To ESG or not to ESG – is that a question?

29th October 2021

By Matthew Cushen 

Anyone in Glasgow this week will see that it is not just politicians, scientists and activists hanging out at COP26 – they will be joined by a phalanx of businesses. There is plenty of commercial value to be had in environmental or social (ESG) propositions. And, as ever, where there is value there quickly follows investors sniffing around.

‘Impact investing’ is estimated as US$715 billion globally (2020 Annual Impact Investor Survey, Global Impact Investing Network). There is plenty of noise around the topic and heavy marketing of funds. But is the perceived growth either real or relevant?

Firstly definitions are vague. ‘Impact investing’ should mean investing in organisations that create positive, measurable social and environmental impact, along with a financial return. But what about scale – does the social & environmental impact need to be significant or will marginal do? Or strategic choices – do shareholders need to give up any financial gain for the societal gains?

Then it is impossible to understand true growth, and much will be re-targeted funding. I’m not, by nature, a cynic but I suspect that some/most impact funds have been created more as a marketing tool to attract funding from investors rather than a thoughtful investment thesis.

However, does this matter? Isn’t what counts that funds are being directed to businesses that are doing some good, have a commercial model to sustain and grow their impact, and that they have a fair chance of succeeding because their customers are more attracted to purposeful propositions?

That is the simple way in which we see the world of impact investing. We have considered creating a fund specifically for investing in entrepreneurs that are a force for good. But we already rule out any business that is doing harm. In our distillation criteria we already rate more highly innovation that will leave the world a better place and we already place more value on propositions that have a clear and worthy purpose at their heart. We’ve been doing this for years because:

1. we believe our investors are ethical people and wouldn’t want to support unethical businesses.

2. we put huge effort and time into helping our portfolio businesses grow – and we jump out of bed faster in the morning to help entrepreneurs solve worthy, purposeful problems.

But most critically:

3. we place a premium on fresh, inspirational insight – it is difficult to create innovative solutions using old, shared market insight. And we obsess over product market fit (the absence of which is one of the most common reasons start-ups fail). One of the ironic things about crisis is that is creates & forces different ways to see the world. It creates different needs. Both the source of rich innovation. So it is not unusual for businesses solving environmental or social problems to impress us with their market insight and product market fit.

4. our whole investment thesis is about backing businesses generating habitual consumption (B2C or B2C) and therefore the foundation for a loved brand. Because we are experienced in brand building and as brand equity creates outsized returns for investors over just a multiple of EBITDA or revenue. We know consumers and customers are caring more about purpose and the back story to the businesses they spend with and this has become an essential ingredient in building a loved brand..

A couple of examples that have made it into our portfolio:

  • Bird is the UK’s first B Corp eyewear brand – using sustainable materials combined with distinctive design for optical frames and sunglasses, the ingredients for a differentiated brand in a highly fragmented market.
  • Unizest are an eCurrent account for the 1.5 million contingent workers (think carers, construction workers, fruit & veg pickers etc.) and 150,000 or so students coming to the UK each year. Unizest solves a financial inclusion problem with a product that can be activated before finding a residential address in the UK. That is a worthwhile problem to solve, but more significantly than that from an investors’ perspective – it solves a huge problem for recruiters, who as a result offer the account as part of their process, which results in a fintech product with near zero cost of customer acquisition.

So we don’t introduce any positive ESG discrimination or bias into our investment criteria. (In fact we are always finding ways to remove inherent bias from our criteria.) We assess those businesses alongside all others. It just so happens, but not by accident, that we are attracted to more purposeful businesses.

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