Considerations for investing in purpose-driven businesses

As the first law firm to become a B Corp in the UK, Bates Wells is committed to operating as a purpose driven business, working to drive positive change and sustainable practices from the roots of its operations. 

As part of its commitments, it is working with Equality Impact Investing on a project around equalising deal terms, and has played host to roundtable discussions around ESG with ESG investors and impact investors.

Nirav Patel, Partner at Bates Wells, joined industry leaders at Sustainability LIVE London 2023 to give his keynote session ‘Not losing impact: Considerations for investing in purpose-driven businesses’, discussing the outcomes of the project and discussions:

Is ESG tarnished? 

The OECD report on ESG investing practices, Progress and Challenges provides that, broadly speaking, ESG investing is an approach that seeks to incorporate environmental, social and governance factors into asset allocation and risk decisions so as to generate sustainable long term financial returns.

ESG has grown at a phenomenal rate. According to the Global Sustainability Investment Alliance (GSIA), in 2020, approximately US$35tn in assets were being managed in accordance with ESG principles across five major markets — Australia and New Zealand, Canada, Europe, Japan and the United States — equating to a third of all professionally managed assets across those regions. 

The reasons for the growth in ESG investing include 

• Growing social attention. We've all seen trial by social media in recent years, and this has been around climate change, biodiversity degradation, responsible business conduct, equity, diversity and inclusion. 
• Growing momentum for corporations and financial institutions to move away from short term perspectives of risks and returns and focus more on long term sustainable investment performance

Interestingly, there was a strong view coming out of our research and our projects that felt that the ESG concept and term had become very tarnished and some of the fingers were being pointed at the additional regulations that have been brought into public company requirements around reporting and the feeling that this has generated a tick box type approach and exercise.

According to a Bloomberg story in December 2021, ESG ratings don't measure a company's impact on earth and society, and in fact, they gauge the opposite — the potential impact of the world on the company and its shareholders. 

Some digging by the Harvard Business Review in August 2020 to found that an ESG investment statement from the asset manager State Street defined ESG issues as events or conditions that should they occur could cause a negative impact on the value of an investment — value, not ESG.

The Harvard Business Review went on to talk about how marketeers are taking advantage of the confusion and doublespeak around ESG when looking for investors with an overuse of terms such as sustainability and circular economy with no clear metrics or criteria about how they propose to achieve those objectives or promote those goals. 

And there are really no universal ESG ratings or rankings. It's very hard to do. And don't get me wrong, we are all aware that there are many, many, many institutions out there who are trying to create some standardisation. 

But your average impact investor would argue how can you measure ESG when ESG is so subjective.

So what can investors do to combat confusion in ESG investing? 

There seems to be a mismatch between investor expectations and investee expectations. 

One of the big themes that came out was that investee companies felt that the beginning of discussions with the investors were very collaborative. 

So we considered how can investors work better with investee companies around ESG? 

One of the things we found was that collaboration and realism is really key, and there was a feeling that there's no point in setting ESG targets and metrics which are generic or unrealistic.

And there was a slightly uncomfortable suspicion that those investors themselves didn't understand the ESG metrics, and they were simply kicking it down the road to the target companies and leaving it to them to resolve and figure out. 

This is not helpful or productive. 

So there are some things that investors can do to help provide target companies more support in achieving those ESG goals and requirements.

• share ESG monitoring software methods or other know how, including training on how they work and how they can be implemented. 
• Provide practical feedback on where ESG targets haven't been met and what a company can do to actually achieve them in measurable and meaningful ways going forward. 
• Work towards carefully crafting realistic and bespoke ESG metrics and targets.

Another thing that's worth mentioning when it comes to investing in ESG driven businesses, and this is also mentioned I heard on the previous panel discussion, is that people often drop the S and the G element of ESG.

The E is very snazzy. It gets the most media attention. Environmental matters are always all over the newspapers. It's tangible, it's measurable, and it's very popular. Therefore, in the media. But businesses in this space, purposeful businesses, ESG driven businesses, really understand the importance and pride themselves on. Also driving forward the S, the social and the G, the governance elements of the way they operate their business.

So for example, with the S, the social, they'll adopt fair employment practices to drive improved diversity and inclusivity and the g for governance. They'll adopt policies around anti-bribery, anti-corruption and other methods of good practice, such as protection for whistleblowers, which is particularly relevant in the current days. 

The key outcomes of our research is that communication is key and ESG targets should be realistic in order to be meaningful for both the investor and the target company.

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Other magazines that may be of interest - EV Magazine | Energy Digital

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