4 min read
ESG and impact are increasingly in the spotlight, spurred by the pandemic and climate change events, which have not left anyone untouched and have elevated business risk. We are once again reminded that we live in an interconnected world, a social and environmental ecosystem that is as complex as it is fragile, and the time to act was yesterday. What is becoming more and more clear, is that we cannot continue to do business as usual. The silver lining is that people are sitting up to take notice, including a conscious younger generation of consumers, founders, employees, investors and policy-makers. The value chain of capital has a significant role to play in responding to today’s challenges and shaping the future of responsible capitalism. So do governments. Increased attention heightens the risk of green washing, with anti-greenwashing rules and global regulatory bodies have yet to catch up.
As more investors and companies get on board responsible investing and sustainable business, ESG integration for risk and ‘do no harm’ is no longer sufficient. For context, refer to the recent Code Red announced in the IPCC report on climate change, asking for science and business to up the ante on carbon removal. Beyond ESG-risk, investors can look at proactive ways to benefit stakeholders, and to create impact, edging towards the other end of the spectrum which is the domain of impact investors with intentional impact strategies.
Does this mean that mainstream investors may embrace responsible investing beyond ESG only through an impact fund? Not necessarily. Large systemic problems require every effort and solution thrown their way, and all actors can participate collaboratively with a spectrum of capital, strategies and unique strengths. As Profit becomes inexorably linked with Purpose, it is in every investor’s interest to transition towards responsible investing to double down on their fiduciary duties.
Enabling this transition is where impact measurement comes in, as one of the first steps. Data demonstrates the potential for impact, helps set strategy, and inspires pro-active measures to increase impact, transparently.
Just by asking for data, you are signalling that impact matters (gender, emissions, HR practices, etc). That by itself has a cascading effect on investees on how they conduct their business (interestingly, some founders and their employees get to see their work through an impact lens for the first time). This translates to motivation and also opportunity. Examples: An impactful company is now visible and attractive to the growing pool of conscious capital across all asset classes as well as grant-makers, bringing funds to help it scale its impact; a B2C company realises they onboarded a large % of female customers with a gender-neutral digital at-home offering – thats potential to unlock more value through customisation; a company working with informal sector partners can facilitate access to benefits or low-cost credit, which increases engagement; a company improves its policies to advance female workforce participation.
If PE/VC players begin to report impact data at an industry level, it gives the government, regulatory bodies and policy makers a comprehensive real-time view into the private sector’s contribution to the UN SDG’s. It could potentially benefit the startup ecosystem through unlocking tax concessions or crowding in government funding with the upside of market returns. Ultimately, citizens benefit from increased access to innovative, quality services at scale.
The fund itself gains credibility as a responsible investor by measuring impact and having that converge into initiatives to bring about positive change, helping strengthen relations with asset owners. It must be emphasized here that measurement by itself is not enough – data must serve to inspire and inform action.
We have been measuring impact for two years now, as one of the first steps in the impact practice, in response to asks from some LPs. At the time, this was a unique initiative at Chiratae Ventures (earlier IDG Ventures, India), which is a leading Indian technology-focused VC with 950M+ AUM since inception across 4 funds, 100+ investments, and ESG-integrated for risk since 2016. The efforts to deepen responsible investing at the firm are reaping benefits for all stakeholders. We have just published our first annual impact report on our website, and look forward to engaging with the ecosystem to learn, share and grow the space.