tool to implement climate considerations in their investment decisions. A comparison of both investor groups shows that PEs are more likely than VCs to follow the climate consideration strategy of active ownership, while VCs are more likely to follow impact investing. Moreover, our findings imply that climate consideration motives influence the climate strategies applied by investors.

Table 12. Summary and explanation of main results.

	VC	PE	Ranking Full sample
Climate consideration motives	Product differentiation motive more important	External stakeholder and portfolio performance motives more important	1. Ethical responsibility motive 2. External stakeholder motive 3. Portfolio performance motive
Climate consideration strategies	Impact investing more likely	Active ownership more likely	1. Negative screening 2. Positive screening 3. Active ownership
Differences in investment approach between PE and VC
VC			PE
Young (small) firms High growth-potential and substantial risk Innovative firms		Portfolio firm characteristics	Established (mid-sized) firms Stable cash-flow and small risk Firms from traditional sectors
(Pre-)Seed stage, early stage, later/growth stage		Investment stage	Later/Growth stage, buyout stage
Small sum in a high number of deals		Investment size	Large sum in a small number of deals
Minor (deal syndication typical)		Equity-share in portfolio firms	Major (usually lead investor in the deal)
Low		Degree of institutionalization	High

Our study contributes to the literature on sustainable investments in entrepreneurial finance (e.g., Crifo and Forget 2013; Daugaard 2020; Dhayal et al. 2023). Analysing the underlying motives for considering climate issues in investments and the actual consideration strategies employed enables a deep understanding of climate issues in the entrepreneurial finance sector. The results of our study connect the why and how of integrating climate issues in entrepreneurial finance investment decisions. Moreover, instead of investigating ESG as an umbrella concept (as most studies to date do), we focus specifically on the climate aspects. Answering a call by Abhayawansa and Mooneeapen (2022), we appreciate the heterogeneity of investors in the context of environmental sustainability by comparing the climate consideration motives and strategies of VCs and PEs as distinct investors.

5.2. Policy implications

The entrepreneurial finance market is subject to uncertainties regarding the issue of (environmental) sustainability and climate issues. Investors face a lack of reporting standards, inconsistent measures and tools, as well as the risk of greenwashing on the side of the portfolio firms. Regulatory initiatives, such as the EU Taxonomy, are often complex and it is currently unclear what effects they will have on the entrepreneurial finance sector. While small firms and start-ups as portfolio firms of PEs and VCs are often not directly concerns by environmental regulation, they may still be indirectly affected due to trickle-down effects from the regulation of large firms. Similarly, PEs and VCs as intermediaries may be indirectly affected by regulatory initiatives targeting large pension funds and other institutional investors. Our study provides an overview of the state of the integration of climate issues in the European entrepreneurial finance sector. It shows that a large heterogeneity exists with regard to the underlying motives and the level of professionalization in the consideration of climate issues. Improved standards for climate risk reporting as well as the measurement of ecological foot- and handprints could help to reduce the heterogeneity and improve the overall level of climate knowledge and climate literacy among entrepreneurial finance investors. As a result, the assessment and comparison of disclosed ESG and climate information by portfolio firms would improve and reduce uncertainties for investors. Therefore, especially in a transitional phase such as the current one, regulatory frameworks that are less bureaucratic and applicable for smaller portfolio forms are needed, and public institutions in the entrepreneurial finance market need to play a leading role in setting and disseminating standards, best market practices, and related expertise. Moreover, since investor types differ in their motives for considering the climate in their investments, they need to be treated differently by policymakers. In particular, PEs seem responsive to regulation, as one-third of all VC and PE investors in our sample state that they are driven by regulatory pressure. Moreover, the effect of climate regulations of other actors involved, such as pension funds or other institutional investors, should be considered by policymakers as they seem to have a particularly strong influence on PEs.

