The coronavirus and responsible investment (i.e. corporate responsibility and ESG standards) have similar characteristics. First, they smoulder in the shadows, spreading unseen in smaller groups. Those handling them speak about it in incomprehensible jargon. Their presences are doubted, underestimated, exaggerated, or feared. Last, they reach a flashpoint, spread, and become acknowledged phenomena.
Similarly to the coronavirus, responsible investment has become visible and spread. Soon their paths will diverge. All efforts are directed at smothering the spread of corona, whereas the aim for responsible investment is to accelerate its spread. When the dust settles, both will be here to stay – coronavirus perhaps as a seasonal visitor, but responsibility as a routine and a necessary licence to operate. Responsibility will be a part of normal business, eventually becoming linked to positive social impact.
Has responsible investment already become embedded into our everyday activities? Are we already responsible enough? We sought the answers to these questions from some 30 fund managers of our active portfolio. They include both Finnish and international Venture Capital, Buyout and Debt players as well as early-stage investors and managers investing in more established growth companies. The spectrum of respondents covers both specialist and generalist investors, new market entrants and more entrenched players.
We learned a lot in these meetings, projected the message and enjoyed very broad-based discussions. Thank you all for your contributions!
We have collected below some of the main points highlighted by our interviews.
Who is responsible for responsibility? The practice seems to be that all investment team members are responsible, particularly for their own portfolio companies. Generally, a single person was charged with ensuring the responsibility policy is updated, and possibly also for in-house training, reporting on a general level and membership of, for instance, an industry association working group. We believe it is important that one of the managing partners handles responsibility issues, regardless of the model used to organise practical activities. So what about the responsibility of the topic between the investor and portfolio company? Interviewees were of the opinion that a portfolio company is in charge of operating responsibly and putting corporate responsibility into practice. The investor, however, is liable for promoting corporate responsibility and can help to solve concrete challenges and share best practices between portfolio companies.
Who trains the experts? Seldom had an investor dedicated resources to planned and systematic training in responsibility aspects or used third party expertise to provide such training. Generally, it seems, each team member educated themselves, and one person was designated to distribute news about pertinent topics and announce relevant seminars. The challenge for this method is how the information, independently gathered by interested team members of different levels, can be disseminated in an investor’s team. We encourage teams to conduct active, internal and/or external, workshop-type training each year, both for inducting new team members and for focusing on responsibility.
Responsibility policy – is it needed? Every team had responsibility policies, albeit differing greatly in depth and content. Still, there was a correlation between the content and practical procedures. All the interviewees emphasised risk management as much as business opportunities and value creation potential, although their wording differed. Some interviewees focused on a particular theme; others (especially in growth equity) excluded certain sectors (mostly because of EIF restrictions.) Often, the policy was updated “when needed”, and this need could be identified by the team, investors, or external forces. We encourage GP’s to update their responsibility policies and procedures annually, in the same way as portfolio companies are encouraged to review their corporate responsibility status each year.
What is the right angle of approach? All the interviewees felt that responsible operation is essential to profitability, especially over the long term. When asked “whose interests have priority?”, the responses were unambiguously divided between “everyone’s” or “the owner’s/investor’s”. More players saw no conflict of interests between different parties, at least over a longer time frame. Many also emphasised that without a responsible approach to investments (either in the team or in portfolio companies) it is difficult to recruit skilled personnel, because responsibility is high on the agenda of the young and educated. Furthermore, LP’s interest in responsibility and its implications for returns has greatly increased in recent times.
Can responsibility be integrated into investment activities? With all the interviewees responsibility was in some way a part of Due Diligence (DD). Some had a more extensive list of questions, others had it more so as a component of legal DD. Although the effect of the findings varied, almost everyone reported a case of not investing because of ESG findings (even though these findings would have emerged in other parts of the DD). Some regarded the findings positively, seeing in them value creation potential, as they had already created a development path for this field as a part of the DD. Integration during the management period varied: responsibility aspects in larger fund managers and portfolio companies had been incorporated into the annual cycle followed by the team and the boards of portfolio companies. Smaller fund managers, and especially VC backed companies, have not yet systematically addressed responsibility aspects. We encourage GP’s to bring responsibility issues broadly to the annual agenda of a portfolio company’s board. All managers considered it important that responsibility issues were in good order when considering an exit.
Beset by standards, KPIs and carbon footprint calculations? Managers rarely used any responsibility standard. The most mentioned were the UN’s Sustainable Development Goals (SDGs). Yet, SDGs are not commonly used. The interviewed found it difficult to link genuinely measurable KPIs of practical operational importance to responsibility. Some managers were trialling a carbon footprint calculator but, apart from some individual portfolio companies, they have not yet been actively deployed at portfolio level. Clear thinking, creative solutions and development are needed.
Reporting and communications – unwelcome tasks? Reporting between portfolio companies and fund managers on responsibility aspects is very diverse because some investors demand a strict format and frequency while others prefer a more flexible procedure. Between GP’s and LP’s, a practical model seems to be forming whereby reporting of a specific portfolio company is one element of other quarterly reporting. In addition, GP’s report annually about their own and portfolio companies’ events, important themes and activities, and possibly statistical data on their portfolios. Some managers have a crisis communications plan in case of unwelcome media attention due to an issue in a portfolio company.
Diversity – do we need quotas? The concept of diversity has become a byword and is now a prominent issue in corporate responsibility. Diversity is fuzzily defined – some players regard it as “just” a gender equality issue, some more broadly as including different backgrounds in terms of experience, skill sets, age, gender and nationality. There is a general desire to promote diversity. However, there are significant practical challenges, partly because of the composition of job applicant cohorts.
Social impact – surely we just talked about it? Or do you mean charity? Opinions about the concept and its relevance, as well as how it relates to responsibility, vary greatly among players in the venture capital and private equity sector. The sector would benefit from creating a common language and glossary for social impact.
The journey towards responsibility and social impact has begun, and they have become everyday and widespread topics. But the destination still lies ahead, and the goal is continuously moving forwards. Reaching the goal demands constant effort. We will learn from each other, we will keep an open mind, and we will share best practices. Each day will be a little better than the day before. Let’s leave COVID-19 behind us and welcome responsibility into our daily life.
Wishing everyone a very happy and responsible New Year!