Recently, Greenspring Associates partnered with Responsible Investor, a respected trade publication focused on the world of socially responsible investing (SRI) to hold the webinar, “Unlocking Impact through Venture Investment.” Moderated by Responsible Investor’s Head of Strategic Content Daniel Brooksbank, panelists Justina Lai, Chief Impact Officer of Wetherby Asset Management, and Seyonne Kang, Partner at Greenspring, discussed venture capital’s unique capacity for driving impact via investment. Read on for highlights from this event.
Editor’s Note: Content below represents direct quotations transcribed from the webinar, with editing for clarity and concision.
Daniel Brooksbank: We’re speaking at a time of global challenges, and it seems to me that venture impact investing is starting to gain real traction with investors seeking growth and strong financial performance paired with measurable beneficial social or environmental impact. So, what we’re going to do in this session is to help investors understand the impact opportunities that exist in early stage private companies and how they are helping to address some of our most pressing issues. Ultimately, it’s about venture as an asset class of choice for sustainability-minded investors seeking to make the greatest impact on society alongside portfolio returns.
How is venture capital suited to impact investing? How do the two bolt together?
Seyonne Kang: We [Greenspring Associates] believe that venture, almost by definition, is impactful since the main objectives of investing in technology and healthcare are to improve productivity and, by extension, standards of living and then overall quality of life. So, we think the asset class is overwhelmingly a positive force for social as well as economic good.
Justina Lai: I would say that we [Wetherby Asset Management] have a similar view to Seyonne [and Greenspring Associates] although not quite the same – we don’t think by definition venture is […] impact investing, however we do think that there’s a natural alignment between venture capital and impact investing. We do think that intentionality matters, but in general, we do believe that venture’s focus on the future economy and on innovations that solve pressing social and environmental challenges creates a natural alignment. And many themes within impact investing are driven by venture capital investment; so, things like financial technology, educational technology, sustainability, and climate solutions – many of those innovations are initially funded by venture.
DB: Obviously we’re speaking at the time of the pandemic, which is still raging… Is there any role in [funding solutions to] particularly that problem – COVID?
SK: I would say quite a bit. Starting with healthcare, Moderna [was a venture-backed company], Everlywell quickly pivoted and created a COVID test earlier in the year), and other groups that are venture-backed offering testing in-home and in clinics [and] telemedicine. On the tech side, food and grocery delivery and e-commerce, where the penetration of retail sales has jumped considerably more during COVID than in the previous 10 years before COVID started, working from home technology… And then, to some of the examples Justina has discussed, on the social benefits of financial inclusion – with startups offering credit and banking services to the unbanked, with education and worker retraining in a time where markets have obviously decoupled from what’s happening on the jobs front, etc. So there are a lot of ways that we think venture is helping the world navigate and recover from COVID.
DB: It seems venture capital firms can be nimbler in some respects, but also investing over a different time horizon to an extent with VC; can we go onto that a little bit – allocating to the future?
JL: I think that’s one of the benefits of venture capital – it’s incredibly long-term, patient capital. So, there is a natural alignment also with the unfolding of long-term themes that we’re seeing play out. People talk about climate change as a long-term theme (although it’s already here) – but just thinking about the fact that venture was addressing climate change and looking for climate solutions 20 years ago, as an example. Tying back to your question around COVID, to take a bigger picture perspective, what the pandemic has raised within the social consciousness is this level of inequity that existed in our society. And I think there’s both a moral imperative and investment opportunity to work on issues that solve or address inequalities – again, I think that’s where venture can play a role in seeding innovation that can help drive systemic change and also technologies that […] enable a lot of the access to financial services, education, and healthcare that will support the recovery – and, hopefully a green, just, and sustainable recovery out of this pandemic.
SK: I totally agree with Justina’s view and should have mentioned that during the question about why venture is uniquely suited [to impact investing]. I think that’s an additional advantage – that the thoughts and the decisions made at these companies have the benefit of being very strategic.
DB: I think most of our audience will be more familiar with the listed [public] markets and people will be tuning in to get a look at the VC markets [given they] may be less familiar with the VC markets; it strikes me that you can operate in these markets away from the sometimes short-termism of the public markets, am I right in thinking that?
