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We started ETF Partners 15 years ago because of a conviction that technological innovation would be critical in tackling climate change, and that venture capital had a massive role to play in funding that innovation. This no longer seems eccentric and, in the past couple of years, we have seen a rapid growth in interest in sustainable investment. The scale and pace of change now look so great that everyone in the private equity and venture industry needs to consider its implications when looking at any company.
In the venture industry people increasingly see opportunities, as entrepreneurs seek to address the grand challenges of the day. While we have all grown used to explaining an economic opportunity, the way to talk about the potential for positive impact is still somewhat embryonic. When we started, we sometimes struggled to explain how an energy efficiency software company might have the potential to produce a larger positive impact than say a renewable generation infrastructure company. There was no simple common language for describing future potential impact. Now, with broader thinking of what it means to be sustainable, as well as improved measuring, we are just beginning to get there.
In the buyout industry, with more established and mature companies to manage, it is tempting to focus solely on addressing risks and to focus on sustainable compliance. This language is quite different than that of a VC. Owners of mature companies have talked usefully about their goals for carbon footprint reduction – which is of course, far more relevant to these large companies than it is to a startup that barely has much in the way of emissions. The effort to do “less harm” is important, but it still can miss the mark - in that reducing the damage done does not necessarily equate to establishing a strong position in the emerging sustainable world. It misses out on the possible opportunities of being in the vanguard of change.
In short, shaping one’s strategy will be complicated, as firms work through what it means for them and their portfolio companies. Add to that another challenge - namely a fear on the part of regulators that some in the finance industry will ‘greenwash’ to attract funding. To guard against that, some regulators are already creating taxonomies that define ‘green’ and seek to add regulation to ensure compliance and transparency. This is clearly well-intentioned, but is likely to further add to complexity and cost, more so, I worry, that it will help drive money to where it can make a useful difference.
So what should those within the private equity and venture capital industry do?
Firstly we do, of course, need to respond to the increasing calls for information on the impact of our portfolio companies. What we really need to do though, is depart from the jargon and talk in simple and clear ways about what we are doing, and what our companies are doing, to become sustainable in the face of change, and hopefully to be even more successful and useful to society in driving positive change. In other words, I think we need to be more assertive in communicating why we, and our companies, will lead in this new sustainable world. Though we all lapse into it, jargon will not help. Acronyms will not help. But simple compelling language and clear case studies will show why our own industry is worth appreciation and support.
There can be a gap between wanting to communicate simply and being able to do so.
Since we launched ETF Partners in 2006, we have gained quite a lot of experience in trying to communicate the potential environmental impact of the innovative companies we support. While we have improved at that over the years, it is still challenging to compare the impact of a company helping preserve biodiversity with that of a company that enables car sharing. In fact, I don’t really think we can… yet. What we can do is show why and how we think each company we support will make a positive contribution to the environment, in their own unique way.
I would love to see the whole private equity and venture industry take up the challenge to do the same. Not to try to achieve ‘net zero’, though to many this may feel bold. That, emotionally to me, feels like a mindset of risk reduction, whereas I think the real challenge is a viable assertion of a positive impact. If society really values our industry, and the companies we support, then we are all more likely to prosper and the world will be a better place for it.