This article features as part of IFA Magazine’s celebration of World Earth Day
By Ricky Margolis, Investment Manager, ARIE Capital Group
A Trend With Substance
Anyone who works in the venture capital space can tell you that barely a month goes by without some new buzzword or trend assaulting our ears every time we attend a conference or scroll through LinkedIn.
And so I didn’t worry too much when, one lockdown morning back in 2020, I rolled out of bed and, still half-asleep, logged in to an online conference only to be greeted by a flurry of terms that sounded familiar but to which I’d never paid that much attention previously such as “ESG” and “impact investing”.
What the hell was everyone talking about? Was ESG just another acronym to throw on the pile, another fad that would disappear as quickly as it came only to be replaced by another one?
I soon realised that this time it was different. This wasn’t transient or superficial. As I listened to a series of passionate founders and dedicated investors discuss how they’ve created a business to tackle the climate crisis or pivoted their strategy to achieve certain social goals, it became clear that ESG was more than just “an inconvenient truth”. This was the future, and many people (including myself) were soon scrambling to figure out what it really meant, whether we were doing it correctly, and how we could implement it into our business models. The genie was well and truly out of the bottle, and we couldn’t ignore it even if we wanted to.
Undoubtedly, ESG became one of the buzzwords of the pandemic. But, for once, this was a trend with some substance. And even if some of us only became aware of it recently, many people had already spent years giving life to businesses that were not only ESG-based but were also amazing solutions to everyday problems. They showcase the very best of the startup community, promoting innovative technologies that are environmentally- and socially-conscious as well as being incredible business prospects.
Because, as I learnt at that conference and practically every day since, we can have it all. Investing in our planet and society isn’t just altruistic, it’s profitable too. Investors don’t have to sacrifice good business opportunities for good causes.
A Chance To Step Up
ESG is important because it’s not some futuristic tech trend that only geeky developers and radical investors can identify. ESG comes from a necessity borne out of a crisis. We are talking about the very future of our planet and man’s ability to exist on it. This affects every last one of us, and the stakes couldn’t be higher.
We’ve heard plenty from the UK government about what they’re doing to tackle the climate crisis and achieve their mythical goal of “net zero”. Naturally, they have obstacles to face when promoting this: political in-fighting, party considerations, and translating policy into action.
Meanwhile, most individuals want to do their bit to help the environment and increase opportunities in society but find themselves overwhelmed by more immediate concerns such as the cost of living and the current health crisis. There’s only so much any one person feels they can do.
It is therefore the private sector – including both the startup and investment communities – that is perhaps best-placed to enact change here. Not only do we have an opportunity to lead the way here, but I would argue we have a responsibility to do so.
We have certain privileges. We don’t have to wait for policies to be implemented because we can take action ourselves. We don’t have to sit around and wait for other people to come up with the necessary answers because we can create those solutions.
That’s a lot of power. And with that power comes responsibility. We can’t shut our eyes and hope that someone else figures it out. We have to figure it out ourselves – and we are doing so, as evidenced by some of the incredible ESG-friendly startups that are currently thriving.
Many of us got into this business with the grand ideal that we wanted to change the world. This might be the very opportunity that we were waiting for.
The Business Opportunities Of ESG
From an ecological viewpoint, thinking about ESG is absolutely critical to our survival. But from a business standpoint, it’s a big opportunity too. And while some investors have been dragged reluctantly to the ESG table, most that I have spoken to find it a really exciting space in which to play.
The climate crisis affects every single person on this planet. We like to talk about a business’ TAM (“total addressable market”) in our industry. Well, when it comes to the environment and those who will be impacted by it, we are dealing with a TAM of 100% of the world’s population. With such a demographic, it makes sense for investors and founders alike to recognise the business potential here.
But the best entrepreneurs aren’t merely tokenising ESG or adding in a bit of environmentally-conscious-sounding tech just to keep some annoying hippies happy (a practice some refer to as “greenwashing”). They’re taking the best of their innovation and applying it in ingenious ways to create solutions.
This new wave of ESG-friendly startups is showing that tackling the climate crisis and other societal issues isn’t about leading lives of restriction and sacrifice for the benefit of future generations. Quite the opposite. They’re actually offering new and exciting solutions that will improve our lives while benefitting the planet and society too. It’s a classic win-win!
This is the core of ESG and impact investing. We’re not looking for compromises or ways to make a painful situation marginally less painful. We’re looking for forward-thinking solutions that will allow people to enjoy a better way of life whilst also being conscious of their environmental and societal impact. We’re looking for solutions that make us sit up and think: “How did we ever think the old way was better?”
A Whole New World
Perhaps the most exciting part of ESG is its sheer scalability. Good solutions that are socially- and environmentally-friendly are something that consumers want. It isn’t a limiting factor, as some of its detractors claim. In fact, it opens a lot more doors than it closes. Practically everything we do has an effect on the planet – either positive or negative – and, as such, virtually every sector can offer innovative solutions.
This involves obvious sectors such as transport, where environmentally-conscious solutions are nothing new. Our governments have spent decades trying to reduce carbon emissions and make us less reliant on the gasoline that is so destructive to produce, transport, consume. Hybrid and electric vehicles have sprung out of the innovation demanded of us by our governments, and although they’re not yet perfect by any means, particularly given the lithium batteries many of them require, they are undoubtedly a monumental step in the right direction. These vehicles may seem new and innovative now but will surely be omnipresent in a few decades’ time. This is an example that every ESG-facing founder and investor can hope to emulate.
But what about other seemingly “less obvious” industries? A new consciousness about what we eat has led to an exciting discussion about the part that our food plays in the climate crisis, from the dangerous gases emitted by cows that are bred for beef to the grain being shipped all over the world to feed them, not to mention the incredible impact that it takes to transport the finished product across the globe.
The recent boom in plant-based foods is a direct response to this. The founders in that sector often evangelise not only about the effects of their products on our personal choices, such as our health and our empathy towards animals, but also on our impact on the environment.
Looking at the numbers, it’s hard to argue with their logic, yet it’s taken this new focus on our relationship with the planet to bring this discussion to the attention of a population that might not otherwise have considered it. Whether this plant-based boom is sustainable or not is another conversation, but it’s an overall trend that most people believe is here to stay.
But here’s the crucial bit: electric cars generally go just as fast as gas-fuelled vehicles. And vegan burgers often taste just as good as their beef counterparts. There’s plenty of room for improvement in these and all other sectors, but the point is clear: if you offer consumers a solution that is just as good as (or even better than) what they’re used to and is good for the environment too, they will usually embrace it. Why wouldn’t they?
Environmentally-friendly solutions have not come at the expense of quality. On the contrary, they are driving improvement.
What’s Next?
ESG is here to stay. But rather than view it merely as another piece of investment criteria or a fundraising box to tick, I hope we can let it inspire us all to think of the kind of future we want to create.
As World Earth Day rolls around again, there’s never been a more important time to think about our impact on the environment and what the business community can be doing to lead the way.
The technology sector has always been about innovation, about dreaming up new solutions and shaping the future in ways that others could not have foreseen. But whatever kind of future we envisage – whether it’s the smart cities in which we live, the electric planes and cars in which we travel, or the low-impact food we consume – it will now have to be done with the planet in mind.
As the ESG movement speeds from the fringes of our business towards its very heart, I for one am happy to be along for the ride, and to feel inspired by the many exciting opportunities it is helping to create.