According to Tesi’s study, Finnish private equity (PE) and venture capital (VC) investors seek to expand the assessment and reporting of ESG and impact topics in their potential and current investments. For startups and growth companies, responding to these demands can mean increased pressure to start developing their sustainability practices. On the other hand, this development also enhances companies’ competitiveness. Since the success of the company marks also the success of its investor, it is in the latter’s interest to help companies get started on – and grow – also in terms of sustainability.
Increasing demands from investors, regulators and customers
Startups and growth companies are under increasing pressure to measure and develop sustainability (ESG and impact). According to a recently published study by Tesi, almost all Finnish PE & VC investors aim for a more comprehensive assessment of ESG and impact when evaluating potential investments. This, in turn, requires companies to openly communicate their sustainability initiatives and related goals.
Yet, showcasing sustainability achievements when applying for financing is not enough. In the future, almost three-quarters of investors intend to follow more rigorous sustainability reporting practices on their portfolio. Since less than half (39%) currently collect ESG data from all portfolio companies, the requirements for startups and growth companies to measure and monitor this are set to increase.
The tightening sustainability regulation from the EU also increases the pressure. Among other things, the corporate sustainability reporting and due diligence directives will impact growth companies at least indirectly. Although it is currently unclear how the legislation will eventually develop, the changes concerning the wider market are worth following already.
For some, the sustainability journey is just starting – yet now is the time to act
Understanding ESG and related practical actions are obvious to some companies, while for others the journey is just starting. According to Tesi’s growth company pulse survey published in November 2022, less than half of the surveyed SMEs have concrete ESG goals (46%). For the majority, i.e., around 40% of all the respondent companies, the goals relate to reducing emissions or other environmental impacts.
The tightening requirements from PE & VC investors and new regulation call for more companies to put sustainability topics on their agenda. In practice, getting measurement right requires practice and demands further development of internal data collection processes. The large-scale integration of sustainability in the everyday business activities does not happen overnight. As the available resources to use for sustainability initiatives are often limited, the work is best to start gradually.
Furthermore, the opportunities sustainability development brings should not be overlooked. Measuring and developing ESG and impact not only ease external pressure, but also increase the company’s value in the eyes of customers, investors and employees. Companies that have already began this journey can stand out in the market. For future growth companies, sustainability is expected to already be part of the DNA.
Measuring and developing ESG and impact not only ease external pressure, but also increase the company’s value in the eyes of customers, investors and employees.
Support from investors
For a lone startup or growth company, getting started on sustainability may feel challenging. On the other hand, investors’ decision to demand more from companies in terms of sustainability also encourages them to offer support and guidance. The investor and company are united by the same goal, as the success of a growing company goes hand in hand with the success of the investor.
The PE & VC investors can therefore help the company to set up and speed up their sustainability practices development. The fund’s previous experiences in the ups and downs of ESG can be useful for companies that are starting their journey from scratch. For example, the private equity space has been closely following the sustainability developments in the EU regulatory space since its origination. Although public sources are overflowing with material on sustainability topics, the opinion and guidance of an experienced expert is still valuable.
I welcome the sustainability targets set by the Finnish PE & VC investors. The shared goals increase the opportunities for a comprehensive sustainability transition and entail the success of Finnish companies as experts in the topic in the global market. However, there is still a lot to be done before sustainability practices integrate into the everyday operations for all market players. It requires a comprehensive understanding of sustainability, continuous monitoring and development, as well as goal-oriented communication – both in startups and growth companies, and among investors.
Tesi wants to raise Finland to the forefront of transformative economic growth. We develop the market, and work for the success of Finnish growth companies. We invest in private equity and venture capital funds, and also directly in growth companies. We provide long-running support, market insights, patient capital, and skilled ownership. tesi.fi | Twitter | LinkedIn | Newsletter