Environmental, Social, Governance (ESG) has been the news and not only because of Earth Day. This investment strategy has already impacted us all in very big ways. Let’s delve into each area to see what has been going on and how ESG is important to SEIS/EIS companies in particular.
The Glasgow Alliance for Net Zero was unveiled by former Bank of England governor Mark Carney, US Treasury Secretary Janet Yellen, and John Kerry, US climate envoy. Boris Johnson pledged to accelerate the UK’s efforts towards net-zero carbon emissions, with the new deadline moved up to 2030. The overall aim is for 55% - 60% of global GDP to be committed to moving the globe to net zero, by deploying renewable technologies and diminishing reliance on coal. Six leading banks have committed over $4 trillion to support climate solutions.
With such ambitious goals, climate leadership is taking center stage as a high-stakes, high-profile matter. Many believe this is for the modern-day titans to address, while others question whether even titans can handle this. I believe that enterprises of all sizes, particularly SEIS/EIS companies should be climate leaders as they are the future. The weight is ultimately borne by each and every one of us, in the life choices we make: how we work, relax, consume, and invest.
Sapphire as a small financial services business is also thinking about these issues. My colleague (and husband) - Boyd Carson - is a member of Harvard University’s Climate Leader’s program and the Harvard Council for Student Sustainability Leaders. As part of the Earth Day celebrations, he was asked to make a video for the Harvard Museum of Science and Culture to explain his reasons as to why he is personally committed to addressing environmental challenges. You can view his video by clicking here: https://hmsc.harvard.edu/earth-day-2021.
Social issues such as socio-economic inequality also came into the spotlight during the Covid pandemic, revealing how grossly unequal our societies are. Such inequality is immoral. Topics that have now become dinner table conversations such as vaccine politics, migrant issues, cybersecurity, remote working challenges are social issues affecting us all daily.
Governments and institutions attempt to address social challenges. Recent efforts include the International Monetary Fund's proposal to levy solidarity taxes on the wealthy and the pandemic winners. Other legislation such as the General Data Protection Regulations came into effect in Europe to safeguard data privacy. There are many significant efforts being made to address the world’s greatest social challenges.
SEIS/EIS companies should also strive to address issues that affect their stakeholders. A first step would be to ensure that teams are operating as inclusively as possible. Recruitment efforts should be fair and balanced to ensure that people of all socio-economic backgrounds are not only aware of job openings but are encouraged to apply. As there are no positive discrimination regulations enacted into law in the UK, managers, and entrepreneurs must be aware that a balanced shortlist of candidates should include both genders and must strive to be as fair of a reflection of society as possible. This is not done to tick the ESG box, but to benefit the company and its shareholders. Empirical evidence from research conducted over the past decade concludes that diverse teams deliver optimal results and enhance profitability by circa 15%.1
Governance plays an important role in enabling a company to meet its mission and objectives. Achieving these objectives depends on the effectiveness of its board of directors, as well as the policies and procedures in place. Without a well-structured and balanced board, a company may not be able to maintain its competitive position because it eventually will fall out of touch with reality.
Current governance issues mainly relate to the diversity of boards, and for the US publicly listed companies there is now a requirement to fulfill both gender and racial diversity quotas. In the UK, the topic of discussion at our most recent HM Treasury Women in Finance meeting was the Financial Conduct Authority's (FCA) latest requirement for the largest listed companies in London to appoint a minimum number of female board members. Per the Financial Times, “as of January 2021, there were no longer any all-male boards in the FTSE350.”2
SEIS/EIS companies often overlook the importance of appropriately structuring their board of directors, even though it is imperative to success. Their excuse is their young age, but this is indeed counterintuitive. Skillset, experience, and expertise are very important ingredients to a company's success; in particular, people with expertise in the relevant environmental, climate, or social issues affecting a company should be included on the board. This is in addition to ensuring the board’s composition is diverse in the areas of age, gender, type of experience, and race.
Why does ESG matter to SEIS/EIS?
From a company's operational perspective, ESG enables growth opportunities and mitigates downside risk. It can also affect a company’s ability to raise both equity and debt finance. As ESG provides a broader perspective it provides a foundation for long-term strategy, aligning perfectly with patient capital, which is what SEIS/EIS is all about. It is no wonder that ESG funds have been recording solid consistent returns since inception.
From an investor perspective, ESG influences company behavior, and SEIS/EIS investors seek to support companies that are purposeful. Let us not forget that SEIS/EIS investing is “risk capital”; investors are aware that they may never get a return. How then do SEIS/EIS investors justify their investment? By buying into the qualitative, non-monetary aspects, and companies with ESG focus rank highly in this regard. Coupled with solid, consistent returns since inception, it is safe to say that ESG is here to stay.
Sapphire Capital Partners LLP is a signatory of the United Nation's Principles of Responsible Investing, HM Treasury's Women in Finance Charter, and is in the process of becoming B-Corp Certified.
(1) 2015 McKinsey research concluded that companies with a mix of male and female senior management outperform homogenous competitors by 15%.
(2) Source: FT.com Caroline Binham, "Diversity mandates eyed by UK watchdog for listed companies' boards" March 17, 2021, https://www.ft.com/content/da4ac203-a52b-4bc1-a3c5-67e5e521495d