The Brief: The VCs who are reclaiming ESG from compliance – and for materiality

Greetings Agents of Impact!

👋 Meet the ImpactAlpha editorial team. As an ImpactAlpha subscriber, you are part of the incredible community of professionals putting finance to work for good that our team of reporters and editors engage every day. Get introduced to other Agents of Impact and meet members of the hard-working editorial team in a lively interactive session, next Thursday, Sept. 19, at 12pm PT / 3pm ET / 8pm London. Register today.

In today’s Brief:

• Taking back ESG in private markets
• Sustainable carpentry in Côte d’Ivoire
• Insuring the insurers
• Mapping capital flows in communities

Featured: Beyond Compliance

How VCs are reclaiming the promise of ESG for private markets. The consideration of environmental, social and governance, or ESG, factors has stumbled in public-markets investing. Long before the current wave of attacks from conservative activists, ESG bore years of criticism from advocates of more, not less social impact. Practitioners, like ex-Blackrock executive Tariq Fancy, came forward to blow the whistle on ESG-washing, relativism, risk-shifting and other contradictions that cast doubt, to say the least, on the real-world impact of ESG. Now, venture capital funds and startups are reclaiming the ESG narrative – and the practice – to drive better performance in private markets, say Johannes Lenhard and Hannah Leach of VentureESG, a UK-based nonprofit that has worked with 500 venture capital funds and 100 limited partners to identify three principles to “do ESG well.” The first is to return the focus to materiality from regulatory reporting (see Lenhard’s earlier post, “Why I love ESG regulation… and tell VC funds to forget about it as quickly as possible”). “There is a very limited business case for ESG compliance,” the authors write. “For a VC, thinking about material ESG issues in due diligence makes for better due diligence. At companies, taking ESG into account helps to build a more resilient business.”

• Name game. VCs are making ESG their own (for context, see “VCs ♥️ ESG”). Balderton Capital calls it “Sustainable Future Goals.” Atomico uses “Conscious Scaling.” General Catalyst names it “Responsible Innovation.” Lenhard and Leach approve of the ecumenical approach but say, “ESG is as good as any other word.” Rather than getting stuck on language, VCs and tech companies should simply be clear and transparent about their definitions, practices and accountability. As for VentureESG, the co-founders say they aren’t standing by ESG just because it’s in their name. “We know that integrating ESG both in how VC funds invest and how startups are run makes long-term financial sense.”

• Material action. While ESG is non-financial, the authors write, “material ESG still has a financial impact.” For example, hiring with diversity and inclusion in mind is financially beneficial, they argue. And, “think about the many examples where building companies on bad governance principles has led to disastrous effects, from FTX to WeWork.” Investors can use a materiality assessment to define gaps and how to bridge them. The authors argue that public market ESG and regulatory requirements – including the European Sustainable Finance Disclosure Regulation and its Principle Adverse Impact indicators – are not fit for early-stage companies and tech startups. Leaving ESG in the compliance, finance or legal departments is a mistake, they say. “ESG, when materially filtered, concerns everyone’s processes, both for an investor and a company.”

• Keep reading, “How VCs are reclaiming the promise of ESG for private markets,” by VentureESG’s Johannes Lenhard and Hannah Leach on ImpactAlpha.

Dealflow: Climate + Gender

WIC Capital invests in sustainable carpentry company in Côte d’Ivoire. The gender lens investment fund out of Dakar, Senegal, backed Wood Packaging Industry, which uses sustainably sourced wood for locally-made pallets for moving goods and shipping. The company supports Côte d’Ivoire’s need for pallets as regional and international trade grows. It works with certified sustainable suppliers that comply with state-mandated reforestation requirements. Wood Packaging Industry came through WIC Academy, the firm’s accelerator program for women-led small and growing businesses in Senegal and Côte d’Ivoire. The deal is WIC Capital’s first in Côte d’Ivoire. 

• Pipeline building. WIC Capital grew out of Women’s Investment Club, a network of Senegalese business women committed to investing in female entrepreneurs. Its Academy provides both pre- and post-investment support to the Club’s investments, and serves as a pipeline for the fund’s investments. WIC Capital has made 20 investments in Senegal. The fund provides both growth equity and repayable advances, a form of working capital that allows companies to ramp up production and deliver on contracts.
  
• Share this post. 

Demex scores $10.3 million to backstop insurers against extreme weather events. Insurance companies are struggling with mounting losses from more frequent and extreme weather events as global warming accelerates. Demex partners with reinsurance companies and brokers to provide coverage when losses exceed predetermined thresholds. The Washington, DC-based company uses weather and claims data to quantify risks and determine the needs of coverage insurers and reinsurers. “Each Demex insurer customer gets a reinsurance product that is precisely calibrated to how those weather events affect its business, which is tuned based on its own data,” said Hank Hattemer of Blue Bear Capital, which backed Demex alongside Congruent Ventures, Moxxie Ventures and MetaProp. The $10.3 million injection of capital comes from a Series A round and a recent simple agreement for future equity, or SAFE, round. 

