Balancing ESG disclosure requirements and real impact, what are LPs looking for?

In this Zero One Hundred ESG & Impact Talks episode, Tej Panesar, Partner at Prism Ventures discusses the role of ESG, impact, and sustainability within the investment industry, particularly in the field of life sciences and healthcare. Tej emphasizes the importance of genuinely integrating impact considerations into investment strategies rather than just superficially complying with frameworks like SFDR, stressing the significance of understanding and measuring the real impact of investments over the long term, focusing on commercial success as a means to drive positive societal outcomes.

Listen to the podcast here. 

In a world where climate change has taken the main stage, why did Prism Ventures decide to specialize in the field of life sciences and healthcare?

We are fundamentally a commercial investor, and we have a huge belief in life sciences and healthcare as an area of growth, the ability to produce commercial returns at a consistent and outperform level, and also to be a key engine for technological growth and the application of technologies like AI, ML, data analysis, computational technologies, to a vast field with huge complexity at the level of healthcare systems, the human body, cells, and molecules.

Our motivation for being an investor in the life sciences and healthcare sector comes from those key areas. And also, fundamentally, that it's a highly impactful field. I think that the initiatives within climate and other areas within ESG and other, let's say, more socially impactful industries are equally important. But life sciences and health care, of course, have a profound effect on individuals' lives in ways that can affect them throughout their lives or at points of emergency.

And is about asking us, what is more important, climate change or us as human beings? Because if we are not taking care of us humans, then we won't care about climate change. Now, I think I get your point. They are both very, very important.

That's right. But as I said, we are fundamentally a commercial investor, and I would need to be better as a climate investor, I would imagine. So, it's not my area of focus. I think I can be both impactful commercially as well as socially in a maximal way by focusing on my area of expertise, and I think there are far better-qualified individuals to focus on areas like climate. It is a massive problem in our society and for the Earth, and I think it is incredibly important that we get it right in terms of how solutions are implemented to achieve a reduction in global warming. I think it's incumbent on regulators, industry, and investors to think about that in thoughtful ways.

But going more specifically into Prism Ventures. What are those macro themes that Prism is investing in? How did you select them and how do you do the screening process when you're searching for the best VC funds for each of them?

So maybe starting at the macro, why these particular sectors? I think within the asset management world, if venture capital is looked on as somewhat niche, then perhaps life sciences health care, and biotech are viewed as a subset of a venture, therefore somewhat a subset of a niche asset class. However, in terms of global impact on health care systems, the effects of population aging, and the massive cost implications for governments, it is a huge area. And of course, the pharma industry and the size of global sales of drugs, it's a massive industry. And so that is part of the reason why we believe that it is an industry of the future. It's already very large, but the requirement, the demand pool from healthcare systems and from large pharma groups that are facing patent cliffs for technological innovation to help solve and deal with some of those fundamental social and healthcare problems is a key driver of what will push this industry further forward in the future and for it to become a fundamental allocation within large asset managers and managers' portfolios. And so Prism Ventures was designed to be an institutional investor within this space and to bring the tools of institutional investment in terms of selection processes, in terms of portfolio design in terms of strategically analyzing a global industry and saying, how can we best allocate capital at scale within this space? 

And we've known, for example, given certain events that are happening in the UK, with the pension industry starting to commit to allocating significant portions of their capital to private assets, that capital will flow increasingly into these highly impactful areas from very deep capital pools. And there needs to be expert, specialized avenues for that capital to flow through. And that was the thinking process in setting up Prism Ventures as a specialist asset allocator.

So it's also about impact, right? To have a real impact, you have to know what you're doing, and what you're talking about. How do you measure that impact?

So maybe if I come back to your previous question first, just to set that answer up. I mean, in terms of how we look at opportunities, so we have a couple of different strategies. We have a core funder funds approach, which means we're investing in GPs, investing into venture funds, and growth funds within life sciences and health care, and we assess each of those fund managers based on an institutional approach. Alongside that founder fund approach, we can co-invest alongside those fund managers into their individual portfolio companies in a selective way that leverages all the work the fund manager has done already.