JL: Absolutely, and again that long term alignment and that patient capital is part of the structure of venture capital in that companies are not beholden to quarterly profits or quarterly reporting. They are able to make investments that may take a longer time to pay off, but will pay off in a much bigger way. […] Venture is incredibly important within the larger capital markets ecosystem because it is what seeds innovations that then scale and commercialize through multiple rounds of venture and growth equity to eventually reach the public markets once they’ve gotten to a certain scale. So I think about venture as playing that seeding and commercializing role and then the public markets as playing that commercializing role and providing additional capital investments in businesses in order [for those businesses] to continue to grow.
DB: When we spoke before, you mentioned the “opening of the funnel” idea – what do you mean by that?
JL: Well, I mean venture is going to take a lot more risk than perhaps the public markets investors are comfortable with, but you need some forms of capital to take that risk and they’re set up that way. The folks that are investing in venture have the wherewithal to take those kinds of risks, have the pattern recognition, the muscle memory of being able to look at these kinds of businesses and determine which ones have the best shot of commercializing and scaling. But you need a lot of companies coming in at that very top of the funnel in order to come to the depth that you eventually have in the public equity space.
SK: Yes, I totally agree.
DB: Let’s move onto this idea of governance. As I say, I think our audience will be more used to the public markets and how governance is undertaken in the public markets. How does the VC governance picture look?
SK: We think that, compared to the public markets, the venture capital-pushed governance is really strong and it’s quite different; in many cases, before an early-stage manager invests in a company, there is no governance, no board. So, we joke that sometimes VC puts the “G” in ESG with respect to the startups they fund. And the oversight also is typically significantly more hands-on than that of a public company. Not only are the boards smaller but also, the board members don’t just provide financing to the companies but they bring a lot of resources to bear to affect outcomes; they invest a lot of human capital as well as capital from their firms, they bring their advisory and operating experience, they provide mentorship and support, they often will connect the companies with customers (beta customers as well as ongoing customers or partners) – so they’re much more hands-on than coming to a quarterly board meeting and serving on an audit committee [type of scenario] with a much bigger board structure.
JL: It’s again the kind of different role the capital plays in the stage of the business [that] venture is investing in versus what public equities investors are investing in. And [I] absolutely agree with Seyonne and think, from an impact perspective, we also see it as a different way of adding value. So, if you think about venture, that’s really much more about additionality and value creation, and in the public markets it’s much more about scalable impact. There may be incremental changes that you’re able to make in terms of ESG or any kinds of best practices and that incremental change is incredibly powerful and scalable change just because of the size of these businesses and the scale that they have.
DB: I’m just wondering if the listed markets can learn something from the VC space in this? That’s a loaded question, maybe.
JL: I personally think that everyone can learn from everyone else. I mean, in the same way that we’re seeing not just venture but the private markets focus on ESG integration [much more] than they have in the past, that’s partly an application of what’s been happening in the public markets for quite some time. And, similarly, I think there are opportunities within the public markets to learn about value addition, value creation through board service. But also, you’re seeing more and more public companies (many [that] were originally seeded by venture) taking a more thematic impact approach where it’s not just about the way in which they run their business – so, not just the ESG integration – but, beyond that, the thematic… their products and services are solving fundamental social and environmental challenges.
SK: Yeah, I think that’s a great point.
DB: Here’s a question for you – how has performance held up during this crisis?
SK: I think both on the public and private side, it’s held up remarkably well. More generally in terms of ESG performance – and there’s a lot of data that I’ve seen from MSCI as well as Morningstar talking about ESG ETFs and funds across both public equities and fixed income that they’ve greatly outperformed. In the venture space as well, probably folks intuitively have gathered that venture and growth and technology have really done well with very few exceptions – maybe companies that are exposed to travel and hospitality sectors – with that aside, we at Greenspring have seen tremendous benefit to our portfolio in terms of performance through the past six months – which, I will add, in March/April, we were not expecting. So I was wrong in terms of thinking the drawdown in public markets would last longer and cross over into private [markets].
DB: Is this a sort of “golden opportunity” for you guys?
