With our #ESGinVC initiative, we want to foster a discussion around ESG and help each other develop and improve our frameworks. As part of this initiative, we spoke to leading managers and LPs about their ESG frameworks. The long-form interviews will be published in a reader on our website, while we will regularly post interview extracts on our social media channels (Linkedin — Twitter — Medium).
The interview below is with Alexander Paterson, Founding Partner at J12 Ventures.
How do you address ESG responsibility at J12 Ventures?
We believe in having a high ambition level and a tailored approach to ESG, for ourselves internally as well as for the companies we invest in. We invest early and across different verticals, so the aim is to help founders first set clear, as well as relevant goals as an integral part of their strategy, encouraging them to better address how they want to work with sustainability, and ramping up efforts as their company grows.
Concretely, we do a broad-based, qualitative assessment of different ESG criteria on all our portfolio companies, both before investing and on a monthly basis thereafter. This analysis is aimed at risk mitigation and based on ratings within each of the three areas of ESG, ranging from “negative impact” to “positive impact”. A negative impact score will lead to immediate action and rectification from the founders, with J12s support.
J12 Ventures also monitors its portfolio companies’ alignment with UN SDGs to identify and better support companies having a measurable impact on one or more of the Goals. In such a case, J12 will together with the founders establish clear KPIs and impact targets to be tracked and measured. We strive to be transparent in our disclosures of ESG practices to investors, and to educate our stakeholders in the specificities of implementing and acting upon sustainability strategies in early-stage tech companies.
Can you tell us more about how you started to think about ESG and the process of creating your own frameworks?
We have had an internal drive within the team to try and contribute more positively to the environment and society at our level and through the work we do with founders. At the same time, venture capital is in essence a very long-term type of investment and we welcomed the demand from both investors, founders and consumers for more accountability, transparency and actionability. Sustainability and ESG is an all-around better way of doing business and we are certain it will lead to higher ROI, the next generation of founders, consumers and investors being less and less tolerant of unethical or harmful externalities of doing business.
“Sustainability and ESG is an all-around better way of doing business and we are certain it will lead to higher ROI…”
We have always been deeply skeptical towards any kind of green washing or embellishing facts within the industry and therefore it has been important for us to develop frameworks that match how we actually work and genuinely make a difference together with our portfolio companies, step by step.
All of our companies have some purpose serving the environment or society at large, but we have chosen not to include every company in our SDG-assessment so as to highlight those with a dedicated and measurable impact and set an example both for current and future investments. Internally within our team, we are also learning continuously and improving the way we work with sustainability for each new investment.
How do you collaborate with founders on ESG?
Through continuous dialogue with the founders in our portfolio. We help them by tracking KPIs relating to ESG and sustainability, pushing them to commit to a clearly defined sustainability strategy early on, and taking direct action if any aspect of their business seems questionable or leaning towards any negative impact, as well as seizing opportunities for positive impact. Exchanging both knowledge and inspiration between both parties, we as a VC-firm and the founders can together strive towards more efficient and impactful action.
As an industry, what should venture capital do to better address ESG issues?
First of all, by being honest, transparent and accountable about the actual contribution and impact being made as an investor. There should be at least as much time and energy spent on actually making investments and the underlying businesses in portfolios more sustainable, as there is today on marketing investments as being “sustainable” based on arbitrary statements. That means allocating resources internally that are dedicated to working with sustainability, and taking a scientific, data driven approach to measuring risk, impact and externalities in a portfolio.
“There should be at least as much time and energy spent on actually making investments … more sustainable, as there is today on marketing funds or investments as being sustainable based on arbitrary statements.”
Externalities, risk and impact need to be measured, monitored and evaluated. VCs should also agree to a common legal framework for imposing sustainability practices in startups, at least on a minimum level, whether they are impact startups or regular tech companies, and typically in the shareholders agreements. We at J12 Ventures are also evaluating incentive-based programs for our founders who manage to measurably impact the environment or society in a positive way.
How can impact contribute to a company’s valuation? How do you see the connection between impact or ESG and valuation evolving over time?
As ESG and impact factors are more accurately quantified, they will (finally) contribute towards determining asset prices, and maybe eventually, on an equal basis as financial metrics. In any case, they will represent an increasingly substantial part of a company’s valuation. Integrating these previously underappreciated factors into valuation practices means companies will be able to better “monetize” their sustainability efforts, thus lowering cost of capital and claiming higher valuations. Making impact at scale also per definition means solving humanity’s most pressing issues and those humanistic objectives might eventually be prized accordingly by our financial markets.
“As ESG and impact factors are more accurately quantified, they will (finally) contribute towards determining asset prices…”
On a more immediate, behavioral level, there is a very large and increasing number of stakeholders, from consumers, activists and policy-makers to investors, business leaders and employees, that demand sustainable and ethical business practices from companies, their products and services. This will undeniably have an impact on future revenues.
About J12 Ventures
J12 is an early-stage venture firm based founded by an international group of entrepreneurs and based out of Stockholm, Sweden. We partner early with teams building groundbreaking companies enabled by software, data, and new technologies across industries. To date, our initial investments have ranged between €0.1 and €2m – investing at pre-seed and seed.
Website – Linkedin
About Alexander Paterson
Alexander comes from a family of entrepreneurs and became one himself when he got the chance. Reaching the age of 30, there are 3 successful ventures that have defined his professional career, and most memorably a few defining moments together with his colleagues and supporting great entrepreneurs over the years. Alexander co-founded J12 because he is somewhat of a contrarian, pragmatic, problem-solving, builder at heart: meeting and working with great people across many new areas of innovation speaks to him.
Linkedin – Twitter – Medium
About Marco Cesare Solinas
Marco is an Investment Professional at Blue Future Partners. He is passionate about Technology and Venture Capital and focuses on both direct and indirect investments. Previously, he has built an international and multicultural background across Italy, US, Germany, Turkey and Malaysia.
Marco holds a CEMS Master’s in International Management and a Bachelor’s in Economics and Finance from Bocconi University.
Linkedin – Twitter – Medium
About Blue Future Partners
Blue Future Partners is a Fund of Funds with decades worth of experience in investing in Venture Capital. We specialize in backing Emerging Managers focused on early-stage technology investments. We are people-centric and relationship-driven. We have a global mandate and existing relationships with Emerging Managers in the US, Europe, Israel, China and South East Asia.
Website – Linkedin – Twitter – Medium