How do we select the fund managers at the first level? At the high level, it's very simple. We look at everybody in a similar way. We break any fund manager proposal down into team, track record, investment strategy, where they are in their fundraising, and what are the terms on offer. Then we layer on top of a series of other important factors to us, such as impact, and ESG, looking at issues like diversity. But we do it in a very specific way that's integrated to those other elements that I just mentioned, so that those aren't looked at in isolation, but relate to how the team's approach to these factors like ESG and impact, how is it going to enhance what they're doing as an investor? Are they having a very clever framework that ticks a lot of boxes? Or is this something they think about as a team? And is it well integrated into their existing investment strategy and processes in a way that will enhance what they do? And that is a key element, I think, when asking an LP me, like myself how I think about the issue of impact because what we saw over the last 10 years or so was an increasing focus by managers on this space, partly driven by them fundamentally caring about these issues. That's certainly an important factor. But certainly an additional, I would say, almost equal or greater factor was the ability to gather assets from LPs who showed a level of concern and focus on impactful topics. As always within the fund management industry, incentives are key. That two-sided coin of both the impact and effect of what they're doing and how they're implementing impactful strategies, as well as its ability to enhance their business services and enhance the ability to gather assets, both exist. And that introduces positive effects, and it can introduce, I would say, somewhat negative effects as well.

Part of the negative side of this world has been highly profiled recently in terms of the debate around greenwashing and how greenwashing has pervaded the industry and resulted very often in checkbox exercises.

To come back to your original question, what we really want to understand from a fund manager's approach is how they think about this. How have they implemented strategies that are implementable, if there's such a word, but fundamentally implementable, simple, transparent, and measurable? That's easier said than done. So, the traditional approach was you would get a pitch deck from a fund manager, and the last slide would be a very colorful UN Sustainability Development Goal slide. And the fund manager would talk about how they've implemented a framework that looks to implement five of the factors there. And for many LPs, that might tick a box. However, the key is to dig under that and understand what is actually being done. It is incredibly difficult, and I think it's no easy task for fund managers to implement these types of frameworks for many different reasons. One of the biggest reasons, and I'll finish off there, is the breadth of issues those UNSDGs are trying to cover off.

And that is then very difficult to implement within an existing investment strategy. How do you translate? How do you overlay those goals onto an existing returns-focused strategy? And so we don't think there's a perfect answer to that. We think that each fund manager has a different approach, and we try to understand what they are doing, maybe be helpful where we can in giving some thoughts or giving some challenges on those approaches. But yeah, that's just to give you a sense of how we look at a basic proposal in terms of a commercial assessment, but then how we also try to layer into it intelligent thinking around these areas of impact.

Maybe you can share an example of a fund manager that has done it right. I mean, how do you distinguish a fund manager that's doing the box-ticking exercise from one that has this internally within the DNA and that's really looking to make a real impact?

So I'm happy to mention one manager that I think has taken a very thoughtful approach to the space. I don't know conclusively if it is the right approach, so I wouldn't advocate for it as a template for other managers. But I think within my industry, Sofinnova has taken quite a sophisticated view on looking at ESG criteria and the area of impact. And they've tried I think, along with advisors, to think about what they're investing into, which is venture companies. Those might be very, very early-stage companies through to later-stage companies. They've tried to apply a, and I may be misquoting, so you better be better off interviewing someone from so forth and over, but they've effectively applied a maturity filter across their assessment of impactful ESG-related factors. So some things may be appropriate to later-stage companies, but maybe less appropriate to earlier-stage companies. They try to provide a level of filtering and weighting as appropriate to those different stages of the company. So I think that that is quite a sophisticated approach. And then they try to measure that using a set of KPIs that they have developed in that space.

Now, again, as a cynical LP, I immediately ask the question, is that the best-looking approach, or is that the best, the most implementable approach that will have a real impact? But having spoken to the manager and heard them speaking on the subject, it sounds like it's headed in the right direction in terms of they've sat down and said, How do we practically have an effect and measure that effect? So I think that is quite good.

To give you another example, though, as I mentioned before, one of the key problems here is, again, the breadth and the use of terminology. So, impact is an incredibly broad term. You might say ESG begins to make it more specific, the UNSDGs, then break it down further in terms of specific categories. But it's such a huge, broad area of fields to try and have an effect within, that that then becomes difficult for any one fund manager or any one underlying portfolio company to say we're touching on all of those areas. I always come back to this issue of how implementable, practically, is an approach and how managers and portfolio companies think about that.

If I think about one of my former institutions, we looked at the area, just one area, as an example of diversity, and the institution put a great deal of thought into that issue. And some of the fund managers in its portfolio, and it's a funder fund also, one of the fund managers said, Well, you are the money. So if you said every single fund manager has to have a female partner, and that's our rule, and we are very significant investors and checks in these funds, everybody would do it. And that sounds appealing, and that sounds nice and simple. But when we did the research in quite a detailed way, they realized that might have perverse outcomes, and it might not always lead to what you want to happen.