SK: We think the pandemic and the impact it had and has on the economy are really pulling forward as well as increasing demand for some of the areas that we’ve talked about already in terms of both technologies as well as healthcare and on the social front.
JL: Seyonne already mentioned a few of the industry studies that showed that ESG integrated and impact funds held up much better in the drawdown in March and also kept up in the rally, so you’re not giving anything up on the upside in order to have that downside protection (and anecdotally we saw that within our impact portfolios as well). I think venture, again, has the benefit of being a long-term investment and so you’re a lot less concerned about day-to-day or quarter-to-quarter volatility and I think impact themes as we saw with ESG-integrated funds as well as thematically-focused impact funds are more focused on essential public goods and services – these are: solving fundamental global challenges that, unfortunately we will always need [to address]. And we know that challenges always give rise to investment opportunities and, given that focus […] on solving those problems, we feel as though, not only were these funds better-positioned through the pandemic, but are better-positioned, as Seyonne said, coming out of the pandemic as well.
DB: The question we have to ask, in a way – the buzzword at the moment is “outcomes” – portfolio outcomes and impact outcomes. So, how do you actually measure the impact that you are having?
SK: We have an official reporting framework that we have adopted on the impact side; we use the B-Impact Assessment which is administered by B-Lab, the group that certifies B-Corporations. It’s a questionnaire that asks a series of questions around both the operations of the company (How many workers do you have who make more than a minimum wage? Do you have a board of directors? How often does it meet? What is the diversity of your workforce and your leadership? Do you recycle?) as well as a series of questions around the product or service that the company is selling. And [we roll] up the scores for the portfolio companies to a fund level [score.] So, we produce and generate [an annual impact] report and distribute it to our investors – we are looking for both the score but more importantly, we want to raise awareness since a lot of companies are quite early-stage and […] if you’re not thinking about the values and the tenets and the mission of your company from day one, it’s quite hard to reverse-engineer [for example,] diversity into your company when you’re at 50 or 100 people … and we’re also looking for improvement over time.
JL: Yeah, well we love that Greenspring uses the B-Impact Assessment. I think it’s always helpful to align to industry standards so that we all aren’t recreating the wheel. And we [Wetherby] are a certified B-Corporation ourselves so [we] have personal experience going through the process. And it’s a wonderful diagnostic tool for understanding how you can improve [over time], to Seyonne’s point. The way that we think about impact, because we manage multi-asset class portfolios and venture is a component of [them], we’re really thinking about […] the theory of change that gets us from outputs to outcomes to impact. So, first and foremost, we’re really looking for… reporting not just for the sake of reporting, [but reporting] that [enables us to] ask questions better and how we can support our fund managers in utilizing those metrics as impact KPIs to better improve their own impact performance over time. And, if we’re doing our jobs right, as they’re improving – broadening and deepening their impact, their financial performance should be a component of that since we’re looking for those opportunities where their impact strategy drives the fundamental investment thesis. So that really brings me to our focus, first and foremost, is that due diligence upfront – understanding what that theory of change is, what is the impact strategy, how [it drives] the fundamental investment thesis. [Also], what commitment do you have in place in order to drive investment decision-making on that basis? What resources do you have in place that enable you to execute on this strategy appropriately – track it, monitor it, manage your portfolio? To the governance point, how are you adding value on the board from an impact perspective? So, it’s really more of that upfront work and then the back-end reporting enables us to ask better questions and hopefully manage our portfolios better for broader and deeper impact over time.
DB: So, we’re talking about an unquestionably positive feedback loop from this stuff?
JL: Yeah, absolutely. We think it’s really important that it not be a one-way flow of information, but it actually be valuable for the managers and the companies themselves.
SK: Yeah, I think there’s tremendous value in companies going through the process of answering the questions. It really raises awareness of things that they need to think about and improve. It’s definitely a meaningful conversation starter about those areas.
DB: What are the barriers – the obstacles to [impact investing]? I mean, this is a relatively new area. What kind of obstructions does this sector face?
