ESG Integration in Venture Capital Investment Practices: Evidence from Saudi Arabia's Transforming Entrepreneurial Ecosystem
DOI:
https://doi.org/10.59992/IJSR.2026.v5n10p10الكلمات المفتاحية:
Sustainable Finance، Venture Capital، Environmental، Social، Governance (ESG)، Saudi Arabia، Investment Decision-Making، Entrepreneurship، Emerging Marketsالملخص
Purpose: This study examines the extent and pattern of environmental, social, and governance (ESG) integration within venture capital (VC) investment practices in an emerging market. Focusing on Saudi Arabia, it investigates how ESG considerations enter investment practices, the relative priority assigned to environmental, social, and governance dimensions, and the motivations and constraints shaping their adoption.
Design/Methodology/Approach: The study adopts an exploratory and descriptive research design based on a structured survey of 21 VC firms operating in Saudi Arabia. The survey captures ESG practices across investment decision-making, monitoring and reporting, and formalization and infrastructure. It also examines the relative priority of the three ESG dimensions and the motivations and constraints associated with ESG integration. Organizational and investment characteristics of participating VC firms are used to contextualize the findings.
Findings: The findings reveal an emerging but uneven pattern of ESG integration. ESG considerations are relatively more evident in investment decision-making, including investment evaluation and, in some cases, rejection of investment opportunities, but remain less developed in formal monitoring, reporting, and organizational infrastructure. ESG integration is distinctly governance-focus, with governance receiving substantially greater priority than social and environmental considerations. Adoption is driven primarily by strategic and internally motivated factors, particularly value creation and risk mitigation, while difficulties in ESG measurement and limited internal resources and expertise constrain more systematic implementation.
Originality: The study contributes to the sustainable finance and entrepreneurial finance literature by identifying how ESG integration is developing within an emerging private-capital ecosystem. The findings reveal a transitional pattern in which ESG considerations can acquire relevance to investment decisions before being supported by systematic measurement, monitoring, and formal organizational capabilities. The study thereby provides insight into the progression from selective ESG consideration toward more institutionalized investment practices in an emerging VC market.
Practical Implications: The findings suggest that the next stage of ESG development requires greater emphasis on translating emerging ESG consideration into consistent investment practices. For VC firms, this includes incorporating material ESG issues into screening and due diligence, developing proportionate monitoring mechanisms, and strengthening internal ESG capabilities. For startups, the governance-first pattern highlights the importance of establishing credible governance and accountability practices while developing capacity to respond to broader environmental and social information requirements. For policymakers and ecosystem-support institutions, the findings point to the value of practical guidance, capacity-building, and improved ESG data infrastructure
المراجع
• Adebanjo, D., Teh, P.L. & Ahmed, P.K. (2016) ‘The impact of external pressure and sustainable management practices on manufacturing performance and environmental outcomes’, International Journal of Operations & Production Management, 36(9), pp. 995–1013.
• Alqahtani, A.Y. (2022) ‘Investigation of startups’ sustainability: Empirical evidence from Saudi Arabia’, Entrepreneurship and Sustainability Issues, 10(1), p. 107.
• Attig, N., Cleary, S., El Ghoul, S. & Guedhami, O. (2013) ‘Institutional investment horizons and the cost of equity capital’, Financial Management, 42(2), pp. 441–477.
• Baldini, M., Di Maso, L., Liberatore, G., Mazzi, F. & Terzani, S. (2018) ‘Role of country- and firm-level determinants in environmental, social, and governance disclosure’, Journal of Business Ethics, 150(1), pp. 79–98.
• Barber, B.M., Morse, A. & Yasuda, A. (2021) ‘Impact investing’, Journal of Financial Economics, 139(1), pp. 162–185.
• Bellucci, A., Gucciardi, G. & Nepelski, D. (2021) Venture capital in Europe: Evidence-based insights about venture capitalists and venture capital-backed firms. Luxembourg: Publications Office of the European Union.
• Bellucci, A., Borisov, A., Gucciardi, G. & Zazzaro, A. (2023) ‘the reallocation effects of COVID-19: Evidence from venture capital investments around the world’, Journal of Banking & Finance, 147, 106443.
• Bocken, N.M. (2015) ‘Sustainable venture capital: Catalyst for sustainable start-up success?’, Journal of Cleaner Production, 108, pp. 647–658.
• Botsari, A. & Lang, F. (2020) ‘ESG considerations in venture capital and business angel investment decisions: Evidence from two pan -European surveys’, EIF Working Paper, 2020/63.
• Brodback, D., Guenster, N. & Mezger, D. (2019) ‘Altruism and egoism in investment decisions’, Review of Financial Economics, 37(1), pp. 118–148.
• Chalmers, A.W. & van den Broek, O.M. (2019) ‘Financial volatility and public scrutiny as institutional determinants of financial industry firms’ CSR’, Business and Politics, 21(2), pp. 240–266.
