In this episode of the podcast, guest host Laura Webb, a partner in the Emerging and High Growth Companies Group at Osler, and Olivia Hornby, Managing Partner of Spring Impact Capital, an impact-focused venture capital (VC) fund, discuss the continuing growth of ESG in the private sector. Laura and Olivia also dive into what ESG factors Spring considers when making investments.
Transcript
John Valley: In this episode of the podcast, we'll be diving into the topic of ESG in the venture space with our guest host, Laura Webb. Laura is a partner in the Emerging and High Growth Companies Group at Osler. She has over a decade of experience working with venture funds on fund formation and investment matters and has been recognized in Technology Law by Best Lawyers in Canada. Laura will be joined by Olivia Hornby, Managing Partner of Spring Impact Capital. Spring supports impact entrepreneurs through platforms including accelerator programming, an angel network, and angel investing across Canada.
Laura and Olivia discuss the growth of ESG in the private sector and dive into what Spring considers from a governance perspective when it comes to the investments it makes.
Over to you, Laura.
Laura Webb: Thanks very much, John. Olivia, thanks so much for joining me today to talk about ESG and venture. You've been in asset management for many, many years on the fund side. And so I think your particular perspective on ESG and, your new fund, how we're seeing it in the venture space play out is interesting. So, maybe what I'd like to do is just sort of set the stage with the big headline that we've seen a lot of coming out of the U.S. The backlash of ESG, the U.S. looking to pass regulations, there's been resistance on things, countered with sort of the European approach, to this, you know, they're very loyal to ESG and sort of are plugging along. So, I'm wondering sort of, just to set the stage, what's your take on investor demand generally with ESG and sort of where does Canada fit in?
Olivia Hornby: Yeah. First of all, thanks so much for having me, Laura. And like you said, I've been in the space for about 15 years. I think I was one of the first advisors to get the subscription to Sustainalytics back in 2009, and everyone would kind of pat me on the head. Okay, young girl, sure. You want to look at ESG in the public market space, and so look how much it's grown over the last 15 years. I think it's amazing to see. And I don't know if we need to define ESG for this audience, but for those who might not know, it's an environmental, social and governance. And it's grown massively over the last ten years. And as you allude to, there have been some more recent kind of interesting, I would summarize them as political debates around ESG and particularly in some key U.S. states that focus on the oil and gas industry. So, I think that's quite interesting. I kind of summarize that up as political back and forth. And I think that, broadly speaking, the growth that we've seen in ESG from investors, from consumers and from policymakers is not going away. I think you could argue a little bit on the policymaker side, but regardless of that let's look at Blackrock as a good example. So largest asset manager in the world, $10 trillion in assets under management. Their ESG assets grew 53% from the year end 2022 to 2023. They had a letter out last year, their year-end letter, where they surmised that the number of institutional investors that they support, they currently have 25% with science-based targets. So, to me, that means net zero targets on their investment portfolio, 25% of their clients. They're surmising that's going to move to 75% by 2030. So, all this to say, I don't see it going away. I know there's been a little bit of pull back from some key cases, but I think overall the way that we're moving is for more transparency, more reporting. And you mentioned in Europe. So, the standards that are coming out in Europe for institutional investors, but also for publicly traded companies in Europe, are going to be massive. And I think that is going to, regardless of what happens in the U.S. and Canada, I think it's going to translate because we're in a global economy and we have EU investors investing in Canadian businesses and vice versa. So, you know, the, CSRD and the IFRS standards, I think are going to probably be applied to all major public companies over the next call it five years.
Laura Webb: When we talk about ESG and we see it in the news, we see a lot of it around public companies. But you and I, we both play in the venture space, private companies. There's no sort of regulatory regime in Canada yet. And to the extent that that comes in the future and is applicable to public companies, I mean, regardless, we're seeing that sort of trickle-down effect in the private space. And so, can you talk a little bit about the venture space in particular and ESG? Because on the reporting side, we're seeing a lot of funds, investors going into funds that are requiring the GPs to report on, you know, what is your air travel look like? What's the diversity of your portfolio in the and the folks running your portfolio companies look like. And so, there is definitely a space for ESG in venture. And I'm curious, can you just talk a little bit about that and maybe particularly, this idea of investors making high risk, high reward investments, but still having this lens of responsible investing?