SK: Yeah, I would say a couple of things. I would say there is the perception that impact investing, maybe across all asset classes but in venture for sure, is [that it’s] concessionary capital. And […] we are aiming to [get the word] out that our impact managers are the ones who fit our definition of impact and will outperform, as a matter of fact. And, again, we've all seen the data, particularly on the public side. But I think that the [mis]perception is still out there and there are groups that don't want to be called impact, even though they're definitely investing in impact, I think. And they have sort of rebranded impact and they've used, maybe better marketing terms if you will – saying they are “world forward,” you know, as an example. So, I think that's a challenge. […] This morning I read this report; it was a survey of 600 global institutional investors from six Countries, USA, UK, Japan, Germany, other big, developed economies, collectively managing about 20 trillion in assets. And they were asking [about] ESG intentions. And the top takeaway among at least US investors, was that ESG had been deprioritized during the pandemic and that was really disappointing. So … I would say there are chances it continues to be a little bit early. And maybe those two answers are related because of this perception and so we just need more cards to turn over, to show that it doesn't have to be concessionary capital, and then people won't think ‘I need to deprioritize this in my portfolio,’ because nobody would ever deprioritize an asset class or an area that [is] widely held and accepted as outperforming.
JL: Yeah, I absolutely agree. I think the performance misperception, unfortunately, is pervasive across all the classes – venture, in public equities, and others. So, I do think education is really important because we do have a lot of performance evidence, and both academic and practitioner [agreement]. You know I saw that article as well and I was also surprised given […] the flows that we've seen go into sustainable funds – given the number of sustainable fund launches. And also the fact that, yeah, again, you know many of these funds outperformed during this this recent market drawdown and have been a part of this. I mean, we should all have been aware of it already, but I think [it’s] now unavoidable for people to recognize just the disproportionate impact as a result of inequity and what that implies in terms of our moral imperative for addressing climate and regional justice. […] It's an investment opportunity and I do think that there is a shift in mindset toward greater stakeholder capitalism rather than shareholder primacy alone. And then from an allocator’s perspective, I do think there's a little bit of an allocation challenge or question; […] when people think of venture, they often think of making direct angel/seed stage investments into companies. And I would say the vast majority of people don't actually have the ability to do that. There's a lot of performance dispersion within venture, in particular – it's a very binary result, especially at early stages. And unless you are, forgive me for using a US sports analogy, but unless you're taking a significant number of at-bats, you're not going to have the batting average that you want to have. Oftentimes from our perspective, it’s more financially prudent for our clients to allocate through venture capital funds and then in many cases also in venture capital fund-of-funds. Because in the same way that there's performance dispersion at the company level, there's a massive amount of manager dispersion. And so again, you need to be in the market […] often enough to really be able to make the right selections there, and that's where a fund-of-funds can play a really helpful role in in that diversification – that manager selection – so that you don't have such binary results.
DB: We got a lot of questions in from the audience, so I'm going to turn over to them. And the first one would be: how does your impact measurement differentiate between catalytic impact as opposed to static impact?
SK: I think what it is asking is are about potentially corrective action. [That’s] how I'm interpreting the question, in which case I would say … what I mentioned earlier is that we are using it at this point as a tool for awareness and conversation and improvement over time. Our rollout [of] the B Impact Assessment to our managers in our portfolio is about 2 years old and so we will be approaching, I would say, the time in the next year or so where we [might] have a pattern starting to emerge. [But it’s only] two data points so far. We do think that if you're not seeing improvement over time in these measures, we are assuming (again to our earlier conversation) that we're going to see that manifest itself in financial performance also – unless there is a situation where the performance is widely decoupled from deteriorating impact measurement. That would be an unexpected situation. We would have more visibility into whether that will arise in the next year or so, I would say.
JL: Yeah, I think there [are] multiple ways to answer that question. And I think [that] standpoint is a great one – there is sort of this engagement process and improvement over time which, again – as a company scales it has more catalytic impact... If you're sort of talking about the very specific interventions themselves, or the products and services themselves, […] I'll be frank in saying that that's not the form of capital that our clients bring to the table. … We absolutely will invest in venture, which we believe and fund [because it] seems a lot of innovations are needed in the world. But in terms of taking that […] additional risk without being compensated fully in the form of financial return – that's not the form of capital we bring to the table. I used to work at the Rockefeller Foundation, [managing] in the program-related investment portfolio there – and that is meant to be significantly more risk-taking capital, because it is ultimately topically-oriented and so that is where you have an opportunity to make a trade off: take additional risk without necessarily being compensated in the form of financial return in order to have more catalytic impact. And that is the opportunity also for layered capital structures that can bring in more commercial forms of capital and leverage that larger base of capital available. But that's not, […] the big focus of our client capital other than through […] seeding innovation within their asset allocation.
DB: Got another question, which is kind of along the same lines, but I would ask: how does impact influence the valuation of startups? How do you integrate that? This is kind of where we were getting too, isn't it? Is there a valuation of impact here? […] How do you quantify it?
SK: I think that there would be indirectly in – we've seen the data around how Millennials and Gen Z are very willing to pay more for cleaner product or be patrons of companies or customers of companies that are more focused on impact. So, I think that there would be potentially, in that realm, […] impact on the valuation. But it would be indirect, obviously, and then in other areas, for example, if you are very mission-driven and focused on the ESG factor. You know, we've heard [a] story anecdotally from one of our managers that, as an outgrowth of having completed the B Impact Assessment, they were able show that to a candidate they were trying to hire and won that candidate away from the competing offer. Again, if you can attract better talent because your employees feel that there is even more purpose – then I think that's clearly going to impact valuation in a positive way. Again, you know [venture capital] is a long-term asset class and so we may not show up in [only] one quarter but we strongly believe it will definitely impact valuation overtime.
JL: Yeah, I think it's difficult, to Seyonne’s point, to assign attribution upfront. But, anecdotally, absolutely we've seen that across stakeholder groups. As Dan mentioned already, better talent – we've seen it ourselves because we're a B Corp. and impact investor. You know being thoughtful about environmental stewardship often reduces your input costs, so there's a lot of ways in which it manifests. I would also say from a diversity perspective – you know impact-driven businesses tend to incorporate a broader diversity of perspectives and diversity of thought which, again, then leads to better outcomes. […] The valuation is the output of the additional value that comes from impact. So, I do think it's reflective of that value versus driving the value.
DB: Question about blended finances – kind of builds on what you were talking about, Justina – your work with the Rockefeller Foundation. Have you seen any evidence of blended finance solutions? De-risking VC such as through first loss structures at the fund level?
JL: Yeah, I mean I think this has happened over the years at multiple levels. Venture as an asset class started with governments decades ago. But setting that aside, certainly there have been foundations that do VC in various ways when they have very specific goals. So, you know [The Bill and Melinda] Gates [Foundation] has done a lot of work around biotech and pharma. In fact, going back, they had made an equity investment in biotech… [There] is a German biotech company that actually led to that messenger RNA technology that's being used in a number of these – I think Pfizer’s vaccine is based on mRNA type technology, so […] it happens both in blended capital structures as well as seeding again, even earlier than venture innovation. For specific examples, there's a group called Convergence that is explicitly focused on blended finance structures, and they have a number of case studies that might be helpful to explore.
SK: I'm not as familiar with that term [blended finance] so I'm not sure it's widely utilized in venture, but I think I can address the second part of the question… first loss structure at a fund level – it's highly unusual. I think that at a company level there are [structures like that] sometimes particularly at the growth stage and or if a company is maybe earlier in its life but perhaps the outcome isn't as obvious. There are ways that investors will get protection, but it's not typically at a fund level. […] It's not common.
JL: Yeah, well and I would just say that … from our perspective, it's not necessary in a lot of cases. As we said throughout this call, venture can deliver risk-adjusted rates of return and can and will in impact. Well, not a guarantee, but again, […] there are certain areas, perhaps where a foundation […] has a specific impact objective that they want to see and, in that case, they will catalyze specific areas of innovation.
DB: Question around the impact of the pandemic on the VC industry more broadly – [is the pandemic] forcing everyone to rethink? What are the VC orthodoxies that are being challenged by the pandemic, if at all?
