Harnessing the power of ESG

ESG white paper sweep
Last updated
June 17, 2024

In this white paper, you’ll learn:

  • How robust ESG tracking can help build a resilient portfolio and investment strategy 
  • Best practices and insights from investors who are leading the way in ESG tracking

  • Why ESG data are key to achieving financial performance and positive impact 

New sustainability reporting regulations are a first step to solving the lack of transparency and accuracy associated with Environmental, