Conversations between LPs and GPs about ESG goals and strategies are not as natural and organic as one might expect. Overcoming this challenge is at the heart of our new Zero One Hundred Conferences ESG and Impact talks. Our aim is to create a secure space where investors and experts can openly share their experiences from their unique positions within the industry, whether they are on the GP, LP, or SP side.
Our inaugural guest was Eva Nedelkova, Co-founder of KnowESG—an integrated sustainability ecosystem that consolidates relevant news, events, and company information, serving as a sustainability data hub. Additionally, she holds the role of Chairwoman of the Board Sustainability Committee at Lindström, Europe’s leading textile service company.
To kick off these talks, we've chosen the topic of making ESG the new normal and engaging LPs and GPs in crucial conversations until they become business as usual.
How can LPs talk to their GPs, and the other way around, about ESG, about sustainability and impact? And why is this an issue?
“I remember leading an ESG investing workshop on an investment conference in Amsterdam a year ago. And during that workshop, this arises as the critical, most fundamental questions. And my audience back then was a combination of impact fund and non-impact funds. And I can tell you these two parties have a little bit different perspective.
First of all, is this even an issue? And my experience and research suggest that it's an issue. We see that in ESG adoption, the most significant driver within the private equity sectors, is the LP preference for ESG conscious investing. What we see a lot, not always, is that LP investors are really asking the fund managers to focus on this topic. What we also see, and the study suggests, of course it depends how the study is done, that this could be up to 80% of the firms. Now, the question that arises with such most of the interest in this topic. Why is there a resistance? and why are the discussion kind of staggering? And I would say there are a couple of elements.
One of them is on the methodology and standardization side. What really seems to be crucial is the data side. Very often we could call the requests of the LPs over optimistic or from GP perspective, could be unreasonable, because it is not easy to derive the data from portfolio companies. I would say what could really help us is just proper understanding of definition of the data that needs to be collected for ESG strategy and subsequent reporting. We need to do it for the whole portfolio here. If the company, the fund, doesn't have enough skills to define a pragmatic ESG policy. The word pragmatic is, I think the key, don't try to do everything. Of course, we need to be compliant, but let's be as pragmatic as possible. Invite an expert that could help you, so you don't overcomplicate. That would be number one, and second would be that use software. There are so many, such a huge number of companies which simplify this process and make it much less manual with data extractions, with APIs, so we don't have to manually collect ESG information from the portfolio companies. This is also what we are tackling with Know ESG, bringing this provider together so all kind of companies can find them.
What is your experience from the people you have been talking to? What percentage actually uses software and which ones don't? And you know why they don't do it and prefer to do it manually?
This reminds me to when I started my career in banking, back then Excel was the holy grail, right? I don't want to say we are doing the same, but I would say it's still a bit, even in this day and age. Everybody talks about data; artificial intelligence and I don't know what it is still a bit of a transition when it comes to data gathering to let the experts and let the tool help us.
So, I would say one is cultural and the second is that the information is very scattered. If you're trying to find the ideal providers, there is a multitude of providers over the world, from startups to very established companies that could help you to do that. So, it's not easy to navigate. And even thirdly related to this is that maybe you want to use a very hip new company, but it needs to integrate with your existing IT system and reporting systems. So, it is not an easy question.
During our off-the-record conversation you mentioned some experiences about how some industries have normalized ESG and sustainability conversations. You are part of the board of sustainability committee at Lindstrom, for example, the textile industry has been normalizing the impact and sustainability topics. How can the private equity normalize these?
I love the cross-cultural perspective and cross sectoral pattern, cross sector, cross industry perspective, because I am actually not quite sure if private equity as an industry is lagging behind. I think it's always good to learn from what the other industries are doing, but I don't really think that the financial sector as a whole is lagging. So just following on the trend and then I would say it really depends on whether you are kind of front runner in an industry or not. I would not say it's really industry agnostic. I would say that it depends on the specific fund or perhaps on the specific type of investor.
What we are hearing often within the textile industry is call for normalization in other industries as well. I've had these discussions with my peers, executives from logistics industry in China, cross industry, and the echo in our conversation is very often that we just need to normalize ESG to take away the emotional kind of load that is in the discussion or the complexity. We need to approach ESG just as a trend, something that we see happening in the market, something that we assume is going to stay.