Our findings regarding the motives and strategies for considering climate issues by entrepreneurial finance investors are relevant for (potential) portfolio firms seeking funding. Confirming previous findings (Bellucci et al. 2023; Mrkajic, Murtinu, and Scalera 2019), innovative cleantech start-ups with a business model or product that addresses climate issues can attract attention by VCs. Such start-ups fit well to VCs motivated by portfolio differentiation and pursuing a strategy of impact investing. Also mid-market firms with moderate climate performance still have a chance to obtain funding from PEs. Our results show that PEs work actively to improve the climate performance of portfolio firms as part of an active ownership strategy.

5.3. Limitations and outlook

Avenues for future research emerge from the limitations of our study. We examine the motives and strategies for climate considerations for those VCs and PEs that already incorporate climate considerations into their investment decisions. Subsequent research could take a closer look at those investors that do not (yet) account for climate considerations in their investments and examine the reasons why climate considerations do not matter for them. This group accounts for 27% of our sample and might have increased since our survey took place due to the increasing polarization around the issue of ESG investing, particularly in the US. Understanding the reasons why some VCs and PEs do not consider climate investment criteria might help policymakers to set the right incentives to encourage a shift towards more climate-conscious investment behaviour. Beyond the PE and VC context, Amel-Zadeh and Serafeim (2018) identify a lack of comparability across firms and the absence of standards for ESG reporting as the major barriers for institutional investors to implement ESG considerations in their investment decisions. Similar considerations might apply for the PE and VC markets. As stated above, the entrepreneurial finance market needs effective interventions in terms of regulatory frameworks also applicable to small and mid-market portfolio firms. Future research is needed to develop such frameworks and measure the effectiveness of the current ones.

Another limitation of our study is that the results are only valid for a certain part of the entrepreneurial finance market. Given the different dynamics and market conditions, studies of PEs investing in large (public) firms would be of particular importance, because stronger regulations exist for them (e.g., European Commission 2022). In addition, it would be important to extend the analysis to investors from the public sector, such as pension funds that also play a role in PE, in order to gain a deeper understanding of their underlying motivations for climate investments. Krämer-Eis et al. (2021) state that public investor participation in PE and VC funds targeting green portfolio firms can have a positive signalling effect in the PE market. The interaction of private and public investors regarding climate investments offers great potential for future research. Finally, the actual financial and ecological impact of the different climate consideration strategies employed build another promising research strand.

Acknowledgments

We would like to thank the respondents to the EIF surveys. Without their support and valuable replies, this project would not have been possible. This paper benefited from the comments and inputs by many EIF colleagues, for which we are very grateful. We would like to express particular a thanks to Cindy Daniel, Oscar Farres, and the EIF Research & Market Analysis team, in particular to Wouter Torfs. Moreover, we would like to express our gratitude for a fruitful collaboration, their support, and advice to Invest Europe and in particular to Julien Krantz and Sofian Giuroiu. All errors are attributable to the authors.

Disclosure statement

Views presented in this article are those of the authors only and do not necessarily represent the views of the European Investment Fund (EIF).

Notes

1. Total PE investments by European and non-European PEs into European portfolio firms.

2. Mid-market investments refer to equity investments made by a single PE firm or fund in a portfolio firm with values ranging from 15 million € to 150 million € (Invest Europe 2022).

3. There are, however, many initiatives to look at the ecological footprint of PE/VC portfolios (or related ESG assessments), including the ESG reporting guidelines by Invest Europe (see https://www.investeurope.eu/invest-europe-esg-reporting-guidelines/ for details). Important recommendations on how PE/VC firms should report on green-house gas emissions accounting are provided by the Corporate Sustainability Reporting Directive (CSRD) regulation and the Partnership for Carbon Accounting Financials (PCAF) reporting standards; see https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en and PCAF (2022) for details.

4. The reported figures reflect the final version of the samples that were used for the respective survey invitations (i.e., after removing fund managers/firms that explicitly requested not to participate in the survey or fund managers whom we failed to reach via e-mail).

5. Firms with headquarters outside of Europe were still included in the sample if they had an office in Europe and were active in the European PE/VC market.

6. We only consider fully completed responses, i.e., responses from fund managers who completed the survey till the very last question.