And so the eventual approach we took on that specific issue of diversity was much more nuanced. And we layered into our investment process. At each stage, from beginning to end, the questions at increasing levels of detail around how do you, as a manager, think about diversity and what steps are you taking to address diversity within your firm. And we kept the reference to the term diversity quite a high level and broad. What we found as a result, we didn't set a specific target, we just asked the question. And what we found as a result was managers were quite concerned, I think, about what we were looking for, what was the right answer to this question. And so, some would point to very simplistic metrics. Well, we plan to have X % of female investors within the firm. So, they took a gender approach to diversity, and they then applied a very simplistic percentage to what their goal was within the firm. And that's one approach, and that's perfectly valid. But we would ask them, how are you going to achieve that? And why is that right for your firm? Other firms would keep their existing approach to recruitment and personnel, but really look to broaden the pool of candidates that they would bring in at the first level of the firm. And so, over the long term, they ended up with a much more diverse set of juniors who they then, by the same progression criteria, too. And you ended up with a high-quality set of diverse investors at the senior level within the firm over a while. 

The reason I give that example is to say that these are incredibly difficult and complex individual areas. And to achieve impact and outcome within each of them really takes some significant thought and some significant effort to implement it effectively. And therefore, if you take a set of categories like ESG and UNSDG and these higher-level considerations, it is difficult for one fund or one firm to say, We are having this impact across those very broad areas. And that's where I think the industry starts to, unfortunately, move into more of the temptation to not focus less on implementation and more on marketing. And that's then what has led, I think, to some of the greenwashing accusations within the industry. So sorry for the long-winded answer, but just a couple of thoughts around some examples of what I've seen in the industry.

No, I think it's perfect because in the end, it's about when you people the exercise of actually think about the approach they want to take, they can also make things happen around that approach more than just asking them, Okay, do you do this? Yes or no? It will be like a personal approach because it's on the way they understand. But in the end, they do measure the impact, which is what matters in the end. It matters the impact. It doesn't matter if you were able to measure it. It matters the real impact.

Certainly. Exactly. What we try to understand is, how is the fund manager we're considering investing. How are they thinking about this? What are the real conversations that happen across their table as a team? Does impact penetrate their underlying investment strategy in a way that is compatible with their commercial focus? Or has it turned into something of a checkbox exercise that is thought about at the end of a and that has been assigned to a specific individual or a specific team within the organization to put an ESG stamp onto something that doesn't reflect the reality? 

So What we're constantly trying to do is understand and learn from our fund managers how they're thinking about this. We see diversity in a variety of approaches across the industry. Everyone's trying to figure it out. Our test as an LP is really, is it simple? Is it implementable? And how are you really thinking about this? And I think if you've ever worked in an organization that's trying to implement these approaches, they very often will use a framework, a framework approach to say, we're going to apply this framework filter across our organization in terms of all our activities, whether it be investing, whether it be supply chain, whether it be at a corporate governance level.

And very often what that implementation ends up looking like is a matrix, a table that has the ESG categories down the left-hand side and has particular aspects of those categories along the top. And what I've generally found is that the more complicated those matrixes get, if it's 10 by 10, you've got 100 squares to fill in. If you've got 10 by 20, it's 200. The more complicated those matrices get; the less people are really thinking about them. And so what I look for each fund manager to do is really to explain how they, in a very simple way that's relevant to what they actually do, how they've broken this problem down and really thought about what they can actually achieve. And we try to dig into some debt when thinking about that. And then what we try and think about in terms of our approach as Prism, we are a fund-to-fund investor. And what that allows you to do is we get a very high-level view across the whole industry of life sciences and health care in my previous institution across all venture capital. And so what we try to understand is what impact is our capital having, applying the same tests that we apply to the fund managers that we're looking at.

And we, again, try to keep it simple, try to keep it at an implementable level. That design process within Prism is still going on, and we're still thinking about this issue and watching as the industry comes up with new approaches. But at the end of that process, I hope we'll have something quite simple, quite implementable, and quite transparent to our investors.

And so far, you have been able to measure the impact of this approach. What are the results you have seen so far? Or how do you measure it? What type of KPIs do you have Prism Ventures as a whole?