Every company just must decide how to react to it. Within the decision also lies responsibility. My discussions with several investment funds on that matter, went along the lines, "listen, you need to do the bare minimum, depending on your market, what legislation tells you, but you don't have to do something or ESG or impact if that's not your focus". So, one of the first decisions that any company or investment fund needs to take is do we want to do something in this area at all? Or perhaps not now, perhaps in three years or in five years. And how aggressive do we want to be? You always need to adhere to regulations. And maybe also another thing to normalize the discussion again would be approaches as a trend.
You have to choose your battles and also choose what you want to achieve...
Right, exactly. And could be within the scope. We need to adhere to legislation, which is very often reporting, could be just one element to choose. So, I've had discussions with investment funds that wanted to focus specifically on mental health, not as a part of their investment portfolio, but something to give back. I have had a discussion with investment funds who wanted to specifically focus on reforestation as a part of portfolio. Could be anything. So again, don't try to do everything and just approach it as business as usual.
From all the conversations that you have had with different investors, what's the difference when you talk about these topics with an impact fund and a traditional fund?
Obviously the discussions with impact funds are usually easier because the first step that I've mentioned, well, let's approach ESG as a trend, as something normal, business as usual, and we have to take our stand.
What's our strategy? Do we want to be impact driven or not? And then how aggressive do we want to be? These two steps or these two questions have already been answered for the impact fund, so they don't have to have this conversation. I would then continue with a fund that is not specifically an impact fund, perhaps wants to remain away from ESG unless reporting asks something, or perhaps they want to pick up a niche, or perhaps they want to transfer. Step number one would be you have to have this discussion within your top executive team again. How do we want to approach it? How aggressive? on which timeframe? Because every single time I have this discussion, when we're forming ESG strategy, there are different perspectives within the team. And unless the management team or the executive team are aligned, you can't ever run a fund effectively.
Maybe one thing that triggered me when you asked me these questions, what are my takeaways when I discuss ESG with different type of funds? Is that, surprisingly, within investment funds, I have never been part of discussions of a tradeoff between impact and profit. I don't want to say the discussions don't exist, just in my experience, it was never an issue. So, it would be quite interesting lesson learned to take it to the discussion with non-impact funds, who are typically also concerned that they will have to do this trade off in their strategy.
Or understand that maybe there's not a trade off in the long term. And that's another question that I have for you. How can investors make sure to measure the added value of sustainability in the short term and not only on the long term?
When we say added value, we need to be clear on what we mean. Do we mean financial terms? Are we talking about return on investment within a portfolio? Are we talking about more? We're perhaps talking about maybe softer things because we have our ESG policy clearly defined, we achieve excellent effectiveness in our processes. So, we actually spend less time on non-value-added services. Our people are more engaged. Or perhaps because we have a clear policy and we have chosen a tax supplier to help us with reporting. So let me continue with non-financial value added. In Dutch we say hold translates to English. To measure is to know. If you want to know the added value, you need to define it. Again, I will go back. You must define your sustainability appetite or strategy. It doesn't have to be a big thing; it just has to be clear on what it is.
And then, okay, if we're going to do this, how are we going to measure it? You have to define KPIs, otherwise the discussion will be never ending. So it could be operational effectiveness, communication, time spent with portfolio companies, the time data requests actually take when it comes to data. And you can actually measure all these things very often in the area of process improvements, they could be in the area of employee engagement, it could be in the area. How difficult is fundraising to us? You can measure this in any terms. And then for financial side of things, obviously this is more complex discussion and I cannot standardize and unify the approaches different institutions or organizations have. But I would say when we are expecting very short term financial return, we have to obviously adapt the whole portfolio strategy. So obviously, if we are going to support multibillion investment projects into hydrogen companies like very long term technologies, there will be minimal financial returns on the short term. So then we would have to be looking for combination of companies that could deliver the added value. And I would definitely be looking at the tech sector here.
Right approach sustainability and ESG as business. So look for investment in green tech. Don't treat them as impact funds, treat them as tech companies who are supposed to deliver a return on a short term and just set up a portfolio accordingly. Very simplified. Very simplified.
