How does sustainable investing differ from traditional investing?
Traditional investors can be focused on generating financial returns with minimal or no regard for the outcomes generated by a company’s operating practices or products/services. They’re just not aware or aren’t that interested about the impact. Unfortunately, if investors only focus on the financials they can potentially miss the risks to achieving those results.
You can also read our guide to impact investing here.
What approaches are there to sustainable investing?
Within a broad umbrella of sustainable investing, the three main approaches that investors will have are either — driven by their values, valuation, or a combination of the two.
Ethical investors are asking, does this company align with my personal, religious, or norms-based beliefs? And if they don’t, then I’m not going to invest. It’s a straightforward approach, but very personal.
With responsible investors, they are looking at the financial impact of a company’s operations around environmental, social, governance practices. Are you efficient in how you use input materials and resources, or treating staff well to retain them, do you have good governance or reporting? This is an internal look at a company to see how well run they are and doesn’t necessarily consider their goods and services.
Finally, with impact investing, we see investors who blend personal motivations and financial considerations and look more broadly at both how companies operate and what they produce. Watch our video on how to create a sustainable startup that can attract impact investment here.
What type of sustainable investors are out there?
Entrepreneurs will come across a range of potential sustainable investors. They can be crudely separated based on their motivations – ‘finance first’ or ‘impact first’.
Sustainable investors who are finance first are often traditional investors who have shifted into the sustainable mindset. They aren’t necessarily too concerned about the positive impact your company generates, rather they’re focused on usual interests in the scale of market opportunity and growth. However, an increasing number want to know that you’re operating your business effectively around environmental, social, or governance issues. For example, if you’re a knowledge-based business, payments fintech for example, the quality of your staff is critical. So investors may delve into your recruitment and employment practices and staff diversity or turnover. This is important to staff but is likely financially material to your ability to deliver the goods, and therefore their investment returns. There are also finance first investors who want to see both competitive financial returns and the positive outcomes your company will generate.
Alternatively, there are impact-driven or impact-first investors. These investors have a particular interest or even passion to solve a social or environmental issue, and they’re going to be looking at your business to see if it can commercially and successfully address it. For them you’re going to need to articulate not only your business model but also your theory of change, that is how you’re addressing the issue as well as how you’re going to measure, monitor, and manage the impact your company generates. Now some of these impact-first investors will still be seeking competitive market-rate returns, they just aren’t going to forget about the impact. Others, however, may be more patient with their return expectations or timeframes or happy to take on additional risks.
As you can see there are a wide range of potential sustainable investors. But don’t be looking for anyone to have a nameplate to say what they are. You must sense that from how they approach you, in what else they’ve invested, or questions they ask.
As a founder raising capital, should you seek out sustainable investors?
Absolutely, if you’re a company trying to address a social or environmental issue – be it climate change, environmental footprint, agriculture, education, healthcare, ocean economy – there are investors who are passionate and motivated to deploy capital to companies that are addressing the massive challenges we face. Even better, they tend to be knowledgeable and well-connected which can further support your business.
Even if your company isn’t trying to solve one of the UN Sustainable Development Goals, if you’re at Seed or Series A and you want investor involvement, I think sustainable investors tend to take a broader perspective and can add value to your company’s operating practices.
However, it’s important that first of all founders determine whether sustainable investors would be interested. Otherwise, it is a waste of time and resource seeking unsuitable investors.
What do they expect? What do they look for?
Sustainable investors often look for the same things all investors want to see – solid team, large addressable market, good business model, unique advantage.
If your company is trying to address a social or environmental issue, they also want to see how you’re doing that. What’s your theory of change in terms of how your company can address that issue? A theory of change is very simply a logical model that clarifies what you do, your activities, the outcomes, and the impact this generates.
Also, they want to know how you are going to measure, monitor, and manage the impact you are seeking to create.
Is due diligence the same or different?
Over the last several years, Barclays has been supporting research with leading global individuals, families, and family offices on their attitude and actions around sustainable and impact investing, called Investing for Global impact.
One question we ask is, how does your due diligence compare between traditional and impact investments? Only 22% do completely different due diligence. A third do their usual assessment and then add an additional impact screen. And about half do the same due diligence. What’s interesting though is that core due diligence now includes assessment of sustainability.
There’s one quote from a chief investment officer of a North American foundation that I think is important: “To be blind or ignore the various factors that are considered and measured within ESG factors would be to not critically evaluate a business and an investment. To me that’s just good due diligence.”
How do you find your investor match?
A lot of this comes down to finding investors with aligned interests and skills. Just because an individual is wealthy, and arguably has the most amount of flexibility to make investments, doesn’t mean they are ready to write cheques after you meet them. A lot depends on their generation, their ambitions, or family setup.
Does sustainability matter to investors?
Today sustainability isn’t an optional add-on, it’s part of any comprehensive investors approach to their decision-making. What academic research is showing is that companies who operate more sustainably tend to outperform those who don’t.
There are two caveats to that. One, you have to put the most effort on the sustainability issues that matter to your industry or sector. Two, you need to be in the right market. If you don’t have a market for your offer or market-product fit, it doesn’t matter how sustainable you are.
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