Olivia Hornby: Yeah, I think there's a few kinds of key things at play here. So one, we have the portfolio company's ESG metrics. And I think as early-stage investors, as venture investors. And there is of course a spectrum of venture. So, some venture investors are very late-stage kind of pre-IPO. And others, like ourselves, are very early stage where, you know, you might have less than ten employees in the company. So, you have a spectrum, but generally speaking, with your port companies, I think all private investors need to consider what the ESG reporting requirements will be as their companies, quote unquote, grow up. Right. So that's something to consider. But it plays less of a role in the very early stages of a private company. But I do think there's another element, which is how the manager looks at ESG from an investment thesis perspective. So, are you considering environmental businesses? And probably more often not in venture capital. It's the S and the G. What do you consider from a social perspective in terms of the investments that you make, and what do you consider from a governance perspective? I think most venture investors would say that they've been heavily involved in the governance side since the start of venture. You know, it's a key component to the investment strategy is how do we set up a board, how we set up corporate governance. That's often where the VC leans in. And then I think that third lens that you touched on, which is LPs requiring ESG reporting. So, I think that is another yet another lens or another pillar. And we are seeing you know, the latest PitchBook reports saying close to 70% of LPs requiring some sort of sustainability thesis or some sort of sustainability policy from their investment managers. Now, that might just mean it's an overlay. It could mean we're just going to invest in environmental companies, social companies, and we're going to heavily kind of get involved in how they report and how they grow up. So, I think there's so many different issues at hand here. I do not think that ESG reporting from the LP perspective is going away. Look at BDC, for example. In Canada, they've got the ESG report. They're the largest venture investor in Canada. And so that's had this trickle-down effect to most managers now needing to report in some way shape or form, very limited transparency, but at the very least, a baseline ESG metric.
Laura Webb: Yeah. Basically, a baseline by which they're going to measure their investments, right? Their investments into funds, their investments into portfolio companies. Interestingly, on the LP side. What interests me the most is sort of the illiquid nature of the investment. So, whether that's a direct investment into a portfolio company or an investor directly investing into a fund, the idea that you're not able to access public markets if you don't like what's happening. Earlier, you talked a little bit about this evolution as companies grow. So, I'm wondering from your perspective, can you kind of comment on this tension, maybe of the illiquid side of private investments. Is it really just if you're not going to provide the reporting at the fund level to your institutional investors, you know, governments, banks, are you jeopardizing your future funds? What does that mean for your portfolio companies as well?
Olivia Hornby: Yeah. I think, as we said, 70% or so of investors are looking for ESG reporting. So, if you're a fund, it's your prerogative if you don't want to do some sort of ESG reporting. But if you're not, I would say it will be pretty challenging to attract large amounts of capital. So, I think you'll see every blue-chip fund out there. Anybody who has a pension, investor, a foundation or institutional investor is going to be doing some sort of ESG reporting. But of course, there's that spectrum that we talked about. So, I think it's common practice. You're the outlier if you don't. At the very least have some sort of policy thought process around how are you going to report on ESG. Now, having said that, with venture, I don't think it's really fair to expect, like really early companies to be reporting on all these intricate details around, call it like scope emissions or governance policies, etc. but I think that's something that as investors, we should coach them on and as they grow up, quote unquote, certainly they should be installing those kind of processes and procedures. And absolutely, as they become public, they will need to have them in place. So, there is this trickle-down effect in terms of best practices from a policy perspective, from a governance perspective that get implemented as the companies, kind of start to grow. I think the beauty of the venture is it's kind of about innovation. So, I think of ESG as more about risk management and a risk management approach. But venture, we can pick a theme like environment or climate and go very deep into that theme. So, I think of it even as like one layer beyond, kind of like the ESG reporting. It's actually more about innovation and how can we support innovation in certain areas. You made a comment about ESG and returns. And I think there's been a number of studies on this, and nothing has shown like statistically significant differences in returns from managers who consider ESG and those who don't. So, I feel like I do have that conversation every once in a while. But I do think, broadly speaking, over the last ten years, the conversation has shifted from, oh, do I need to give up returns to consider these practices to more of a standard of okay, we do need to consider this. It's just a matter of how we're going to consider it and how does that measure up with your investment strategy?
Laura Webb: And I think there's been a shift in the focus and the understanding that these are non-financial metrics by which you're assessing risk of investing into a company. And so when you think about the social and governance side of things and even the environmental, but these considerations when an investor is going through that risk analysis and looking at these non-financial metrics, there's value in this in terms of the idea that there is potential for reduced litigation or regulatory processes that will bog up the company and being able to focus on their business. So, you definitely see that, and that shift is occurring, for sure. I want to give you an opportunity to talk about your fund because you guys, what you're doing is impact investing. And so maybe you can just give the audience a little bit of, an overview of your fund, what you're doing on the impact investing side, and dissect the difference between ESG and impact investing, because I think the two often get conflated and I think are an important distinction to make.
