Private investors who hold high net worth wealth or family wealth have massive power to make socially responsible investments. Deloitte data shows that the world’s professionally managed asset base totalled $123tn at the end of 2021, while private individuals represented $42tn.
And according to data from Isomer Capital, a London-based investing firm, Europe accounts for the largest share of all investment going into early-stage purpose-driven tech companies globally, at 57%.
Environmental, social and governance (ESG) investing refers to a set of standards for a company’s behaviour used by investors to screen potential investments. But what exactly is the role of private investors when it comes to ESG — and how can they be most influential with their capital? We asked the experts.
The case for private investors
While private investors don't have the ability to deploy funds at the same scale as institutional investors or corporates, they also aren't bound by fiduciary duty to generate returns for their investors, so have more freedom to invest in what they believe in. Alexandre Garese, a French private investor, believes this makes them ideal for ESG investing.
“In many cases a good cause is more important than valuation multiples and quick returns,” he says. “There may be no minimal cheque, company maturity or return horizon.”
Garese has multiple impact-led businesses on his portfolio including ZeroAvia, a startup aiming to produce hydrogen-powered aircrafts — and has set up Kouros, a green industrial investment company, which co-invests alongside oil giants such as TotalEnergies.
The secret to investing in this space is to know that there is a prize at the end — and that's a very valuable company
For Chris Wade, cofounder of Isomer Capital, private investors have the flexibility to invest in smaller, early-stage companies which might not meet the investment criteria of larger institutions, but will soon start to perform well. Data from Isomer shows that one in six ESG funds outperform conventional funds — and firms that implement ESG practices outperform others by up to 4.8%.
“When you're building technology that will redefine how you reclaim battery materials, for instance, this technology may take three years to even be developed — and private investors understand that these things take time,” he says. “The secret to investing in this space is to know that there is a prize at the end — and that's a very valuable company.”
The green transition is underway — meet the startups driving it.
Private investors can also influence the actions of their portfolio funds and companies to make sure that they’re taking ESG into consideration.
“When a founder needs to recruit a CTO, we can say, ‘have you thought about having more diversity?’ We can also influence decisions like how last-mile delivery is carried out and push for more sustainable choices there,” says Thomas Schneider, partner at Isomer Capital.
“All this is part of the role of private investors. They can influence and make sure that the company has ESG as part of its DNA from the beginning, and when they become the next Apple or Facebook, they’ll continue to care about impact because that’s always what they’ve done and they associate it with their success too.” Isomer’s portfolio includes 592 companies tackling a sustainable development goal — making up 33% of their total portfolio.
Transparency to a tee
Data from Isomer shows that 54% of Gen Z would pay upwards of 10% premium for goods from companies that have explicit ESG missions. The onus of being transparent, even if the data is incomplete, is on the founders when communicating how a company is setting ESG goals, and measuring and reporting progress to investors.
In three to five years, we'll have a working framework to get better data on our portfolio
Garese says that communication is also key when it comes to inspiring ESG action from your portfolio companies.
“Clear communication is important when it comes to funds that compete for investors’ money so that they realise the importance of ESG — and that it is a major differentiating factor in investment decisions,” he says. “This will compel the funds to consider ESG to be a competitive advantage, and, therefore to deploy capital in this direction.”
Schneider says that VC funds in their portfolio often ask them how to measure and report ESG better, but without standardised ESG metrics, reporting will remain a pain point.
“We’re trying to push for standardisation as a big player in the sector,” he says. “In three to five years, we'll have a working framework to get better data on our portfolio, and this can then be used by VC and companies to build their energy capabilities, and push them to adopt a more long-term perspective.
“And that's saying to the founder, yes, you have to think about profitability, but if you want to build a long-term company, ESG is an important criteria that you should take into account.”
Building an in-house sustainability function
Some claim that it’s crucial for investment teams to have access to sustainability expertise and PE firms are now building in-house ESG expertise and appointing ESG specialists to increasingly senior roles.
We’ve noticed a trend that funds are hiring people that have come from a purely impact or sustainability company and have those kinds of credentials
Wade says hiring sustainability expertise is also key to adding credibility to a company’s ESG posture.
“We’ve noticed a trend that funds are hiring people that have come from a purely impact or sustainability company and have those kinds of credentials,” he says. “This is important to be able to have not just the ability to think about ESG, but also have credibility, because the biggest fear for any VC is if they're doing this seriously enough, or they’ll be accused of greenwashing.”
But not all private investment firms believe that in-house sustainability experts are necessary.
“We use a network of trusted investment partners, who we can reach out to discuss or ask for a more structured evaluation of ESG when considering the impact of any investment,” says Garese. “For example, I have invested in SaaS startup CloudNC, which was recommended to me by Isomer, together with such giants like Atomico, Lockheed Martin, Autodesk.”