In 2005 UN Secretary-General Kofi Annan first presented the United Nations Principles of Responsible Investment (UN PRI) at the New York Stock Exchange. These principles are based on the conviction that problems related to the environment, social aspects, and corporate governance (ESG) can affect the performance of investments. Institutional investors should therefore be obliged to take them into account in their investment decisions and not just look at the traditional financial and operating indicators.
I’ll freely admit that in 2005 I really didn’t think about ESG as an investment criterion. At that time I was in London at JPMorgan, working on large mergers and acquisitions and a couple of large IPOs, and none of my clients in any sector (including the mining industry, power generation and air transport) paid much attention to ESG issues in their investment due diligence. There were a few enthusiasts in my vicinity who were starting with sustainable investing, but the investment funds they were managing were absolutely tiny, itsy-bitsy. The only thing no one really wanted to be involved in even back then were guns and gambling. The environment wasn’t really on the radar, human rights belonged to Amnesty International, and things like equal and fair conditions for employees or data and supply chain security never entered anyone’s head.
Much has changed since then. The UN PRI have become a global standard according to which more than 1750 signatories – the largest global funds – manage over 70 trillion dollars in assets. Next year the UN PRI will become even more stringent and will require its members to manage at least 90 % of all assets according to ESG principles, to vote accordingly in general meetings, and to make their ESG reports public or allow themselves to be audited.
Our team at Rockaway Ventures, with me and Dušan Zábrodský at the helm, really believes this. True, we don’t publish glossy annual reports in which we calculate by how much our partners reduced their air travel carbon footprint (even though 2020 is really excellent in this respect!). But we did start measuring carbon footprint during the selection of our new offices, for example (we’ll be moving soon). In 2020 we implemented a formal Rockaway Ventures ESG Policy as one of the first venture capital investors in the CEE. This year we will be formally joining the UN PRI standard.
For a long time now, we’ve liked companies whose activities protect the environment in an active way. We pay a lot of attention to them in our pipeline. We also know that companies are part of society and hence depend on human capital, infrastructure, quality, and the predictability of regulation that applies to them. At Rockaway Ventures, all this is part of the social aspect of assessing start-up projects. And governance? The start-ups we pick have to take into account and balance the interests of everyone they work with, both internally and externally. This is because poorly configured corporate governance principles can lead to a quick loss of a company’s legitimacy accompanied by major damage to its market position. In the case of start-ups, this can be fatal. We therefore monitor the quality of strategic and financial planning, how employees are evaluated and compensated, data protection, and cyber-security.
We use our ESG policy both in selecting investment opportunities and in managing our portfolio. It includes negative screening, according to which we identify and eliminate potential targets that don’t fit ESG criteria. We then perform positive screening, where we perform a detailed analysis of competitive advantages or risks of a project in relation to ESG, set possible KPIs that we’ll want to measure over time, and the influence of ESG on valuation and possible future appreciation. We incorporate this into investment documentation. And as everyone knows, signing an investment isn’t an end, but rather a beginning. We want to play an active role in the projects in our portfolio and want to help founders establish the right criteria and measure progress in fulfilling them.
This commentary was published on Info.cz