So we, as Prism, are relatively young as a firm, so I can talk about what we've done at Prism, which is heavily influenced by what we did at my previous institution, British Patient Capital. As I said, what we do at each stage of our diligence, we have layered in questions around ESG, impact, around diversity. We repeatedly ask those questions throughout our selection process. We signal to the underlying fund managers that we are thinking about this process and that we care about this process. But again, there isn't a template answer that we're looking for. We simply want to understand at increasing levels of depth how they think about these types of questions. That equally within our internal investment decision processes, within our team discussions, and within our investment papers, is incorporated into that to take a thoughtful assessment of what is being done by the investment firm that we're looking at. 

We effectively try to provide an interpretation and an analysis of what that firm is doing. We try and project what that will then look like for our portfolio once we have 15 to 20 fund managers within a portfolio. We try to get us to develop a sense of for us as a firm 5, 10, 12 years down the line, what likely impact will that have?

In some fund managers, we've seen a heavy focus on the ultimate impact on patients. And that is certainly something that we're looking at, and we're trying to track and track in terms of the life sciences and healthcare industry and its direct impact on patients. However, that's sometimes tricky because in areas like drug development, an investment firm may be at the beginning of a drug's life, but drugs can take 10, to 15 years to come to market. It can take up to a billion dollars of investment to get those things to market, and no one fund manager may necessarily see that process through to the end. So it may be difficult to assess what is the ultimate impact on patients. However, what they can do is project patient populations that this drug will likely be effective for. So we try to, wherever possible and wherever the fund manager is taking that approach, we try to think about potential patient impact. And then we rely on some of the underlying KPIs that the fund manager is producing. And wherever possible, we try and lift out of those comparable KPIs across different fund managers. One of the areas, as I is patient impact.

Other areas are areas like environmental impact across portfolio firms and their supply chains, and that's particularly interesting. Again, scorecards are different across different portfolio companies and different fund managers. So comparisons become difficult. But we try and understand at a qualitative level and wherever possible quantitative, how is that looking across our portfolio? And then we just spend as much time as possible talking about it as a team and understanding what our belief the firm is focused on. And by doing this investment into the firm, what are the fundamental areas of impact that we're likely to have by investing in this particular strategy? So is it an oncology-focused strategy? Is it a dementia-focused strategy? What at a high level do we think, philosophically, how will that affect the world? Will that do good in the world? 

But again, our fundamental focus at the start is a commercial filter. And that's one of the key things that I'll mention, is that it is my personal belief, and to an extent, our belief is affirmed, that the greatest impact that we can have within life sciences and health care is by investing in successful commercial strategies. And part of the reason for that is because life sciences and health care are inherently impactful. But that's a nice pithy answer that isn't good enough as an answer. But what we do know is that successful portfolio companies will likely have the biggest impact on society, whether positive or negative, and ideally positive. And so we want to invest in fundamentally successful commercial investors that then have these nuanced approaches to impact.

You've been working for fund funds. I mean, Prism Ventures is quite young, but then you have a vast experience from your past jobs. So the question is, how's the conversation around these frameworks? Now, how has this conversation evolved in the last years from this “must” to maybe taking a more careful approach, as you were saying? Now, there's this pressure that fund managers have to accomplish all these new frameworks, but in the end, they leave impact on the side. Have you seen a change in the conversation? In general, LP is more focused on investing in SFDR-compliant companies? 

Yeah, I think that LPs are absolutely focused on this. And that has, again, the fund management industry is very often motivated by the gathering of assets and the ability to generate returns that will ultimately affect their bottom line as fund managers and the returns to the fund manager itself. And that is the fundamental incentive structure that exists within the industry as a baseline. It's not to say that fund managers don't care about this, care about impactful issues. They do, but they've tried to think about it initially in terms of ways in which issues such as sustainability can, enhance their returns. I think that was the beginning of the conversation. What you heard at the beginning of when SFDR was first implemented was a mix of approaches from the industry in terms of saying, yes, we will be compliant and we will look to implement sustainable approaches. But as I mentioned before, very often this was a very broad spectrum of self-regulated approaches to this challenge of sustainability, net zero, and ESG criteria. And that resulted in very broad, sometimes somewhat cynical approaches to saying, we tick the box. And at the other end of the spectrum, sometimes very genuine and very good approaches and very thoughtful approaches.