Olivia Hornby: So, firstly to define the difference between ESG and impact. And I kind of alluded to this, the ESG, I think of it as reducing harm. I think of it as risk management. I think of it as required reporting so that investors and the market can understand, how you're considering environmental, social and governance practices at your fund level and then how your individual investments are also considering environmental, social and governance practices. So, I think of it as really kind of more of a risk management piece, whereas I think of impact investing as contributing to solutions. So rather than saying, okay, this is our investment strategy, and now we're going to put an overlay on ESG. It's more investments that have the intention to create some sort of measurable positive difference to either social or environmental outcomes in the future. So, it is a little different. I think it aligns very well with the venture capital asset class, because it's the asset class that focuses on technological innovation. So, if we want to go deep into environment, let's look at clean tech. And what sort of innovations are out there in regards to clean tech or what sort of innovations are out there in regards to health care? So, I really think of them as kind of almost two separate pieces for us. The reason why I wanted to start an impact fund is that I always believed that it's possible to do well and do good. It took me many years to kind of sift through the different asset classes. And I worked across public markets and hedge funds and then alternatives. And I realized that in the private markets, there's much more purity to the investment that you're making. So, if you're able to kind of ascertain the measurable impact of an investment when it's such a small company, you get to know the founder, you can understand their intentionality and the outcomes. And so that's what led me towards like impact VC and naturally, being based in Vancouver, one of the first places that comes to mind when you think of impact entrepreneurship and impact angel investing in VCs is Spring. Spring had been around for ten years supporting entrepreneurs who want to change the world through innovation in a positive way and bringing together angel investors and new investors to the space. And so, it was really kind of a natural progression to take this next step with Spring and apply a more kind of institutional venture fund to a lot of the work that we were already doing in supporting entrepreneurs who are trying to focus on innovating around health and climate, as well as diversity.
Laura Webb: And so when you're out there fundraising what's the story in terms of achieving that balance between returns and social impact for you?
Olivia Hornby: Yeah, I think they're tied. And so, we're really looking for companies that are growing companies, that have some sort of moat, have some sort of unique differentiator, maybe technical advantage. But the growth of the company will result in both financial returns but also some sort of positive outcome. So, for example, our first investment in a mental health platform. As they see more patients and often their target is young patients who are dealing with, you know, anxiety and depression, ADHD, these are issues where we see massive backlogs in the health system in Canada. And so, this is a private company that has found a solution to provide support to young individuals who are battling these mental health problems. So, when we look at, okay, what is the impact of this sort of business, we'll look at, okay, how is the business measuring mental health outcomes in the patients that they're seeing? Are they already doing it? You know, what's the intentionality of the leadership team around this piece? And how intentional are they building out their business to support that audience? How would they measure it? And then how is it related to financial return? So as the business grows, the therapists see more patients. The business earns revenue, and more patients are seen. And so that's the kind of businesses that we're looking for where, as they grow, the positive outcomes are increasing. Same with some of the climate tech devices and materials that we're looking at. So obviously as they produce more, they're disrupting in terms of reducing waste or reducing carbon emissions. And they're generating revenues. So, they're really tied together. I don't think of giving one up to gain the other.
Laura Webb: I want to shift gears a little bit. So, sort of at the top of our discussion, you talked a little bit about how we can see a lot of the social and governance aspects sort of pervasive throughout the venture community, the fundraising, the companies that are around and the ability to decide or to make investments with these themes in mind. So, I want to talk a little bit about the social aspect of this and sort of diversity, DEI, the other well-known acronym that's talked a lot about in terms of ESG. Let's talk a little bit about the importance of diversity as a measure for sort of social sustainability.
