By Willbur Payne, Junior Analyst at King’s Private Equity Club
When thinking back to 2019 and the significant events that occurred during that year, our minds are instantly teleported to the Covid 19 pandemic. However, few will instantly link 2019 to the explosion of the climate crisis when governments and corporations started to align their ambitions and agendas to be focused on tackling the climate crisis and promoting sustainable growth. Investing in sustainable ventures is becoming more mainstream with those who have placed equity in these funds requesting for more ‘impact investing’ options; an investment strategy coined by the Rockefeller Foundation in 2007 where funds aim to generate specific beneficial social or environmental effects in addition to financial gains. This article aims to explore how the relationship between venture capital firms and Environmental Social and Corporate Governance ventures has developed as a result of the pandemic, and how the pandemic may have acted as a catalyst for the rise of impact investing.
Two proposals can be accredited as being the catalysts for the advancement in sustainable investment; “the Green New Deal” in the United States and the EU’s “Green Deal”, both of which focused on having circular economy principles at the core. However, in the wake of these announcements, debate has arisen over how realistic these policy proposals are due to the profound financial risk they present. Nevertheless, it has promoted a positive response from financial institutions to bring forward an increase in their climate-related financing earlier than expected.
As 2019 entered its final months, how did Covid-19 effect the global financial markets at the close of the year and how did the pandemic influence the rise of impact investing?
February saw the start of a major market crash as the coronavirus pandemic took hold and the world watched on in apprehension. Yet April saw the start of a ‘market rebound’ and investors began placing their trust and capital back into venture capital funds. By the end of 2020 the market had not just rebounded but was also experiencing growth. Audrey Choi, the CEO of the Institute of Sustainable Investing and Chief Sustainability Officer at Morgan Stanley attributed this growth to the global populous being more conscious of their decision making: “As economies begin to emerge from the volatility of the pandemic, sustainable investing continues to show its mettle by empowering investors to make more informed decisions that allow them to align their investments with their desire for impact while mitigating concerns around performance.”
As venture capital (VC) firms emerged from the turbulent year of 2020, their private nature of choosing which ventures or start-ups to invest in was unwrapped. Driven by a new founded demographic, of those aged between 18 and 24, VC firms decision making was now reflective of the investors desire to align their thematic priorities with current events. Yet as further reported by Forbes and Morgan Stanley, 83 percent of millennials, aged between 25 and 38, believe that sustainable investing requires financial performance trade-off. These suspicions are well founded as quarantines, social distancing, business closures and travel restrictions have given rise to scepticism over concerns of the conjecturing nature of businesses who may be engaged in ‘greenwashing’ practises. The tendency to mislead consumers through marketing about their positive consumer impact, creates an aura of solicitude and forges one of the largest barriers to entry when it comes to sustainable investing as VC’s are unable to carry out due diligence on possible ventures.
However, businesses that undertake greenwashing practises may soon be extinguished because the pandemic has helped to create a heightened level of environmental awareness prompting companies to exhibit a greater level of transparency. With a commitment to social and sustainable practices being even more pronounced among younger people, who have a stronger conviction in expecting these concerns to be front and centre in the post-covid recovery plans, entrepreneurs, start-ups, and established businesses need to align themselves with green credentials to attract VC funding being generated through this new demographic.
Reports indicate the VC market being relatively unaffected by the pandemic with evidence pointing to only a modest overall impact, VC funds aren’t looking to hibernate and preserve face unlike other financial organisations, they are looking to invest. A report conducted by the National Bureau of Economic Research (2020) found that 52% of their portfolio companies were positively affected or unaffected by the pandemic creating a confident attitude amongstEnvironmental Social and Corporate Governance (ESG’s).
The characteristics of venture financing make it well suited for sustainable and impact investing compared to the other forms of financing options available to enterprises. With the nature of VC’s looking to be a financial tap engaging in an extended lock-in period, this dynamic compliments that of sustainable projects who are looking to secure investment through the extended formation stages. In addition to the capital injection, VCs can provide additional support to ventures in the form of technical knowledge, industry relationships and management skills that contribute to the maintenance of a competitive advantage.
With reports of fund managers feeling ever increasingly optimistic about the future of impact investing a post covid society, several trends are creating an early signal for a promising 2022 for VC firms. With portfolio companies being able to commercialise on their innovation, it heralds a multitude of environmental and social benefits, which create a pipeline of robust opportunities to invest. The immense influx of capital into sustainable investments may be seen as peculiarity, but it should be welcomed. To ensure VC’s continued support for ESG ventures, evidence and opinion points to a dualist strategy encompassing a contractarian approach with government support is required to ensure investment and engagement longevity.
King's Private Equity Club is a student society at King's College London, providing a high quality of networking, speakers, workshops and social events to the King's Community. Our goal is to improve our members understanding and employability.
