Sustainable investment trends, recap from Startup Day Riga 2021
I've had the opportunity to join Startup Day and Startup BBQ in Riga in person. This event was cause for great excitement on my end, of course! The event gathered many amazing people in person, but what surprised me the most was 2000+ live viewers on Facebook!
The article proceeding will speak to anyone who didn't manage to join in person or watch us live. But before we proceed, a thank you goes out to EiT Manufacturing and BuildIt Latvia, who were curating part of the agenda focusing on “Sustainable Manufacturing” and decided to involve me.
Sustainability's place on the priority list
Sustainability is higher on the agenda for companies with a physical product. Today’s manufacturers are regulated on environmental impact and pollution. And it looks like - this is just the beginning. Keep on reading to get an overview of the latest trends that will reach the manufacturing industry first.
In the case of sustainability, the money holders and investors are the trendsetters. Many of the changes take place because of new regulations flowing downstream from the European Commission and large financial institutions.
The flow of new regulations
2021 has been an unusual year in many ways. One of them is the number of new legislation passes from European Commission supporting sustainability. European Commission’s Green Deal and EU Taxonomy had captured the attention of many business owners globally.
However, in reality, only certain public-facing large companies are required to disclose information on social and environmental issues. That would include large banks or insurance companies, for example. Also, the information currently required is rather general.
The real change might come when some of the newest regulations are approved—for example, CSRD or Corporate Sustainability Reporting Directive. The new directive would require all large companies (above 500 employees) to report on sustainability issues. It introduces more ESG metrics and would require external auditing. This would be a complex process for any company to launch. But for now - we're left on a lookout. The first set of standards should be adopted by October 2022, and more information should follow.
The European Commission initiatives can be already felt on a large industry player level, too. We’re seeing banks promoting pension funds that prioritize sustainable investments. We see more sustainability-focused funds and accelerator programs than ever before. That is not happening just because the topic is trending in society but also because funds want to attract more funds and comply with their investor (LLP, large VC requirements).
Meanwhile, what’s happening on the small VC and angel investor level? There’s a lot of confusion. There are many good examples, but there are more unanswered questions on defining and measuring sustainability.
I’m also noticing a gap between impact investing and ESG tracking. Some investors prefer to invest in companies whose primary purpose is to make the world a better place, for example, a company that’s solving one of the SDG’s. And then, some investors continue to invest in “normal” companies but require them to start tracking ESG metrics after the investment is made. How do these two approaches connect and overlap? I haven’t heard of a solution. Also, each investor defines “sustainability” differently. And the approach to measuring sustainability or the impact of the whole portfolio varies.
Sustainable investing trends
#1 Good business is good for the business
It’s been proven in 100s of studies that companies with sustainability initiatives drive better financial results. That’s hugely due to mediating factors such as improved risk management and more innovation.
Also, the impact investor community is starting to speak up on their ROI from impact investing. In the latest Global Impact Investor Network report, 88% of 294 world’s leading impact investors confirm that their investments in impact companies are meeting or even exceeding their expectations.
That’s a considerable change in the narrative as previously, the majority of the investors were saying that they’re investing in sustainable companies to “do the right thing.”
#2 The expansion of the impact investing field
The definition of “impact investing” is expanding. Previously, impact investment would be more related to green energy or mobility space. Impact investments in 2021 are made in every industry - food & water, fashion and consumer products, carbon capture and offsets, industrial and consumer solutions. There is a positive impact potential in all industries out there.
Also, the general perception of investors is changing. Massive problems require massive solutions, fast. And that’s where investors can generate high ROIs. Impact investments are becoming financially attractive. The latest data from 2021 H1 shows that the ticket sizes and evaluations of impact-based tech ventures are above average. And the investor interest in the field is growing.
#3 The journey
We’re still on the journey to a clear definition of “sustainability” and defining best practices. Although the new EU legislation, called the Sustainable Finance Disclosure Regulation (SFDR), sounds promising, many don’t have the processes in place to get these funds.
Last thoughts
I would like to wrap up with an idea hopefully worth sharing. A sustainable business might just mean staying in business. We’ve been overusing Earth’s resources for years now. This year, we used up all Earth’s resources to regenerate in 1 full year on Jul 29 (aka Earth’s overshoot day). That means, the rest of the year, we’re just demanding more when there is not much more to give.
If the scientific calculations are correct, there won’t be much left soon enough, and we will have to start thinking about natural resources as a limited, valuable commodity. And those companies, cities, families, and individuals who will know how to operate in these circumstances will succeed. I hope yours will be one of them!
