The ASG has been under scrutiny for the past 12 months due to pressure from some Republican politicians in the United States., which have asked investment managers to move their clients' money out of ESG-focused investments.
Put simply, their argument is that ESG prevents investors from accessing assets like fossil fuels and, in doing so, they will have missed out on the rising valuations of fossil fuel companies driven by rising energy prices. ESG critics argue that continuing to apply ESG doctrine in today's market is therefore a breach of fiduciary duty on the part of investment managers.
This, of course, overlooks a fundamental challenge: the Intergovernmental Panel on Climate Change (IPCC), in its recent AR6 report, stated that G7 economies should reach net zero emissions in 2040, not 2050, if we want to avoid catastrophic climate change.
At the 2021 United Nations Climate Change Conference, countries committed to reducing their consumption of oil and fossil fuels. The IPCC's latest scientific assessment sets the stage for a future climate change conference (not too far in the future) at which a commitment will be made to reduce fossil fuels and accelerate the already significant investment in an electrified future. decarbonized.
Therefore, the fiduciary duty of investment managers, seen through that prism, would suggest a long-term imperative to ensure that the funds they manage are not placed in assets that will become stranded or obsolete. In other words, investing using ESG metrics and favoring renewable and climate technology investments makes sense from an economic and long-term investment point of view.
We follow this approach, and we are not the only ones. Despite the recent controversy, the ESG investment market is estimated to be worth $53 trillion worldwide by 2025 and data, collected by Bloomberg, from the European Funds and Asset Management Association (EFAMA) have shown that the EU's highest environmental, social and governance classification, known as Article 9, attracted €26.000 billion ($28.000 billion) in 2022. This coincided with the largest outflow of income fund clients fixed since the global financial crisis of 2008, while equity funds also suffered, losing 72.000 billion euros in the same period.
Regardless of the criticism,ESG-focused investing is attracting significant funding and is expected to account for around a third of all funds under management by 2025. Whether you believe in ESG or subscribe to the “woke capitalism” view, they simply cannot be ignored, and any company seeking funding should ensure they are structuring their investment case accordingly.
Despite this, very few companies, especially in the expansion phase, think about how to structure their investment arguments so that they are attractive to a wide range of investors, particularly those who follow ESG criteria.
EFAMA data shows that a significant amount of money is flowing into Article 9 funds, but to become a portfolio investment, startups must meet the Article 9 criteria, otherwise they will not meet the investment criteria.
This means that it is no longer enough to have a brilliant idea, a business plan, the intellectual property and a team to carry it out. Instead, they also need to incorporate ESG metrics into their business model and demonstrate positive social and environmental impact from the start.
For many startups, this creates an additional knowledge barrier that they have to overcome, but addressing it from the beginning will pay dividends, not only in obtaining initial funding, but also in improving their scale-up potential, making them your business potentially more valuable and making it easier to exit.
This changes the parameters for both the investor and the investee company. Investors must accept that they have a role to play as coaches and guides in helping entrepreneurs understand what they need to report and the impact they need to demonstrate as part of the value they add to the companies in which they invest.
At my company, we have always considered our role as a mentor and investor. Access to our LPs' funds requires us to work with our portfolio companies to ensure they are equipped to report success and impact in ways that go beyond the traditional bottom line.
Companies seeking investment need to understand this change in investors' perspective and make it as easy as possible for them to vet, approve, and want to invest in their company. It means launching a business with a clear idea of how you will seek funding at scale, what your exit plan will be, and how you will facilitate all of those elements in your growth journey. This means incorporating ESG into the company's DNA from day one.