But that variability across the industry made it very difficult as an investor, as a sophisticated LP, or as a retail investor, to tell what is real and what is just marketing. And that issue has been much debated over the last couple of years as to how do you fix this? And I think what in the initial implementation of SFDR, people saw that that was somewhat flawed. There are new implementations to that. There's a version of it coming out in the UK in 2024, where attempts have been made to tighten up the rules. And I think that's great. And I think that a much clearer classification of what is sustainable versus what is just an attempt at sustainability or paying lip service to the area is very helpful and very important. But again, I would say that these frameworks, such as SFDR, are complex, and they're trying to tackle very large issues. And so tightening up the reporting requirements is the first and most important step. But I would still like to see the industry address the core issue of really thinking. Rather than complying with the regulator as effectively as possible, I would like to see the industry thinking, how do we actually think about it from the starting point, from the ground up, and how can we be as impactful as possible?

Doing what we do in the way that we do it, how can we be as impactful as possible in a way that's compatible with our commercial investment strategy? Then reflecting that accurately under new SFDR reporting requirements rather than the other way around,

I think I've seen a development in the conversation. It's great to see that greenwashing has been called out. That's really good to see. But I think now we're waiting for the next iteration and reaction from the industry. Will it react to these tightened-up rules by more cleverly and more cynically optimizing to those new reporting requirements? Or will those tightened-up rules make the industry have a very strong think about how they can be most impactful? And then complying with the regulations will just be a very natural, organic process. 

Because as we are in this process, we're waiting to see what happens. What would you recommend fund managers to do? Because they think that they are still still under the pressure or at least under the idea that they have to be SFDR compliant to get at least to some LPs, which makes it harder. What would you recommend to them? What should be their approach?

I think it's difficult for me to advocate an approach because, as I said, the LP universe is very broad and very diverse, and different LPs take different approaches to this topic. Some LPs are satisfied with compliance with SFDR and feel that that is a strong, and it is a strong framework and set of criteria for assessing focus on sustainability and ESG factors. So some are very satisfied with that type of framework. And so I think fund managers do have to layer that in, and it would be commercially disadvantageous for them to not do so. But I, as an LP, and my firm, as I said, really want to understand how they are thinking as a team. Does this end enter their thinking? What are the pieces of impact that enter their debate and discussion as a team around the table as they look at opportunities? For example, within life sciences and healthcare, if you speak to a life sciences investment team, and you speak to them as a team and you speak to them one on-one, you will very often hear them speak passionately about the impact of science and the ability of science and drug development to impact large patient populations who suffer terribly from chronic or sometimes fatal diseases.

And that's when I get an “aha” moment. I know you care about this. I can see it in your eyes. And let's explore that. Let's unpack that. And how is How are you bringing that then affecting your thinking? How are you bringing that lens of something you really care about into an intelligent commercial investment strategy? So I think that the frameworks and the formalized structured framework have an important role to play. But I think firms that only rely on those may miss the fundamental question of 10 years from now with our investment strategy, what impact can we say we actually had? What did we do within the industry? And do I need that to be 100 different checkboxes? Or can that be two things or three things, bringing an incredibly impactful cancer drug to market that affects millions of patients' lives, bringing an incredibly impactful drug to affect neurodegeneration that's affecting an increasing part of the population? If they just did one drug or two drugs, is that more important than applying a token climate assessment layer on their diligence process? I'm not sure of the answer. I think this debate is being had within investment firms every day as we speak.

And what we want to do as a fund of funds is understand where that debate and thinking process is within the firm. And again, as I said, help it to inform our own very active internal debate on this issue. But I'm fortunate that I'm in the field of life sciences and health care, which some might say is inherently impactful, and that is good, but it's not enough. And I think when I read a survey of the C-suite executives who talked about their understanding of the impact of their supply chains, I think that, if I remember rightly, something like 58, 59% of executives across all industries felt that their firms weren't really implementing these criteria, these impact criteria properly. Within life sciences and healthcare, I think the figure was north of 74%, 75%, where executives didn't really understand the impact of their own supply chains. So while the field is inherently impactful, there's so much work to do in terms of trying to, at a qualitative and quantitative level, understand the impact of investment strategies and the approaches and processes of underlying portfolio companies.


Other news you might be also interested in

We’re Hiring: Head of Sales & Business Development (fully remote)

Join the Zero One Hundred Conference Team

We’re Hiring: Sales Executive (fully remote)

Join the Zero One Hundred Conference Team

We’re Hiring: Investor relations & Conference Producer (fully remote)

Join the Zero One Hundred Conference Team