When you have these conversations with different investors in different funds, how do you see the balance between what they do in terms of ESG internally and what they do in terms of externally the portfolio and what they want to build? How much do they invest internally on the team, inclusion policies and governance. So, how's the balance? How do you see that?
I think I've been pretty lucky, because I have specialized myself on the impact sector now for a while and on the sector of green tech for a while. So I do very often if not all the time work with companies who want to be honest and transparent. Some investment fund could be specifically impact driven and they particularly then invest on the outside activities. So, meaning portfolio, right. But some funds perhaps are just people with very good ethical compass without calling it ESG. In my case, a lot of the discussions that I'm having, the good things that companies or investment funds are actually doing, don't be afraid to highlight them, to call them out..
There's terms like sustainable business and that very often comes another voice that says there is nothing like sustainable business. You can't do things 100% sustainable. Exactly. In every sector. Don't be afraid to communicate what you do, but be careful with your wording not to put an incorrect label on you. Right. So I love impact statement around KnowESG for us is particular around the domains and transparency and within the sectors of ESG we pick up this area.
But do you normally see companies that are afraid to communicate or companies that just over communicate and maybe communicate too much.
Personally. It's the first case, yes. It's also my experience with some of my other clients in different industries. You would be surprised how many amazing great funds companies are there just because they were founded either recently or true generations with the right values. And it can take a company so far. And in those cases, it's actually being modest or being shy and perhaps in combination not having a clear ESG appetite statement. When you don't have it, you don't know what to say. Perhaps you are afraid. Now let me tell you, and I will end this question, because I think I've been speaking for a long time, is this is my experience, obviously in the industry we know, and I will use the term again, green marketing or greenwashing. There are plenty of investors, companies in other sectors that communicate more than they really do. And I think that's one of the big struggles within ESG. And one of the favorite argument of ESG opposers come from this type of companies.
Do you think that we will get into that point, into the point where all investors will consider ESG as an organic topic, so they don't need to be communicate it that much, because it's already there. When are we going to get into that point?
It's kind of looking into the crystal ball of where the future is going. And I think that we'll only get there 100% globally if the regulation in every market will tell us so. Otherwise, I believe investment fund will differentiate. And again, there is nothing wrong with that. It's nothing wrong with an investment fund not to focusing on ESG. However, there are some investments in the prohibited areas. Very often even investment companies say, well, maybe we don't have inclusive policies, but we do not invest in fossil fuels, we don't invest in tobacco. Right? So this is not the discussions, but I think I don't really see ESG developing organically in the last ten years. I think it would take us much more. And I don't want to exaggerate, I don't know. And I think nobody knows what the future holds in such a long period, but the regulation is developing very quickly worldwide. From Asia. To have John Sindh study from Brazil all know generic business sectors and investment sectors. So the chance could be that it will be something to standardize. However, I don't think we will get there.
It might happen sooner in Europe. Do you think?
Yeah. And with Europe we have to be very clear. And again, it is regulation driven. Right. We as a people, we will only change when we have to, except of small group of Ford runners. Right. But anything we can learn from the history of humankind, ESG is nothing new in that area. We will only move together and everybody when we have to. So within the EU, the chances are not. The chances are that the guidelines and regulations are already implemented for every financial institution and investor to actually already disclose what they are doing and if they are doing anything. So maybe your wish will come true very soon within EU. Exactly. Yeah.
I just want to ask you with this last question. If you were to ask some advice on a sustainability and impact related topic to anyone, who would that person be?
I really love the notion of just normalizing ESG. Let's make it pragmatic. Take away all the emotions. And when I think about pragmatism, I think one quote is stuck in my mind. And the quote was, let me think about it. That there is no crisis so big that can't be solved in 20 minutes. And I believe it was Winston Churchill who said it after second or during second World War. Right. And when you put this into the. And, you know, I really try to remember it when I planned my meetings, I was like, do we have to discuss more than 20 minutes? I usually say, well, let's try not to because Winston Churchill said this. So I would maybe go if I put to, I mean, he was an amazing character in the history and what happened at that particular moment of time on earth. But I would be really interested what Winston Churchill actually thinks about it.
Stay tunned for our next Zero One Hundred Conferences ESG and Impact talks on February 8th. Our guest will be Machtelt Groothuis, Partner and Founder of Rubio Impact Ventures.
