Being impactful without being ‘impact’
Marijka Scheerder, Head of Business Intelligence and ESG, and Ayoni Guda, Operations Manager and Compliance Officer, of HPE Growth explore the impact element to growth investing.
Although there have been several impact investment funds launching in recent years, many other funds are adopting an impact mindset to play a vital role in building a sustainable future.
Private equity investors and fund managers are aware that they are in a position where they can meaningfully contribute towards building a sustainable future, and many are already taking steps to act on this. Over the last decade or so many firms have formalised their approach to sustainable investing, driven by a coordinated global effort to define and ensure sustainable development, an internal desire to help build a better future, and increasing pressure from investors. Younger staff at fund managers and LPs have grown up aware that sustainable behaviour is essential for the sake of future generations. They care deeply about making this change happen and are playing an active role in fast-tracking its adoption inside their organisations.
Alongside this internal drive to be impactful, several studies over recent years have shown that the returns from impact investing are in line with the broader private equity market. The Global Impact Investment Network reported that 88% of respondents in its 2020 Annual Impact Investor survey saw their impact investing performance meeting or exceeding financial expectations, and a study by the Wharton Social Impact Initiative found that exits where social and/or environmental impact was required to continue post-exit generated a gross IRR of 33.5% and a cash multiple of 4.9x. These and other findings have accelerated the change as fund managers and LPs become increasingly confident that they can fulfil their fiduciary duties through investing impactfully. This shift in mindset means the private equity industry can play an active role in addressing the unprecedented challenges humanity is facing.
The launch of the United Nations Principles for Responsible Investment (PRIs) in 2006 and the 2030 Agenda for Sustainable Development in 2015, which includes the 17 Sustainable Development Goals (SDGs) have given private equity firms a standardised framework to define their approach to sustainable and developmental investing. Signatories to the PRI commit to incorporating ESG principles in their decision making and ownership, and the SDGs offer guidance as to the issues to consider and focus on.
At HPE Growth, we have been signatories to the PRIs since 2009, and have integrated what we see as the ESG factors over which we can have the most influence into our DNA as a firm. In both our business and our portfolio companies we strive to achieve diverse and inclusive teams, management, and boards. This in turn allows us to ensure the wellbeing of individuals within each organisation, and to ensure exceptional standards of governance that represent all stakeholders.
Studies by McKinsey and BCG have shown that companies leading on diversity and inclusion (D&I) financially outperform and are more innovative that their peers, particularly when systematic business-led approaches to diversity and inclusion are adopted. McKinsey’s most recent study found that, out of more than 1,000 companies, those in the top quartile for gender diversity were 25% more likely to have above-average profitability than those in the bottom quartile, and top-quartile companies in terms of ethnic and cultural diversity outperformed bottom-quartile firms on profitability by 36%. These results reinforce our view that building D&I into our due diligence process when making investments and continually monitoring and improving it throughout our ownership provides the best outcomes for our investors, our portfolio companies, their employees, and their customers. We believe that this also creates significant positive impact more broadly, as the values upheld by D&I leaders are recognised as major contributors to their business success and are adopted by more and more companies.
As an organisation, HPE focuses on two SDGs across all our portfolio companies: SDG 8, decent work and economic growth, and SDG 9, fostering innovation. Individual companies also create impact on other SDGs, for example ZAVA, which offers online health consultations and pharmacy services, reduces the cost of healthcare whilst increasing its accessibility, and so contributes to SDG 3, good health and wellbeing.
ZAVA also serves as a great example of how technology investors can create positive impact. Traditional healthcare relies on patients traveling to see doctors face-to-face to be diagnosed, and then separately to collect treatments. ZAVA makes healthcare accessible to anyone when they need it, with qualified doctors reviewing assessments within 24 hours and treatments delivered to the patient’s door. To date the company has delivered five million online consultations across Europe.
For private equity firms, having a comprehensive sustainability approach will be increasingly important when it comes to winning deals. HPE has experienced this first-hand with our portfolio company WeTransfer. The Dutch firm, founded in 2009, has always prioritised using its business as a force for good. It is a certified B Corporation, has since its founding donated 30% of its advertising to raise awareness for artists, creative work, and the world’s most pressing issues, and in 2019 helped wipe out $30m of medical debt for those in need. When raising Series B investment, WeTransfer wanted to partner with investors who shared its values, and this was a factor in us winning the deal.
WeTransfer shows how committing to be a force for good can complement business performance. The company has grown to 87 million monthly active users, who share around 2 billion files every month. It has acquired three additional products, and launched WePresent, a bespoke editorial platform to tell unexpected stories about creativity from a diverse range of young talent and renowned artists such as Solange, John Legend, and FKA twigs.
As well as helping to win deals, genuinely incorporating sustainability into your DNA as a private equity firm will become a regulatory necessity for managers. The European Union’s Sustainable Finance Disclosure Regulations (SFDRs) place mandatory ESG disclosure obligations on asset managers and require standardised reporting on how they integrate ESG factors. The upcoming technical standards will form the basis of an industry-wide consistent categorisation and measurement of sustainability factors and will accelerate adoption as investors become more comfortable with what measures to focus on.
The combination of a desire to contribute to a better future, financial returns, and regulatory requirements mean that sustainability and ESG will play an increasingly large role in private equity investing. We believe that, sooner or later, these factors will become a central part of the investment process, and that this will meaningfully contribute to creating a sustainable future for humanity.
