There’s no one-size-fits-all approach to implementing ESG.
Earlier this week I joined the CEE Sustainable Finance Summit in Prague where I chaired a panel discussion about leadership in investing. Joined by a few fund managers, we ended up devoting a large chunk of the session to talk about various ways of embracing sustainability.
Martin Hudeček, who is an asset manager of tech and insurtech funds at RSJ Investment, said that two years ago he didn’t know much about ESG (environmental, social and governance).
“ESG were just some letters,” he added. “Somehow, I understand what you are all talking about but it is still a new language for most people. And it is still a problem.”
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Not being fully familiar with ESG doesn’t mean a company doesn’t have an ESG-compliant strategy. In the end, RSJ is mainly known as a company where values are important. They invest in emerging industries such as organic farming and they are focused on making a positive impact on the environment.
When they realised it was time to look at ESG they started working with a non-governmental organisation that would help them translate what they were doing into sustainability-related ventures. They started supporting smaller projects and, in that way, also learn how to embrace sustainability. And this continues to be RSJ’s approach.
ESG in the DNA
Brian Wardrop, who is a partner at ARX Investment Partners, also recalled the beginning of his firm’s operations: “Initially when our firm was established with the critical support of certain development finance institutions (DFIs), the European Investment Fund (EIF) being one of those investing in the [emerging Europe] region, the EBRD being another one, in the late 1990s and the 2000s, the idea was that all funds that were invested in by these DFIs contained a list of excluded industries, for example, tobacco and alcohol production, pornography and so on.
“Generally, what happened in the private equity industry is that almost every fund has some capital from either EIF or EBRD, or both, and the catalytic role of these investors in the early days was to cause fund managers like us to start thinking about the general theme or the general concept of what I would define as just responsible investing and then over the years it became part of our DNA. And only more recently have we started to understand what ESG really is in terms of a risk management tool and a source for potential competitive advantage or competitive differentiation on the investment side,” Wardrop added.
Wojciech Łukawski, who is a partner at Abris Capital Partners, said his company’s journey was different as they didn’t have any DFIs amongst their investors. Perhaps “it started with the G. […] To me it’s just pure logic. When you are an investor and you are buying a majority stake in a company then by definition you have to make your impact and then try to make your impact and try to change this company so that it basically serves the world in a better way either you improve the governance and that was probably the very starting point. You then take next steps and you start to take care of the environment it starts to take about take care about social aspects.”
Łukawski later made a very interesting point when he emphasised the differences in ESG perspective between a private equity fund and a regular company: private equity funds have to make an impact in a significantly shorter time perspective, and that includes ESG.
“In order to be able to make that change and make that impact over four or five years we have to be very specific in what we want to deliver.”
With the ESG noise that we constantly hear about, regular companies, especially those smaller ones, often get lost or taken advantage of.
“I am an entrepreneur and I want to [embrace ESG]. Who is going to help me? Who is able to advise me? Who is able to walk me through the first steps? Last week, someone offered me ESG certification, now I know that I should ask what kind of certification that is. But not everyone knows that,” Hudeček said.
The panel agreed that there is still a lot to be done to raise awareness about ESG and sustainability to pave the way for those companies who are less familiar with the concept.
“I think the biggest challenge here is this first step. [Just like] me, when you start, somehow you can be better and better [with time]. When we speak to banks, insurance companies, everyone talks about ESG but when you ask them what they are doing for their customers so they could understand ESG,” Hudeček added and concluded that too little is done in that area.
And those smaller companies who have already embarked on the ESG journey, also need to start their ESG reporting journey.
Wardrop gave the example of his own firm that has issued five reports so far.
“If you’re cynical and you look at it, you’ll say ‘these guys are just advertising, they’re picking nice anecdotes from their portfolio, advertising their good deeds. Aside from the big scandals, I’d say in small-cap venture capital funds and private equity, I don’t think there’s anything wrong with creating awareness, embedding the concept of ESG awareness into the cultures of the firms, and then over time, if you continue to do that systematically, you’ll get more data-driven, you’ll get more systematic,” he said.
In my opinion, this also applies to any other company that wants to make an impact. It is much better to highlight some of the company’s activities or achievements, even though they might be considered greenwashing by sceptics, than not do anything at all.
As Łukawski said at some point, we need to have more ESG leaders, but people will not become leaders overnight. The process will take time and we need to start somewhere.
“There are still so many people who are not really fully aware of what we are faced with and what future generations or even our generation is faced with. Leadership is really about actually promoting awareness,” Aleksandra Palińska, who is the executive director at Eurosif, the European Sustainable Investment Forum.
“Little by little, it’s going to be very difficult to avoid discussions around sustainability, around the creation of value beyond financial value. Sustainability is going to stay because we as an investor have an interest, asset managers have an interest, they cascade that down to their companies, and then it goes down to the consumers,” Elodie Donjon, who is an investment manager at the European Investment Bank, added.
It is time to start now as there is no turning back.
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