SK: I would say the major one would probably be increased awareness and sense of urgency around diversity. That is something that has been very top of mind since probably mid 2017 when …the “Me-Too” in venture really kind of started. And obviously with some of the events of this year, that has become the biggest change - that people are feeling a lot of pressure, in a good way, I would say, to address more quickly.
JL: Yeah, absolutely. I think there's absolutely a reckoning with the broader investment industry around this. You know it – other things I think are common, too, across the board across industries: I mean in venture, a lot of that requires […] face-to-face interaction [and] getting to know an entrepreneur. And obviously we're all now doing that virtually. So, I think that's required some level of adaptation. But in some ways it's also enabled, you know, reach into geographies that are less well-covered. Frankly, clearly talent is distributed equally. Opportunity is not. So oftentimes the concentration that folks have on startups in the Bay Area or in Silicon Valley is not reflective of the innovations that are happening around the country [or] in the world.
DB: Building on that, there's a question around diversity […] broadly, and I'll say the question in full… As you say, venture capital often puts the “G” into ESG of private companies and yet only 7%, apparently, of investor money goes to women-led startups. What's the answer to gender equality in private investing?
JL: Yeah, we don't think about it [restricted to] just private investing. So first I will say we do not have the answer, but it's something that we're focused on. We've had a D&I initiative for a number of years now. And then lots [of our diversity & inclusion effort] has been internally focused on our own work, but also something that we integrated across our investment policies and processes and across asset classes – not just within our impact portfolios. […] First, we start with transparencies – really asking the questions … Secondly, using the answers to those questions in order to better engage with our managers and understand what they're doing. You know what, their investment practices and policies are. […] [I]s that actually meaningful in terms of senior leadership and what kind of accountability do senior leaders have? And then we track their performance overtime. There have been several years now where we've seen shift overtime and I would say we're, you know, unfortunately as an industry at the very early stages of it. But I think […] there's no escaping the fact that this is critical – that it's not only a moral imperative, but it's a better business… better business practices will result in better financial outcomes as well.
SK: Yeah, and I agree with Justina's response. And similarly, outside of just our impact and diversity pools of capital, we – across all of our direct and fund investments – we have an ESG questionnaire, etc. that we've implemented. It's just part of our investment process irrespective of the pool of capital that the investment’s being considered from. Again, I obviously echo what Justina said on it's very early days and I think one way to improve is to get more capital into the hands of diverse investors – who, you know, as a positive externality of being diverse yourself, chances are your network is a little bit different than what the traditional face of venture capital may have been in terms of demographics as well as the schools you went to …You know, [the same] schools that many of them [current VCs] have attended. And that is an area where we see a lot of positive activity and there is quite a bit of diversity – both gender as well as […] other underrepresented groups historically in venture who are starting to invest their own funds. I read a statistic recently that there are 276 venture funds in the US led by women and a little more than 75% of them started in the last five years. So […] we're seeing some green shoots, if you will.
DB: What exactly is the B [Impact] Assessment? Can you explain what that is […] [and how it relates to the] startup or the fund level? Can you explain what [a] B Corporation is?
SK: The B Impact Assessment is the questionnaire that B Labs, which is [the] group that certifies B-Corps., administer[s]. So, if you are a Certified B Corp, as Wetherby is, you fill it out bi-annually – [and] you need to have a score of a certain level to maintain your certification. And it asks … questions about your own operations as well as about the product or service that you deliver to customers. In terms of who is filling it out at our request, … the answer is both …every fund manager fills it out for themselves as a management company (and we at Greenspring fill it out also). And then for our impact fund, each of the funds to which we commit will, in turn, ask all of their portfolio companies to fill it out and then those scores will roll up to a fund-level score. Then across our program, we’ll aggregate all those scores and […] we'll produce that report for our own investors.
JL: […] We find it to be incredibly useful tools for ourselves and [the B Impact Assessment has] guided a lot of the best practices that we've implemented. And, of course, there's always opportunities for continuous improvement.
DB: Right, question about green tech opportunities and it's a really simple [one]: what are the most interesting GreenTech themes these days?