Olivia Hornby: Yeah, I definitely think DEI is kind of the new kid on the block in a lot of ways. I never had a single investor ask me about it up until post-Covid, and then all of a sudden it kind of exploded and we were reporting on all the managers we invested in and their diversity and our team, and also trying to figure out what that meant. I think there are a few things that brought the DEI movement to the forefront. And so, one is the Black Lives Matters movement. The other is this broad kind of social media mental health crisis that has been looming for quite some time. But Covid really, I think, brought that to the forefront. And then the other piece that I found was really prevalent was gender equality and working mothers. And maybe that's just because I was a working mother through Covid, but to me, it seemed like a very strong theme that just suddenly came to kind of the forefront. So Covid, I think, helped bubble up a lot of these issues that were already at play. And all of those are encompassed in social. And I think that when we think of investing, our dollars have a role to play in terms of future, not only productivity but the social sustainability of our future. And I think there's more recently some recognition that we actually have some influence with our money around where we're going to put that and who we invest in. And so that comes to play in terms of what kind of managers do you support? What kind of underlying investments are those managers investing in? How are they thinking of the social practices and the underlying companies that they invest in? So, I think it's been a really exciting time. I think that traditionally with venture capital, it's really been this unique ecosystem of deals being done in the private clubs. And it was very much a white, male dominated, wealthy asset class that was unattainable for a lot of people. Something that Spring has done to try and disrupt that is actually building out programs to support new, underrepresented angel investors. So, we need both sides. We need more underrepresented founders, for which there are, but they need access to the capital. And so how are they going to gain access to capital if they don't have a membership to one of those private men's clubs? Right. So, some of the work that we do not at the fund, at Spring Activator in the programmatic side is around training new investors and new underrepresented investors so that we can ultimately have more diversity in the investor landscape and which we hope will also result in more diversity in terms of the allocations to the underlying companies and founders.
Laura Webb: You know, we see a lot of that as well. Groups like Women's Equity Lab sort of coming to the forefront, expanding nationally to provide greater access to groups that historically haven't been the investor groups, like you talk about this sort of private club. And I always think of venture capital, there's a little bit of this illusion that it's available to everybody. We see a lot of the stories on the news about, they may profile, for example, like a woman in tech who's CEO of a company and has sort of built the company, like Knix comes to mind. Right. But that's not everybody's experience. And I think that's probably not a lot of people's experience in terms of accessing capital. And I know this underrepresented founder group for you is a really important piece to your thesis. And I'm wondering maybe you talk a little bit about the emergence of specific funds that target investments into these underrepresented groups. Is that enough to move the needle on this? It seems like we're talking a little bit less about now reporting and a lot more about action. So, like what has to happen on the action side in order to provide the avenue and the channels for these underrepresented groups to gain capital?
Olivia Hornby: So, another thing just to highlight that came out more recently was the reporting on Capital Two underrepresented founders. So PitchBook came out a couple of years ago with their percentage of VC capital allocated to women, which showed up as less than 2% and obviously that number was shocking to people. So, I think that's another thing that triggered a massive push towards better equality in terms of our investment strategy. And then just to highlight in that same report less than half a percent to black and Latino women. So those are the stats that continually get stated out in the market. I think that it's been really exciting to see investors open up their investment thesis to not only supporting specific funds that might focus on a group. So, we've seen a lot of funds pop up that focus on female founders, black founders, Latina founders, you know, one particular maybe diverse group that might be easy to define. But we also see, and I think it's really important, that we continue to foster investment in new managers. So, some kind of sophisticated institutions out there are now dedicating some resources just to emerging funds that have kind of differentiated leadership. Because the idea is if you have differentiated leadership, you show up to different groups, different communities, different events. Your marketing materials might be different. We've seen this at Spring. We consciously tried to communicate to certain groups, and therefore we've seen over the last ten years, you know, more than 50% of the founders and more than 50% of the investor participants are women, and more than 35% are BIPOC. So, coming from an ethnic background. So, I think there's more than just investing in the founders. I think it's about how we show up, how we communicate, who's making the investment decisions. And then I also think one thing that comes to play that maybe we don't talk about much is what is our investment strategy? So, the classic VC investment strategy has been this kind of tech SaaS focus. If you think of the Ubers of the world. This has really been this classic power law model. Peter Thiel's famous book around venture investing is about tech investing and building unicorns. One thing that we thought about a lot at Spring is there are a lot of really differentiated founders who are building companies that we think are great companies that are growing, that might not be IPO companies and they might not be tech companies, but can they generate great returns for investors? We believe they can. Their exit strategy might look different than an IPO. It might be a strategic acquisition or PE (private equity) buyout. If we can be more flexible in terms of the way that we think of investing in early-stage companies, I think that opens up a new market of individuals. So, for example, a lot of the female founders that I meet are running kind of lifestyle businesses or consumer brand businesses, not B2B SaaS businesses. I think there's other things we can do around just supporting more diversity in schools. And I think that's happening. I was just recently looking up the stats: Ivy League STEM faculties, you know, 60% are men. So, I think good improvement, but we have a ways to go. So, I think we can push for more representation by diversity in schools. I also think having diverse leaders showing up to the youth to show that, you know, you might be a black female CEO and that it's possible as a frame of reference, this career as possible for me as a young person. I think of my childhood, I rarely saw females in strong leadership roles in high growth businesses. So of course, it wasn't top of mind when you thought of what you were going to study in school and what your career was going to be. So, I think there's a lot we can do there with youth, with schools and then finally so when we talk about the investment strategies as investors, how are we asking founders to show up? You know, are they standing in front of a stage in front of 400 people who are picking them apart? And is the audience reflective of the founder? I imagine how intimidating it would be if you're the one person in the room with that color skin or that gender standing up on a stage and being picked apart. So those are some little things I think that we can do to kind of shift the framework around who we're investing in, how we're showing up, there's so many layers to this. I don't think there's a black and white approach. And I'm not saying that we should be excluding certain groups either. I just think that we need to be more conscious about how we're showing up, how we're pushing deals through, what is our investment approach, what are the audiences, who are the founders that we're speaking to? I was chatting with another VC fund recently who is saying they consciously set targets around different communities that they want to show up in. And I think that's a smart way of just ensuring that you are not just fishing in the small pond and kind of perpetrating this pool of investment of capital and wealth to the same communities.