• Cheng, C., Chu, Y., Deng, Z. & Huang, B. (2022) ‘Venture capital and corporate social responsibility’, Journal of Corporate Finance, 75, 102208.
• Choudhury, T., Kamran, M., Djajadikerta, H.G. & Sarker, T. (2021) ‘Can banks sustain the growth in renewable energy supply? International evidence’, The European Journal of Development Research, 35(1), p. 20.
• Dushnitsky, G. & Lenox, M.J. (2006) ‘When does corporate venture capital investment create firm value?’, Journal of Business Venturing, 21(6), pp. 753–772.
• Eccles, R.G., Kastrapeli, M.D. & Potter, S.J. (2017) ‘How to integrate ESG into investment decision-making: Results of a global survey of institutional investors’, Journal of Applied Corporate Finance, 29(4), pp. 125–133.
• Fama, E.F. & French, K.R. (2007) ‘Disagreement, tastes, and asset prices’, Journal of Financial Economics, 83(3), pp. 667–689.
• Freeman, R.E. (2010) Strategic management: A stakeholder approach. Cambridge: Cambridge University Press.
• Friede, G., Busch, T. & Bassen, A. (2015) ‘ESG and financial performance: Aggregated evidence from more than 2000 empirical studies’, Journal of Sustainable Finance & Investment, 5(4), pp. 210–233.
• Fujii, D., Saito, Y.U. & Senga, T. (2017) the dynamics of inter-firm networks and firm growth. RIETI Discussion Paper Series.
• García -Sánchez, I.M., Aibar -Guzmán, C., Núñez -Torrado, M. & Aibar -Guzmán, B. (2022) ‘Are institutional investors “in love” with the sustainable development goals? Understanding the idyll in the case of governments and pension funds’, Sustainable Development, 30(5), pp. 1099–1116.
• Gaspar, J.M., Massa, M., Matos, P., Patgiri, R. & Rehman, Z. (2013) ‘Payout policy choices and shareholder investment horizons’, Review of Finance, 17(1), pp. 261–320.
• Gillan, S.L., Koch, A. & Starks, L.T. (2021) ‘Firms and social responsibility: A review of ESG and CSR research in corporate finance’, Journal of Corporate Finance, 66, 101889.
• Gompers, P. & Lerner, J. (2001) ‘The venture capital revolution’, Journal of Economic Perspectives, 15(2), pp. 145–168.
• Gregory, A., Tharyan, R. & Whittaker, J. (2014) ‘Corporate social responsibility and firm value: Disaggregating the effects on cash flow, risk, and growth’, Journal of Business Ethics, 124(4), pp. 633–657.
• Grewatsch, S. & Kleindienst, I. (2017) ‘When does it pay to be good? Moderators and mediators in the corporate sustainability–corporate financial performance relationship: A critical review’, Journal of Business Ethics, 145(2), pp. 383–416.
• Gucciardi, G. (2024) ‘Do venture capital investments contribute to the achievement of the sustainable development goals?’, Business Strategy and the Environment, 33(8), pp. 8716–8746.
• Hegeman, P.D. & Sørheim, R. (2021) ‘Why do they do it? Corporate venture capital investments in cleantech startups’, Journal of Cleaner Production, 294, 126315.
• Heinkel, R., Kraus, A. & Zechner, J. (2001) ‘The effect of green investment on corporate behavior’, Journal of Financial and Quantitative Analysis, 36(4), pp. 431–449.
• Hofmann, E., Hoelzl, E. & Kirchler, E. (2008) ‘A comparison of models describing the impact of moral decision making on investment decisions’, Journal of Business Ethics, 82(1), pp. 171–187.
• Hsu, Y.W. (2010) ‘staging of venture capital investment: A real options analysis’, Small Business Economics, 35(3), pp. 265–281.
• Jianye, W., Yubing, K. & Yi, S. (2023) ‘Venture capital and ESG performance: Hindrance or help?’, Economic Computation and Economic Cybernetics Studies and Research, 57(4).
• Khan, M.I. & Iqbal, A. (2024) ‘Integrating ESG with corporate investment decision-making’, in The Emerald Handbook of Ethical Finance and Corporate Social Responsibility: A Framework for Sustainable Development, pp. 329–350. Bingley: Emerald Publishing.
• Lange, E.M. & Banadaki, N.G. (2024) ‘ESG consideration in venture capital: Drivers, strategies, and barriers’, Studies in Economics and Finance, 41(3), pp. 724–739.
• Li, S. & Lu, J.W. (2020) ‘A dual-agency model of firm CSR in response to institutional pressure: Evidence from Chinese publicly listed firms’, Academy of Management Journal, 63(6), pp. 2004–2032.
