This article was first published in the Financial Times.
With the consequences of business practices and investments increasingly scrutinised, the concept of impact investing is a crucial theme in the venture capital industry. Investors are realising that their investment decisions will shape our future, either contributing positively or negatively to the challenges we all face. There is a clear need to align business models with a just transition to a low carbon world and for investors to consider these impacts when making investments. As Mark Carney, the former Governor of the Bank of England, said, firms that fail to adapt may well cease to exist.
Earth Capital Limited (ECL), a clean technology thematic investor, focuses on the three core sectors of energy, food and water which are in desperate need of innovation and funding due to the dual impacts of climate change and population explosion. These sectors are suffering resource scarcity, damage to natural capital, increasing insurance losses and fossil fuel depletion, whilst stakeholder pressure for positive impacts continues to increase. There is clearly great need and where there is need, there is opportunity – to make both a positive impact and a financial gain. It therefore makes commercial sense to focus on impact investing.
In line with our energy, food, and water sector focus, we partner with exciting companies offering innovative solutions such as SoftIron, a manufacturer of low energy use IT infrastructure; Ace Aquatec, a welfare-led innovator of aquaculture technology solutions; and Propelair, the low water flush toilet for commercial use that saves up to 84% compared to standard toilets. Each one on its own will not change the world, but as they utilise investment funds to grow and expand globally, their positive impact will be felt. Areas of particular interest that we have identified for future investment include energy efficiency solutions in the real estate sector, funding solutions that facilitate a just transition away from fossil fuels in the transport sector, technologies that aid regenerative farming or encourage biodiversity, and sustainable water purification methods.
But it is not just about what we invest in that is important, it is also how we invest. Although climate change is the core investment thesis, we must go wider in our due diligence, investment, and portfolio management processes to consider all Environmental, Social, and Governance (ESG) factors relevant to a specific company or industry. These ESG considerations focus on how a business is managed rather than simply what it or its product does. It is about doing business in a way that is less damaging, more respectful, and more transparent. ESG factors emphasise the inherent value of a well-run business that prioritises long-term sustainability over short-term profit taking and it is ECL's core belief that the more sustainable a company is, the more valuable it will ultimately be and the greater the return. If a management team is prepared to underpay its staff, fails to implement appropriate governance measures, or dumps untreated water into rivers, would you trust them with your investment funds?
It is important to understand that no investment is purely "positive" – its aim may be to deliver positive benefits but use of raw materials, manufacturing processes and global transportation will always have a negative environmental impact, however much these are improved over time. It is therefore critical for investors to ensure that the positive benefits always outweigh the negative impacts. At ECL we use our inhouse tool, the Earth Dividend", to manage the sustainability of our investment portfolio by driving continuous ESG improvements, as we seek to limit the negative impacts whilst driving positive change. For us, this is a value creation lever that we employ to enhance the sustainability of our portfolio companies across the E, the S and the G to deliver stronger returns.
ECL is backed by a Guernsey-based family office, however, for those investors that remain unconvinced about the need to focus on ESG impacts, irrespective of their core investment focus, one needs only to look at the results of getting it wrong. Making meaningless promises will no longer suffice and companies neglecting ESG considerations now face increased legislation, class action litigation, value erosion and the loss of investors who simply cannot risk the reputational damage of being linked to such an investment. We expect the market to change over the next 5 years as the effects of climate change escalate and we predict a future where all investors embrace sustainable practices as the norm due to increasing stakeholder demands. Sustainable investing will no longer be a sub-section – it will just be investing.
Impact investing presents a pivotal opportunity for businesses and investors alike to contribute to a more sustainable future. By aligning business models with the transition to a net-zero world and considering ESG factors, companies can enhance their resilience and foster value creation while addressing the challenges posed by climate change. As the world faces increasing pressures to combat global issues, the path towards sustainable investing becomes an inevitable choice for all stakeholders.
Richard Burrett, Director and Chief Sustainability Officer at Earth Capital, was a panellist at Guernsey's Sustainable Finance Week held in Guernsey 18th - 22nd September 2023.
For more information about Guernsey's finance industry please visit www.weareguernsey.com.
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