Laura Webb: Yeah, I love all of that. I think those are some really great takeaways. This is a process, right? And you start somewhere, and you build and you build and you encourage and you educate and you do all these outreach programs to provide people with an opportunity to connect. And I think largely a lot of this has to do with networks and opening up people's networks, making introductions and making sure that people have a proper forum from the founder's perspectives, to pitch their company to, like you said, the right audience. Making sure that they're being put in front of the right people who have alignment in terms of the end goals here because, as you said, venture, I think, traditionally was very much like you have your founders, you start your company, and you seek for IPO. That was sort of the goal, right? And I think we can all see that IPOs it's not really the hallmark in terms of your exit. And I think seeing a lot of focus on lifestyle businesses and different ways to build and to make an impact. And make money, of course, that's what this whole thing is about.
Olivia Hornby: I think we're being more open minded. And in a lot of ways ventures kind of grown up, that's what we've seen. It's not that old of an asset class, and it traditionally came from the semiconductors and the tech industry and the Silicon Valley. And so, it makes a lot of sense. Those frameworks made sense then. And they might not make as much sense now. I think in a lot of ways it's really you know, the community is kind of grown up and we're applying a venture lens in a more broader fashion. And I do think on the reporting side, both the DEI and the ESG, it might be a pain, it might be time consuming and expensive for everyone involved to report on these things, but I think it is making a difference, I really do. I think LPs have a lot of power in just asking for like a basic DEI report is forcing a manager to now be conscious. It might not be at the forefront of your strategy, but at least you're thinking of, okay, who am I hiring, who am I promoting, who am I investing in from a DEI lens? And I think that those are such valuable conversations to have. Same on the ESG side. So now we need to consider what the net zero targets are of companies. And what are the scope of missions. Ten years ago, very few people were kind of considering that. Now it's common practice and common knowledge. So, I do think kind of the policy side and the reporting side is actually shifting perspectives.
Laura Webb: I love that you just sort of brought our entire conversation full circle back to sort of the policy side of things in this give and take and back and forth. And that's the thing with these discussions, like there is tons to unpack here. And we could have very lengthy conversations on any number of the topics that we talked about and just sort of touched tangentially today. But I do think that our conversation has provided some interesting food for thought on how ESG is trickling and has been trickling down to the private sector and how venture can and should react and sort of take this in and apply it. It's about reporting, but it's also about action, right?
Olivia Hornby: And this is for all the investors out there and the way that I try and kind of reconcile all these concepts together, I think that all asset classes have a role in a portfolio, especially if you're talking large kind of institutional portfolios. And I think that for me, impact is the piece where you have the potential to make a positive, tangible, intentional change to the future. And that happens in the venture world because we're investing in innovation, new companies, disruptive companies. So, I think of this as like the one little sleeve of a portfolio that you can get really excited about, like the deep impact that you can make in the future. And it's beautiful because it also is a very high performance driven asset class. So, you can generate fantastic returns and make a really meaningful difference. And so, my message for investors out there is to consider this as maybe the most meaningful piece of your portfolio, and perhaps you don't want to apply an impact lens to the rest of your portfolio. And I think that's totally valid. Fixed income plays its role. It provides you your income. And this will be your sleeve that is about the future. So, I encourage all investors to think that way. And if anyone wants to have a deeper conversation about that they can reach out to me.
Laura Webb: Thanks so much, Olivia, for your time today. I really appreciate it. I think this was a wonderful conversation and love what you guys are doing at Spring Impact Capital. I think it's really important on the impact investing side.
Olivia Hornby: Thank you for having me. Thank you for all your support, Laura. We really appreciate it. And this has just been a pleasure.
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