SK: There seems to be a lot of innovation happening in agtech… Microbes in the soil or waste or ... waste management solutions that […] turn waste into biodegradable product. There's [also] a lot of innovation happening there in terms of sensors in the soil to improve crop yields, etc … I would say the other theme is around data and analytics. So, there's a lot of analytics for solar panels, analytics for transportation and logistics, analytics for sensors. I mentioned sensors, but that is a big theme and that gives you data … [for example,] around leak detection for natural gas pipelines [or] weather analytics. There's quite a bit happening in those areas … that we're hearing quite a bit about.
JL: Yeah, I would say very similar to Seyonne, I mean we think about it both in terms of climate change adaptation as well as climate mitigation. […] in some of the themes that Seyonne mentioned – agtech [and] regenerative ag are both about mitigation. An application you know, a lot of sensors are both about mitigation and adaptation… Geospatial imaging – that kind of thing is also about adaptation. I think the reality is we need to tackle it on all fronts an across the entire ecosystem.
DB: I was just going to say: is this enough to solve the problem [of climate change]?
JL: […] I mean I am hopeful but venture alone … venture plays a very specific role in seeding innovations. But we need enabling policy. We need the larger capital markets to be aware of climate risk and working towards a net zero investment framework by 2050. I mean there's everybody – individual consumers [etc.] … This is, I think, all hands-on deck … everybody needs to be thinking about these issues, focus on these issues and working to both adapt and mitigate climate change.
DB: Is there a case for a third party coming into to verify or certify impact [scores, such as those companies receive on the B Impact Assessment or other ESG ratings platforms]?
SK: Oh, is the question to verify the responses to the impact assessment are accurate? There's actually an auditing process that's done … it used to be that Deloitte would [audit some of the companies that complete the assessment].
JL: [They would] audit 10% of the folks that complete the [B] Impact Assessment. But there's also an auditing process that B Lab goes through in verifying various questions. They have an audit process where they will select a random selection of questions and ask you to provide documentation to verify that sort of thing. Also you may be familiar with the IFC's operating principles or the Impact Management [Project], which sets forth a set of principles for how you measure and manage and monitor impact. And there are third parties, for example, Tideline, which is an impact investing advisory or consulting firm that has created a service called BlueMark, where they are verifying and certifying the reports that different fund managers are issuing against the IFC's operating principles.
DB: We're seeing an increase in the demand for ESG reporting from limited partners and portfolio level. Is this also the case in venture capital firms? if so, how is it being addressed?
SK: You know we talked a little bit [already] about our [operational due diligence] process. We are asking every manager irrespective of which pool of capital we're committing [from]: ‘Do you have an ESG policy?’ If [they] don't, we offer to help them. I don't think in many cases LP's are requiring them [yet], but, anecdotally, we are seeing more. I have couple of hard copies sitting [on my desk] of impact reports that are … bespoke that different managers are sending out. We've really evolved on this topic, and we're probably at the forefront of it …I would say it's probably early days – before [requiring every firm have an ESG policy] is more of a common thing.
JL: Yeah, I mean I think it goes back to one of your earlier questions, which is, you know, what can private markets learn from public markets. I think 90-something percent of S&P 500 companies now issue sustainability reports and similar [in the broader] public markets. The private markets are starting with disclosure and transparency. Again, we also ask our managers about their ESG policies as well, as you know, resources as well as processes. So, I think you start with disclosure and then you can't end there. It's then holding them accountable for adhering to those policies. And how are they themselves tracking their adherence to those policies, how is it financially material and how [are they] actually using it to improve their portfolios overtime. So again, I think this is where that cross-pollination between public and private markets is really important.
DB: How focused are you on blockchain enabled verification solutions for impact measurements? […] How do you verify? How do you know that what you're being told is correct?
SK: We are not focused on that at the moment. This is the short answer. […] Where we are, we complete the B Impact Assessment and we work with B Lab but beyond the verification that they do, I don't know of the third parties outside of B Lab – [because B Lab] is a third party that [has]their own auditing.
JL: Yeah, I mean it’s something that we've looked at. We are aware of a few startups in the impact measurement world that are using blockchains and proof of impact is one example of that. […] It's one of the things that we're looking at as part of our focus on continuously improving our own impact reporting and measurement and management.
DB: I'll bring this webinar to a close […] Seyonne, Justina – thank you so much.
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