This article is an English translation of the op-ed written by Jessica Rameau, Wellstreet Partner & Fund Manager, and Caroline Farberger, Wellstreet Partner & Chairperson, published on Dagens Industri Debatt, Tuesday 2023-01-10
ESG is dead. Long live ESG!
ESG has become increasingly scolded. But at the same time, it is a matter of survival for companies. We have a big responsibility as investors, and now is the time.
We will soon have completely run into the ditch with ESG, the increasingly jaded acronym for environmental, social and corporate criteria. Critical newspaper headlines follow each other and accusations of greenwashing are on the rise.
No wonder. The playing field for ESG has become too complex even before we've even gotten started in earnest. The amount of organisations and consultants who, with their guidelines and templates, at best support, at worst profit from, the hysteria around ESG has multiplied exponentially.
The playing field for an entrepreneur with limited resources can appear impenetrable, while balancing the pressures of a recession against expectations of helping to save the planet or promote human rights in faraway countries.
Critics argue that ESG has become a distraction, that it is still not possible to measure in a meaningful way or that the causal link between ESG and profitability is not proven. ESG 1.0 is dead. Like a stranded whale. Monstruously large and surrounded by delusional spectators.
Where did we go wrong? Let's look ourselves in the mirror. We as investors have failed to convey
two important things; that ESG is seriously a matter of survival for entrepreneurs, not least to access
capital, and subsequently to help entrepreneurs with the practical guidance.
What the critics of ESG miss is that every company needs a "license to operate", which in short means that a company needs to earn its trust to exist based on how the company behaves towards employees, customers, investors and other stakeholders.
Gone are the days when it was possible to get around as a homogeneous group of founders with a singular focus on quickly scaling a revenue opportunity and at the same time running slalom between unpleasant regulations. No such company will be considered investable in the capital market, as the entrepreneur's ability to work with ESG is directly crucial for the ability to attract capital. This is because the investors themselves are subject to the supervision of both the market and regulators of their ESG work, which in practice is based on the portfolio companies' ESG work.
We cannot therefore handle ESG as a cost consideration. Instead, ESG is prerequisite for a company to exist at all in the future. ESG 2.0 must therefore be about moving from words to deeds, seeing implementation as a hygiene factor and an opportunity to future-proof the business. We both can, want to, and must rise and make ESG happen. As investors, we also have a great ownership responsibility to practically guide our entrepreneurs on the journey.
A common misconception is that the regulations around sustainable investments, SFDR (Sustainable Finance Disclosure Regulation), have been created so that the companies will jointly solve all the challenges society faces. This is not the case. SFDR has primarily been created to evaluate a company's sustainability risks in order to ensure the company's long-term success.
From this perspective, the SFDR with its three pillars is both justified and understandable:
● Risk assessment of how the company's actual ability to conduct its business is affected by ESG-related risks, and in which areas the company risks going wrong and may lose its "license to operate" if efforts are not made and followed up.
● The company's ambition to make a positive impact on selected sustainability areas, e.g., by starting with the UN's Global Goals.
● Transparency by reporting on reasonably standardised metrics. It's not more complex than that. The rest is about rolling up your sleeves and making it happen.
For you as an entrepreneur:
● Build in ESG right from the start as part of both the business model and all the company's processes. Understand the implications of environmental, social and governance factors in supply chain design, how you distributor charge for your offer, business terms and conditions with customers, compliance follow-up and how your employment conditions promote equality and diversity.
● Actively look for investors who can provide practical help with the training and implementation of ESG in your company.
● Build trust with your stakeholders early on by sharing your ESG work in your internal and external communications.
For those who invest in companies in the early stages:
● Prior to reviewing ESG risks in the investment process, both as a consideration prior to the investment decision and as part of due diligence.
● Review with your entrepreneurs how a risk assessment is made and explain that the sustainability works absolutely necessary for the long-term survival of the company.
● Invest time, build your own knowledge base and work with real experts. See your task as an investor to act as protector of the future of portfolio companies.
● Register your fund as at least "light green" according to SFDR, so-called Article 8 fund so that we as investors submit to the same regulations and standards ourselves.
ESG offers a good framework for bringing about a fundamental shift in how we run businesses. Stop blaming the regulations for the resignation you feel. It is about future-proofing companies. Roll up your sleeves and make sure that 2023 will be the year when we together make sustainable business become the new norm.
We don't have the answers to everything and we are at the beginning of our journey, but our operational approach as investors has proven to work. We will therefore continue to share our insights as well as our tools, our failures and successes, as this is of the utmost importance for all of us to succeed with. Be inspired of our work, adjust it or reject it. But do not ignore it, if you want to be relevant in the capital market at all.
Caroline Farberger, Partner & Chairperson, Wellstreet
Jessica Rameau, Partner & Fund Manager, Wellstreet
Link to the article in Swedish Published on Di Debatt Tuesday 2023-01-10 >>
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