Two of the most common concerns facing investors today are, firstly, how they can invest in companies in a more socially responsible way and, secondly, how they can maximise their exposure to high-growth technology companies.
These issues of sustainability and social responsibility, on the one hand, and the digital economy, on the other, have tended to be treated in isolation, or even as mutually exclusive. Technology has become a universal theme within investing that is widely recognised for its unique potential to drive outsized returns for VC and PE firms. Conversely, many businesses and investors want to be more socially responsible but have historically feared that doing so will impact their profitability or returns.
In fact, there is significant overlap between these two areas. Investors no longer need to sacrifice financial returns to support ethical companies thanks to the evolution of new technology.
Sophisticated, bleeding-edge technology companies, often backed by venture capital and private equity firms, are among the best-placed to help develop solutions to overcome societal challenges
Impact investing has been a thematic driver for a while. However, the past couple of years have significantly accelerated this trajectory. Grass-roots protests and landmark geopolitical events such as COP26 have focused global attention on the climate emergency to an unprecedented extent. The climate crisis is an existential threat and will require substantial capital to address. The pandemic and the Black Lives Matter movement have also provided strong catalysts for companies to better account for their role in society. Public companies and investment managers are under intense pressure, from their shareholders and Limited Partners (LPs) respectively, to respond accordingly.
But what can be overlooked is that it is sophisticated, bleeding-edge technology companies, often backed by venture capital and private equity firms, that are among the best-placed to help develop solutions to overcome these societal challenges. Examples might include a Fintech company providing access to essential financial services for ‘unbanked’ populations in developing markets or a software provider improving the efficiency of vaccine development and drug discovery.
Investors are now under increasing pressure to strengthen the alignment between financial returns and societal impact
Meanwhile, high-growth companies operating in the digital economy are also uniquely positioned to help drive social change in terms of diversity, representation and social mobility. Shortages of software development and other technical skills afford significant negotiating power to employees. Many government-funded programmes to improve attainment within underrepresented demographic groups focus on digital skills such as coding. The start-up culture in the technology ecosystem that incentivises staff with equity provides early access to wealth creation opportunities for a wider spectrum of employees.
New technologies are therefore driving businesses that can be profitable and socially responsible in equal measure, which investors can confidently back on both counts.
High-growth companies operating in the digital economy are uniquely positioned to help drive social change in terms of diversity, representation and social mobility. The start-up culture in the technology ecosystem that incentivises staff with equity provides early access to wealth creation opportunities for a wider spectrum of employees
Impact investment trends
As we ring in the New Year, investors in the digital economy are now under increasing pressure from their LPs to understand, quantify and ultimately strengthen the alignment between the drivers of financial returns and the societal impact within their investment portfolios.
One fifth of European tech investors have a dedicated social impact fund
An Arma Partners analysis of 50 of the most prominent tech investors in Europe found that the vast majority, over 90%, refer to social impact policies or a responsible investing framework through which they make investment decisions and conduct due diligence. By contrast, only one fifth of the funds have a dedicated fund or sidecar vehicle with the sole aim of investing exclusively in “impact” companies. But almost half of these managers now have at least one asset in their portfolio that specifically qualifies as an “impact investment”, defined as a business whose goal is to benefit society through economic access, healthcare, the environment or social change.
The circular economy, efficient supply chains and less carbon-intensive mobility are themes of Arma’s recent deals
The Social Impact of Arma’s deals
At Arma we are proud to help our clients make a positive impact through the landmark transactions we orchestrate. As advisors at the heart of the digital economy, we are actively helping shape a more sustainable future for the planet by unlocking the potential of technology.
Prominent themes underpinning recent Arma deals include reducing material consumption and waste through the circular economy (sharing and reusing existing products), as well as more efficient consumer supply chains and less carbon-intensive mobility. Arma advised on a number of successful capital raises that touched on these themes for clients such as Rohlik Group, the leader in e-grocery in Central Europe, and MPB, the world’s largest online platform for used photo and video kit.
As advisors at the heart of the digital economy, we are actively helping shape a more sustainable future for the planet by unlocking the potential of technology
Healthcare is another common theme where the societal contribution of technology companies is self-evident. Arma recently advised on the sales of Servelec, whose community care software for local authorities enhances access to healthcare, and Allocate Software, whose workforce management solutions help healthcare organisations deliver safe and effective care with limited available resources.
Finally, Arma has worked with Unit4, a global leader in enterprise cloud software for people-centric organisations. The company is distinguished within the industry by a high proportion of women in senior executive positions. Its success in promoting this diversity has both supported its strong commercial performance and helped drive interest in the company from top-tier investors.
Quantifying social impact
These examples clearly illustrate that there are a range of high-growth technology companies with compelling financial profiles that also meet investors’ growing appetite for responsible investment propositions. VC and PE firms need to judge opportunities and markets not only in terms of financial metrics but also a company’s compliance with the firm and wider society’s commitments to tackle the most important challenges we face as a civilisation.
When PE and VC firms talk about their commitment to responsible investing, they tend to do so in terms of ESG (Environmental, Social and Governance), SDGs (the United Nations’ Sustainable Development Goals) and DE&I (Diversity, Equity and Inclusion) objectives with a view to properly capturing or quantifying the extent to which they are funding companies with a positive and tangible social impact.
Today, for the majority of investors, strong social impact credentials remain nice-to-haves rather than the primary driver of a transaction. Over time, we expect to see further convergence between the best-performing and highest-valued digital economy businesses and those that can demonstrate and quantify the positive social impacts intrinsic to their business model
That said, most funds are only just starting to distinguish between a qualitative ESG framework and the more quantitative metrics provided by the UN SDGs. There are a total of 169 defined targets across the 17 SDGs, providing a more rigorous and rigid framework against which to measure specific aspects of a business’s operations, such as equality in employment practices or carbon emission reduction. These quantitative metrics help mitigate the risk of ‘greenwashing’, where investors and companies overstate their ESG credentials.
For the majority of investors, strong ESG credentials or quantifiable SDG metrics remain nice-to-haves rather than the primary driver of a transaction. Over time, greater rigour will be applied to the disclosures that companies make and greater value ascribed to the businesses that perform best against these social impact metrics. As this happens, we should expect to see further convergence between the best-performing and highest-valued digital economy businesses and those that can demonstrate and quantify the positive social impacts intrinsic to their business model.
At Arma, we are excited to keep playing our part by orchestrating more landmark transactions that exemplify this evolving trend.