The integration of ESG (Environmental, Social, and Governance) factors into investment processes and decision makinghas seen tremendous growth in recent years.
Additionally, with the investment world adopting an active role in achieving the UN Sustainable Development Goals (SDGs), we see a rising need for a framework enabling sustainable and quantifiable value creation as well as a straightforward implementation. We believe to have found the solution in the Triple Top Line. But first, let’s see why the Triple Top Line excellently meets today’s Zeitgeist and how it takes our sustainability practices to the next level.
The rise of ESG
Investors trimming their portfolios for sustainability, food manufacturers praising the CO2 neutrality of their production, or companies marketing their coal phaseout planned for the next two decades, are all to be understood as reactions to changing customer needs and – ultimately – as a fight for legitimacy and survival. The race for sustainability just entered a new dimension.
There is no doubt that industrialization has contributed to social welfare by supplying highquality products adapted to human necessities as well as by ensuring the right working conditions for employees. But our globalized system also made it easier for some companies to plunder natural resources, exploit cheap labor, and exacerbate the inequality of wealth by earning profits from their operations in less developed countries and distributing them to their shareholders in wealthier ones. But these times are coming to an end. With our society facing extreme challenges such as climate change, infectious dis-eases, and resource scarcity, our economies will have to undergo a profound structural change and companies will have to take action.
And many of them already did. 2019 could certainly be called „The Year of ESG” (Environmental, Social, and Governance), with daily announcements from companies having implemented ESG criteria, having reached 30+ of ESG key performance indicators (KPIs), or having achieved 100% ESG conformity. This comes slightly delayed, but is a step in the right direction and is actually based on scienetific results. A study conducted by Harvard Business School’s Serafeim showed that companies having developed organizational processes to measure their ESG performance in the early 1990s outperformed a carefully matched control group over the next 18 years. Similar results are provided by Nordea Equity Research as well. And let’s not forget customers for whom ESG compliance is not an option anymore – but a duty.
As a signatories of the UN Principles for Responsible Investment (UNPRI), Munich Venture Partners (MVP) and Demter have a longstanding history in measuring the impact of their portfolios through company specific ESG KPIs. Besides learning a lot about our investees’ operations, our ESG experience also taught us why ESG is a perfect tool for negative screening and early risk identification but incomplete when it comes to outlining the whole impact of our portfolio. Particularly by mainly focusing on the past (12 months’) performance, ESG neglects the huge potential of earlystage companies, which just might need some additional years to be able to shine with huge numbers. Moreover, by separately tracking environmental, social, and governance factors, ESG neglects the interaction between these pillars and misses out the impact of each on the other
ESG neglects the the interaction between environmental, social, and governance aspects and mainly looks at past performance.
Taking one step at a time
Unlike ESG – which by establishing policies and processes guarantees a minimum level of sustainability, the UN Sustainable Development Goals (SDGs) are more output oriented and illustrate how investment decisions impact the broader environment and society as a whole. As we believe this better reflects the fast-paced and future-oriented venture capital sector, we decided already in 2018, to go beyond the standard ESG approach and linked the E/S/G KPIs we have been tracking to the SDGs, guiding our investees towards long-term orientation and focusing on the road that lies ahead.
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