There is a pervasive notion among much of Wall Street and many mainstream investors that financial returns come from a finite, scarce pool of capital. By and large, the financial industry still operates on the zero-sum-game concept that a dollar paid in dividend to someone else’s P&L, did not come to mine.
However, there is a growing chorus of asset managers and asset owners, Helix Ventures included, that looks at investing through a different lens. These asset controllers recognize that looking beyond the financial bottom line, and considering environmental, social, and governance (ESG) factors, has created multi-trillions dollars of wealth. Bio-tech, renewable energy solutions, the internet, and social media have not only distributed outsized financial returns to investors, but have also changed our societies forever and impacted our natural environment for the better.
If you didn’t invest in these industries in the past, not to worry, the next waves of wealth creation are upon us: life sciences, more-efficient renewable energy technologies, waste & recycling, the circular economy, sustainable agriculture technologies. The list goes on and these industries are here to stay. Medication and health care distribution will become more personalized and efficient, less energy will be generated from carbon-based minerals, more products will be designed to cycle through the economy instead of landing in landfill, and satellites and sensors will help farmers and foresters to run their land more productively.
The common denominator in these waves of technologies is to take a more holistic approach to investing, which means to look at value creation beyond your own financial bottom line and to wear a lens that includes looking at the impact on society and environment that your investments make. Especially in the context of venture capital and private equity, the importance of this becomes intuitive very quickly. These days PE is deployed in an environment that tolerates less of the infamous leveraged LBO’s, which drove little to no value to the enterprise.
PE is more and more transformational capital. Company CEO’s are challenged to create purpose-driven value on behalf of the enterprise. And PE investors, looking for ways to transform a company with their investments, deploy a more holistic approach by looking beyond the IRR’s and financial returns, and consider the impact on society and environment.
By paying close attention to these non-financial factors, PE investors will reap the benefits at the latest on exit (by selling at a higher multiple than a peer company who didn’t pay attention to these non-financials), but probably earlier, by being able to monitor the growth of their investments better, to improve risk/return profiles, to increase transparency and reporting capabilities and to avoid compliance and regulatory infringements that could lead to penalties. By the way, in the process you may find that you tick more boxes with an increasingly large base of institutional investors that demand you to pay more attention to these factors. These sophisticated LP’s only invest in responsible investment opportunities that have a positive value for society and our natural environment, beyond financial returns.
By not paying attention to non-financial performance factors, asset managers and owners increasingly leave money on the table as their peers catch on. This is especially true now that metrics systems are emerging that allow us to collect, monitor, analyze and (often) quantify the non-financial performance of our investments.
Major asset managers, with over $30 trillion under management combined, have signed the UN’s Principles of Responsible Investment over the past decade. For GP’s in private equity and venture capital, it is increasingly unlikely to get funded by major pension funds or institutional investors if they have not signed the UN PRI. For privately owned companies, there are a number of metric systems and rating frameworks that are being used by company and fund managers. The Global Impact Investing Rating System allows companies in the US to incorporate as Benefit Corporations under new legislation signed into law already in over 20 states. ESG Analytics is an ESG data analytics platform that was spun out of Swiss private equity group Adveq. And the most recent initiative, by former directors of the Global Reporting Initiative is ESGrevolution, a big data and long term value provider across asset classes.
The jury is still out on which of these and other frameworks will eventually become the prevailing systems in private equity and venture capital, but at least we cannot say any longer that we don’t have the metric systems available to drive value to our financial bottom line by tracking environmental, social and governance data.