In 2021, 89% of global investors said they would like the reporting of Environmental, Social and Governance (ESG) performance to be measured against a set of globally consistent standards to be a mandatory requirement.
As a consequence, many businesses will, and already are, beginning to feel the pressure of reporting on their ESG standards in order to gain access to capital.
Bearing in mind the fundamental need of ESG reporting for society and investors alike, this article outlines why Private Equity (PEs) firms, Venture Capitalists (VCs), and Business Angels (BAs) are interested in companies reporting on their ESG credentials, and how their motives will affect you if your company is trying to access capital. Why should you be getting ahead of the curve?
Why are investors interested in companies that report on their ESG standards?
If you are a company pursuing investment, firstly it is important to understand the reasons behind why your investors are engaged in your company reporting on your ESG standards.
PEs, VCs and BAs are increasingly integrating ESG considerations across the investment cycle however, they all have different motives for engaging with ESG friendly businesses.
- Private Equity firms
Numerous PE managers and General Partners (GPs) believe that ESG risk is now as important as any other type of financial risk. Due to pressure from internal and external stakeholders, organisations requiring funding have to be held accountable for their actions, and an organisation’s collaboration with key stakeholders is essential in helping investors mitigate ESG risks, and put forth a strong disclosure strategy.
Limited Partners (LP’s), as the investors into the PE firms’ funds, are putting pressure on GPs to deploy money in ESG investments. GPs, in their responsibility to oversee the management of the PE fund, and pick what investments to include in their portfolios, are consequently both seeking opportunities with ESG credentials and incorporating ESG in their appraisal and diligence processes. Not only does this movement encourage the continued growth of ESG as a central component of strategies for growing businesses going forward, but it has the combined benefit of enhancing PE firms’ own credentials too by default.
It is becoming apparent in the market that many PEs are investing in ESG experts – sometimes even sustainability departments – to be equipped in assessing ESG credentials and the impact upon their portfolios.
Overall, a growing number of PE firms are taking a progressive perspective towards ESG by actively seeking and funding companies with credentials. Not only will this ensure they satisfy their stakeholders and comply with the evolving legislation, but for the PE firms in question (provided that they have adequately understood the true ESG credentials of their portfolio), it should provide downside risk protection on their investments.
- Venture capital (VC) funding and business angel (BA) investors
7 in 10 VCs and 6 in 10 BAs incorporate ESG criteria into their investment decision process, demonstrating that ESG investing has been accelerating into the investment mainstream.
All investors have different motives and investment criteria with regards to why ESG criteria is relevant to them, and VCs and BAs are no exception to this.
Broadly, the financial relevance of ESG criteria is a stronger motive for ESG engagement in the case of VC investors, and BA investors are more motivated by the effect that a company’s ESG goals and reporting has on society.
Graph 1: VCs with ESG procedures in place – Motives for ESG engagement
The above graph demonstrates that the main reason VCs are interested in investing in companies that report on their ESG credentials, is because it is a part of their policy. Currently, this is driven by the regulatory requirements to incorporate ESG in the investment policies and has trickled down from the requirement of LPs.
However, over time we expect the motives to shift more toward the ethical and societal change benefits that ESG can bring to funds, their investors, their portfolios, and the wider stakeholder community.
What does this mean for you if you’re trying to access capital?
Whether your firm is seeking capital from PEs, VCs, or BAs, a key factor you should bear in mind is that:
With many investment firms and individuals seeking to fund businesses with adequate ESG reporting, businesses trying to access capital should be positioning themselves in advance of investment in order to mitigate the risk of failing to meet investor’s criteria, and consequently not only slowing down the appraisal process but, in some cases, not being able to secure investment.
An important point to make is that it is not just about incorporating ESG reporting into your business to gain investment – ESG has to be a genuine part of a business’ values, culture and operations.
For longstanding businesses, ESG reporting may mark a shift in the business. However, for companies in their early stages, or who are just starting out, there is an opportunity to build your company with ESG being an intrinsic part of the business’s existence.
With continuing regulatory changes and pressure filtering down from GPs and society, ESG reporting will not be going away. On the contrary, we are certain it will become a requirement and building foundation, and reporting on your ESG standards early will future proof your business by enabling you to access capital more readily.
This article was written by Agne Schoenmaker a manager in the SCF team at Price Bailey LLP. Agne has invaluable experience of the early-stage funding market, global market intelligence skills and all-things sustainability. For help and advice on anything mentioned in this article, or for setting net zero targets for your business, you can contact Agne or a member of the SCF team using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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