• Insurance tech. Parametric insurance triggers automatic payments to policyholders upon a predetermined event, without the need to calculate actual losses after the fact. It’s gaining traction as a way to mitigate weather and climate-related risk (for example, “Uptick in climate-smart insurance for vulnerable farmers”). Payouts are much faster compared to traditional insurance claims. Madison, Wis.-based Understory raised $15 million in June to expand parametric weather insurance coverage for renewable energy developers. Arbol, based in New York, raised $60 million in April to provide parametric insurance coverage against natural disasters in more than 15 countries.
  
• Check it out.

Dealflow overflow. Investment news crossing our desks:

• Mexico-based AltScore clinched $8.5 million to provide credit underwriting and loan management software for financial institutions and large companies that offer small business financing. (AltScore) 

• Cairo- and Abu Dhabi-based FlatKap raised $34 million in debt and equity to expand digital lending to small businesses in the Gulf region of the Middle East. (Africa Private Equity News)
  
• Germany’s Reonic secured €13 million ($14.3 million) in Series A funding for its business operating software designed for small renewable energy installers. (EU-Startups)
  
• Drip Capital raised $113 million in a mix of debt and equity to provide working capital to small businesses in India, the US and Mexico. (TechCrunch)

Podcast: Capitol Gains

How capital flows shape communities. Mapping the multiple streams of money through a given system may not be the sexiest area of finance. But the size and direction of these capital flows can mean a neighborhood thrives, or is left behind. On the latest Capitol Gains Podcast, Brett Theodos of the Urban Institute underscores the need for large, long-term investments in order to truly make a difference in historically underinvested communities. “We need half a billion to a billion dollars in a single neighborhood over 20 to 30 years to really catalyze growth,” says Theodos. The mission finance sector, including community development financial institutions and development finance authorities, can help bridge the gap, but what’s needed is a larger transformation in finance. “We’re spending a penny when we need a dollar,” Theodos says. 

• Race and place. Theodos highlights two factors that most strongly influence capital flows: race and rurality. “There’s a unique penalty to Blackness in America,” he explains. Even when accounting for other variables, the Washington, DC-based institute’s research shows that these neighborhoods consistently receive less investment (see, “The ‘Black Tax’ plagues small municipalities”). Rural communities also struggle to attract capital because many lack the local institutions, such as banks or loan officers, needed to drive growth. Such institutions are the starting point for the Greenhouse Gas Reduction Fund, a $27 billion effort to dramatically expand local lending for community infrastructure and the green transition (for background see,”Green bank and community lending plans shift into high gear“).
  
• Data-driven. “We’re interested in investment and where it’s going,” says Theodos. “That might be debt, equity or other tools.” His team has developed a “capital flows scorecard” to help cities assess their relative performance in attracting investment for needs like small business lending and commercial real estate development. One version of the scorecard assesses the social impact of municipal bonds. The benchmarks can help local leaders make decisions about where to focus their efforts and steer investors and philanthropic funders to places capital might be most catalytic. Atlanta and Denver, for example, are figuring out how to leverage growth, despite challenges, he said. “When we look across cities and we hold everything else equal, there are places that are doing better or worse.”
  
• Listen to the latest episode of Capitol Gains with Matt Posner and James McIntyre. Capitol Gains, a project of Court Street Group, is part of the ImpactAlpha Podcast Network. 

Agents of Impact: Follow the Talent

ImpactPHL appoints Kafi Lindsay, former director of Philadelphia’s Office of Strategic Partnerships, as CEO… Patricia Letayf will replace fellow co-founder Alice Bosley as executive director of Five One Labs… Vizien is recruiting an environmental sustainability program manager in several US cities… Kataly Foundation seeks a managing director of programs in San Francisco.

Value for Women is hiring an advisory services engagement manager… Heifer International has an opening for a president to lead their $200 million endowment… Gates Foundation is on the hunt for a director in Seattle… Broad Foundation seeks a program officer in Los Angeles… LEGO is looking for a sustainability reporting senior manager.

ImpactPHL’s John Moore, Zenith Wealth Partners’ Jason Ray and Chris Capato’s Public Media Foundation will join a virtual discussion on the workings of foundation boards and investment gatekeepers and how foundations are investing locally Wednesday, Sept. 25.

👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.

Thank you for your impact!

– Sept. 10, 2024