by Paola Compés Tatay
When the Sustainable Finance Disclosure Regulation (SFDR) came into effect at the end of 2019, it marked the beginning of a new era for European finance. As early-stage investors, it became essential to gain a better understanding of how Environmental, Social, Governance (ESG) criteria could be systematically applied to venture capital. This necessity extended to our portfolio, which is mostly comprised of nascent companies with limited resources and a steep growth journey ahead of them. Most importantly, we wanted to understand how it could be integrated as a value- adding exercise, with the benefit of best practice integration from the outset, rather than an overly bureaucratic process.
“Building our foundations” is our first ESG report and the culmination of our first year of in-depth exploration – and first-hand experience – on how and in what shape ESG should be applied to early-stage companies across the life of the investment. At the core, we believe that analysing our companies through a non-financial lens – considering established ESG frameworks and best practices – will give us not only a more comprehensive picture of its potential but also lay the foundation for long term success and financial excellence. For that reason, we observe the Ten Principles of the UN Global Compact (UNGC) and utilise the United Nations Principles for Responsible Investment (UN PRI) as a compass and basis for our fund strategy.
Download the full ESG Report 2023.
With this publication, we want to share our progress and learnings across the year, recognising that this is an iterative process which evolves as societies’ expectations change and through trial and error, we improve our own approaches. So, to get started, let’s see the three key learnings of 2023:
1. To offer the most valuable advice to your companies, you need to go through the process yourself first.
We started 2023 with a Gap Analysis of our fund using typical metrics coming from Invest Europe, the Sustainability Accounting Standard Board (SASB) and the Global Reporting Initiative (GRI). We quickly realized that there are areas that needed larger attention, for example, our own environmental policy. Only by doing your own carbon accounting, securing buy-in from management and understanding where your impact lies, you can share that experience and know-how with your early stage-ventures which, at the end, turn to you as an investor for support as they are balancing multiple priorities at once.
2. A blanket approach does not work.
Research has shown that an ESG analysis of your business brings the most value when you focus on those metrics that are material – i.e. fundamental – to your industry, size, and geography. This is particularly important for small companies which can get overwhelmed by the complexity and abundance of ESG metrics in the market. As investors, we believe that starting to think early about these can put you ahead of your competitors, create a commercial advantage and be prepared for regulation. However, as investors, we must be realistic and do a balancing exercise between preparation and incremental adoption versus asking all the questions at once. After all, a McKinsey report this year showed that outperformance in ESG seems to boost general outperformance but not compensate for underperformance in profit and growth.
3. The most interesting information comes from direct conversations, not collected data.
One of the challenges of as an ESG manager – and I believe this happens to the industry as a whole – is how to best capture the value creation of focusing on ESG metrics as a business (e.g. energy utilised, how do you ensure fair pay for your employees or you assess the resilience of your supply chain). While we need data and metrics to find correlations between outperformance in profit and diligence over people and planet, secure buy-in and keep our own investors informed, the “aha moments” come from those 1:1 conversations where you give founders and management teams room to jointly explore the risks and opportunities of their business.
As we prepare to enter 2024, our focus will be on generating more in-depth knowledge through materiality analysis of our deep dives and organisating workshops giving our portfolio teams the opportunity to brainstorm as a group and exchange best practices.
Read our full ESG Report 2023 below.