Environmental, Social and Governance (ESG) topics have been gaining significant attention over the last few years and are becoming an increasingly important consideration for investors. The global pandemic has played a part in accelerating this interest; one survey revealed that, while the economic impact of the crisis had led to a temporary deprioritisation of ESG, 96% of investors expect their firms to increase prioritisation as the world recovers from COVID-19, with 93% expecting the same from the companies they invest in.
It is hardly surprising. When we look at our own portfolio of investments, ESG is an inextricable part of how our companies do business. No business can operate outside of the society in which it is based, even in a time of increased remote working. Furthermore, the individual elements of ESG are tightly interwoven – good environmental practices are often good social ones, and vice versa. In our experience, the best run businesses consider these long-term risk factors in both their strategy and operations.
We expect 2021 will be a major year for both increased awareness of and action on ESG. Customers, partners, investors and employees will expect businesses they support to be able to demonstrate how they are committed to better ESG practices and what they are doing to improve the world we all share.
Indeed, there is a growing impression that any post-COVID recovery is going to be closely tied to ESG. The pandemic has demonstrated how low probability, high impact events are possible and can have a huge influence on all aspects of our lives. As such, expect to see an increased interest in preparing for other hard to forecast, complex systemic risks, such as the potential effects of climate change.
That said, with the COVID-19 crisis leaving major health, social and economic catastrophes in its wake, there is already much to do. Fortunately, some businesses that address the challenges the pandemic has created, are ones that have ESG practices woven into their very fabric.
The nature of the crisis means that many of those businesses are technology companies. We have all seen the headlines of how the likes of Microsoft and Zoom have posted record results, enabling, as they do, a more remote way of life, exactly when it has been required. But beyond those companies, there are thousands more innovators who are supporting those who need it most, or operators that are naturally aligned to the new challenges people are facing.
Companies making an impact in our remote world
For instance, companies such as Onfido and Systancia are developing solutions that liberate those whose movement has been limited by the pandemic, providing digital tools that take traditional in-person activities online. Then there’s Azimo, Acorns, CurrencyCloud, Simplesurance and Toutabo, all examples of businesses that are widening access to digital services and increasing financial inclusion. Elsewhere, Dacadoo is making significant progress in helping manage user health and well-being, while Efficient IP, CybelAngel, Bleckwen and Dedrone are just some of the names making our new reality more secure, and in doing so, helping other companies to continue to operate. Then there are those, such as Aqua, that are promoting sustainable energy production or, in the case of Depop, sustainable fashion and retail consumption.
The latter is also a good example of how industries with a history of poor environmental and social performance can be disrupted. As a marketplace for resale fashion items, Depop makes fashion more circular and sustainable – in a sector that is responsible for up to 10% of humanity’s carbon emissions.
The remittance sector offers a further example of a company making a positive impact on society with its solutions. Remittances are an essential source of income for millions of families, particularly those in migrant communities. Azimo, a digital money transfer platform, helps underserved demographics to transfer money across borders more cheaply and efficiently through its digital infrastructure.
Living the UN Sustainable Development Goals
The companies detailed above have two things in common – they are all part of the TempoCap portfolio, and they all contribute to the United Nations Sustainable Development Goals (UN SDGs). These UN SDGs are at the heart of the 2030 Agenda for Sustainable Development, a blueprint for peace and prosperity for both humanity and the planet. These goals recognise that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.
Given our ongoing and steadfast commitment to the UN SDGs, TempoCap recently became a signatory to the UNPRI, an international global network of asset managers, owners and service providers working together to put responsible investment into practice. The principles, which are voluntary, aim to provide a framework for integrating ESG considerations into investment decision-making and ownership practices.
While we are not formally “impact” investors at TempoCap, we do always try to think about long term risks, and ESG issues are something we consider when weighing investment decisions. But our responsibility to understand ESG risks facing a company does not stop there; during our entire holding period, we monitor ESG issues at our investments, even gauging the ESG commitment of those investors or acquirers taking our place at an exit event, such as a sale.
Our portfolio companies are dynamic and fast-growing, but as relatively young organisations, they also have limited resources as they expand. While ESG is generally accepted as increasingly important, time spent on such issues can sometimes be seen by management teams as a distraction from their ambitious growth plans. So as investors, we are conscious of our responsibility both to hold leadership teams to account when it comes to monitoring ESG issues, and to support them on the ESG journey. At the same time, we do take a pragmatic approach, focusing on the most material elements of ESG.
In the past, our focus has been in areas such as diversity, equality and inclusion, employee engagement, customer privacy and data security. While those topics remain important for our portfolio, we expect an increasing emphasis on environmental risks too. That is all despite the fact that our technology investments are typically in companies with a low environmental footprint, creating high-quality jobs.
After all, maintaining strong ESG practices is inextricably linked to a holistic view of running modern business, where profit and purpose do not need to be mutually exclusive. As we all seek to recover from the crisis of 2020, action on ESG will be a critical element for those that lead the way forward.
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