ESG and early-stage investing

ESG investing is obviously the talk of the town. ESG inflows are incredible and growing at about 17% per annum. Globally standing at about 50 trillion USD of assets, a recent Deutsche bank report forecasted 150 trillion USD of assets by mind 2030s. 

Put simply companies that take ESG seriously can mitigate risk substantially for investors. At the public company level if a company gets a very high ESG rating from a ratings agency in general it will communicate that company has a strong awareness of risks across environmental issues, social issues and governance. A great example of this would be the recent collapse of Wirecard bank in Germany. Due to continued governance issues Wirecards’ ESG rating had plummeted. At its last ratings review it scored only 4 out of 100 on governance – effectively rendering the business untouchable from an ESG point of view. Months later it was bankrupt.

At a deeper level ESG is about much more than risk. Companies that have sustainability and environmental and social values at their core are likely to thrive in the new climate change/ pandemic world we are now entering. The days of robbing Peter to pay Paul in terms of planetary and human health are now truly coming to an end. FMCG companies that are pushing product lines that drive poor health run the risk of being consigned to a high-risk investment with poor ESG scores. The cost of capital increases and business performance suffers.

But where does early-stage investing sit within this new world of ESG? Initially I was sceptical regarding how ESG metrics would or could apply to early-stage companies. I heard the term ESG thrown around the industry as an acronym but with little substance behind it. What is also very clear is that there are still no standardized formats for ESG guidelines and frameworks.

Early-stage companies are often just trying to prove a concept. Even in the climate change space, founders often haven’t really thought about the world of ESG and will usually not score highly on governance or indeed social factors. Often the boards of investee companies can exist of the founder and a small team. They don’t usually have much bandwidth to tackle non-core issues.

That being said, OnePlanetCapital specialises in companies focused on climate change and environmental impact. Often many of these companies will have a strong social impact angle although the thinking on this will be less developed that the environmental angles. 

Having worked on the development of this business for the last 12 months my understanding of ESG has changed substantially. It is clear that strong ESG frameworks need to be implemented across the board. Our role as an early-stage investor is to prepare these companies for the future. We need to help them shape their ESG strategy and their ESG communication strategy to ensure they are in the best shape going forward as they move onto Series C and Series A rounds.

This is why we have decided to put an ESG framework at the heart of the OnplanetCapital offering. We intend to be industry leading in terms of ESG compliance in early stage investing and mentoring our companies to have really well developed ESG compliance and communication going forward. Ultimately it gives the company a stronger strategy and will lead to better access to capital going forward.