The term “sustainable investing” is an umbrella that covers both impact investing and considering ESG risk factors in the investment process. Today, over 60% of investors have implemented a sustainable investment program. This is because banks and financial institutions know that climate change is a real threat to businesses. Companies that can innovate to lower their climate risk will have better odds of securing funding.
Within the investment world, there is a perception that venture capital lacks other areas of private markets when it comes to sustainable investing. Some VCs believe that early-stage companies need to be focused solely on getting a product to market. However, at Dahlia Eco Products, we are showing that environmental and social impact can and should be prioritized over financial returns. In a world where very little funding goes to female founders or founders of color, there is no downside to prioritizing our planet first. Even with this reputation, most VCs plan to increase attention to ESG risk factors in the coming year. The biggest obstacle for VCs is that it can be unclear how to define and measure impact outcomes.
Impact investing is defined as “investing with the dual goals of achieving financial returns and positive social or environmental results”. Most investors are targeting the IRIS framework, which includes energy, climate, agriculture, and waste. Again, measuring impact is highly important, and this can be a challenge for investors. There is also a misconception that early-stage companies don’t have anything to report because they’re still developing their business model. However, at Dahlia Eco Products we are proving this myth wrong by putting the planet first. After all, it’s much more difficult to retrofit a company for proper ESG practices than to start off with the principles in mind. VCs have an opportunity to provide the ESG policies that launch companies off from a good path.
As for ESG factors, most investors think it is at least moderately important that an asset manager utilize an ESG risk factor framework in their management of portfolio companies. It can be interesting to compare companies that already perform well across ESG issues with companies that say they will address ESG goals as part of their investment strategy. Overall, 15% of respondents to the Sustainable Investing Survey said they prioritize a completely clean portfolio - that is, a portfolio with zero carbon emissions. This is great news for our planet as companies and governments innovate towards Net Zero.
Many investment managers use a custom framework to measure and report on ESG risk factors. This may be based on a standard framework, such as the UN Sustainable Development Goals or the Principles of Responsible Investment. Investors can create a framework in-house, or they can hire consultants to develop one. Often these custom frameworks are “confidential” or “proprietary”. The industry could benefit from transparency in measurement so that strategies could be more easily compared and ultimately standardized.
Our co-founders, Addison Zaring and Emily McCabe, have direct experience with both sides of this equation. Addison is a Sustainability Consultant at Environmental Resource Management, the largest sustainability consulting firm in the world. Emily will start her career at Hall Capital Partners, an asset management firm that prioritizes Full Consequence Investing and consideration of the environmental and social impact of investments. Together, this team has the expertise to translate and share climate news with Generation Z.
Source: PitchBook Sustainable Investment Survey