7. The South (Europe) region includes Cyprus, Greece, Italy, Portugal, and Spain.

8. The DACH region includes Austria, Germany, and Switzerland.

9. The Benelux region includes Belgium, Luxemburg, and the Netherlands.

10. The CESEE region includes Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovenia, Slovakia, Turkey, and Ukraine.

11. Instead of a t-test, we performed a chi-squared-test for the variable total assets, as it consists of unequal categories (chi-squared (5) = 48.3).

12. Instead of a t-test, we performed a chi-squared-test for the variable age, as it consists of unequal categories (chi-squared (5) = 17.3).

13. Due to only a few observations, two items are not considered any further in this paper: the “COVID-19 pandemic highlighted the impact of nonfinancial considerations on business activities” and “other/s”.

14. More than one strategy can be selected.

15. The six size classes to be chosen in the questionnaire are: less than 50 million €, 50–99 million €, 100–199 million €, 200–499 million €, 500–999 million €, and more than 1 billion €.

16. The ten variables included in this set are biotech and health care, business products, business services, chemicals and materials, consumer goods, consumer services, energy and environment, financial and insurance services, ICT (communications, computer, and electronics), and no clear sector focus. These items are identical to the predefined response options of the survey question that asked to select the most important industries in which a respondent’s firm invests.

17. The six classes to be chosen in the questionnaire are: 18–24 years, 25–34 years, 35–44 years, 45–54 years, 55–64 years, and 65 years or older.

18. Regulation refers to, for example, the EU Sustainable Finance Disclosure Regulation or the EU Taxonomy.

19. Following a significant Bartlett’s test of sphericity and a Kaiser‒Meyer‒Olkin value of 0.58.

20. e.g., the Principles for Responsible Investment.

21. For the year 2021, Invest Europe (2022) states that PE buyouts in 580 mid-market portfolio firms with a total investment of nearly 29 billion € took place in Europe compared to VC investments in 5 334 portfolio firms for a total of 20 billion €.

Appendix

Table A1. Description of variables.

Variable	Definition
External stakeholder (motive)	Row means of the four motives for climate considerations in investments, namely: growing demand from LPs/stakeholders, reputation benefits, regulation, and relevant initiatives; ranging from 0 if respondents select none of the four motives to 1 if they select all four motives.
Product differentiation (motive)	Row means of the two motives for climate considerations in investments, namely: as part of investment product/strategy, and for innovation and portfolio differentiation; ranging from 0 if respondents select none of the two motives to 1 if they select both motives.
Portfolio performance (motive)	Row means of the two motives for climate considerations in investments, namely: the importance for investment performance, and for risk management; from 0 if respondents select no motives to 1 if they select both.
Ethical responsibility (motive)	Takes the value of 1 if ethical responsibility is stated as a motive for investing into climate, 0 otherwise.
Climate consideration strategies	Takes the value of 1 if the respondent pursues a particular climate strategy, 0 otherwise.
PE investor	Takes the value of 1 if the respondent is employed in a PE firm and 0 if employed in a VC firm.
Total assets under management	Ranked total assets under management of PE/VC firms on a six-item scale, from < 50 million € to > 1 billion €.
PE/VC firm age	Number of years since the PE/VC firm has been established.
Female partner %	Percentage of partners that are female out of all partners in the firm.
EU-only investments	Takes the value of 1 if the PE/VC firm only invests in the EU, 0 otherwise.
Long-term investor	Takes the value of 1 if the PE/VC firm incorporates climate considerations in investments for five years or more, 0 otherwise.
Male	Takes the value of 1 if the respondent is male, 0 if female.
Respondent age	Ranked age of the respondent, from 18–24 years to >65 years.
Respondent experience	Respondent’s total years of experience as a fund manager.
First-time team	Takes the value of 1 if the most recent fund raised has also been the team’s first-ever fund raised, 0 otherwise.
Investment industries	Group of dichotomous variables taking the value of 1 if the respondent’s firm invests into a particular industry, 0 otherwise.