• Lim, K. & Cu, B. (2012) ‘The effects of social networks and contractual characteristics on the relationship between venture capitalists and entrepreneurs’, Asia Pacific Journal of Management, 29(3), pp. 573–596.
• Liu, L., Jiang, H. & Zhang, Y. (2023) ‘The impact of venture capital on Chinese SMEs’ sustainable development: A focus on early-stage and professional characteristics’, Humanities and Social Sciences Communications, 10(1), pp. 1–11.
• Lueg, K., Krastev, B. & Lueg, R. (2019) ‘Bidirectional effects between organizational sustainability disclosure and risk’, Journal of Cleaner Production, 229, pp. 268–277.
• Mansouri, S. & Momtaz, P.P. (2022) ‘Financing sustainable entrepreneurship: ESG measurement, valuation, and performance’, Journal of Business Venturing, 37(6), 106258.
• Marcus, A., Malen, J. & Ellis, S. (2013) ‘The promise and pitfalls of venture capital as an asset class for clean energy investment: Research questions for organization and natural environment scholars’, Organization & Environment, 26(1), pp. 31–60.
• Margolis, J.D., Elfenbein, H.A. & Walsh, J.P. (2007) ‘Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and financial performance’, Ann Arbor, 1001(48109–1234), pp. 1–68.
• Masud, M.A.K., Sahara, J. & Maola, M. (2025) ‘Enhancing ESG performance through corporate governance: Insights from emerging markets’, International Journal of Energy Economics and Policy, 15(1), pp. 47–58.
• Maula, M.V., Keil, T. & Zahra, S.A. (2013) ‘Top management’s attention to discontinuous technological change: Corporate venture capital as an alert mechanism’, Organization Science, 24(3), pp. 926–947.
• Meles, A. (2021) ‘Venture capital and responsible investing: Progress, problems, and perspectives’, in The Evolution of Sustainable Investments and Finance: Theoretical Perspectives and New Challenges, pp. 211–249. Cham: Springer.
• Merhabi, R. (2023) ‘Systematic literature review of sustainable finance: Implications for entrepreneurial finance through venture capitals’, Economic Analysis, 56(2), pp. 68–83.
• Nguyen, P.A., Kecskés, A. & Mansi, S. (2020) ‘Does corporate social responsibility create shareholder value? The importance of long-term investors’, Journal of Banking & Finance, 112, 105217.
• Park, H.D. & Tzabbar, D. (2016) ‘Venture capital, CEOs’ sources of power, and innovation novelty at different life stages of a new venture’, Organization Science, 27(2), pp. 336–353.
• Pasewark, W.R. & Riley, M.E. (2010) ‘It’s a matter of principle: The role of personal values in investment decisions’, Journal of Business Ethics, 93(2), pp. 237–253.
• Postiglione, M., Carini, C. & Falini, A. (2024) ‘ESG and firm value: A hybrid literature review on cost of capital implications’, Corporate Social Responsibility and Environmental Management, 31(6), pp. 6457–6480.
• Prakash, A. (2001) ‘Why do firms adopt “beyond-compliance” environmental policies?’, Business Strategy and the Environment, 10(5), pp. 286–299.
• Revelli, C. & Viviani, J.L. (2015) ‘financial performance of socially responsible investing: What have we learned? A meta-analysis’, Business Ethics: A European Review, 24(2), pp. 158–185.
• Scheyvens, R., Banks, G. & Hughes, E. (2016) ‘the private sector and the SDGs: The need to move beyond “business as usual”’, Sustainable Development, 24(6), pp. 371–382.
• SVC & MAGNiTT (2024) Saudi Arabia venture capital report.
• Voß, L., Cordes, H. & Lueg, R. (2025) ‘the impact of environmental sustainability on willingness to invest in startups: A survey among private investors’, Sustainable Development, 33(2), pp. 2672–2695.
• Wang, X. & Wang, Q. (2021) ‘Research on the impact of green finance on the upgrading of China’s regional industrial structure from the perspective of sustainable development’, Resources Policy, 74, 102436.
• Wang, T. (2023) ‘The ownership structure of corporate venture capital financing and innovation’, Technovation, 123, 102736.
• Wang, R. (2024) ‘ESG integration into venture capital in the UK’, Journal of Applied Finance & Banking, 14(1), pp. 123–153.
• Yin, W. (2019) ‘Integrating sustainable development goals into the Belt and Road Initiative: Would it be a new model for green and sustainable investment?’, Sustainability, 11(24), 6991.
• Zhang, L., Cui, X. & Jing, W. (2024) ‘Who are responsible venture capitalists? The effect of business experience’, International Review of Economics & Finance, 96, 103593.
• Ziolo, M., Bak, I. & Cheba, K. (2021) ‘The role of sustainable finance in achieving sustainable development goals: Does it work?’, Technological and Economic Development of Economy, 27(1), pp. 45–70.
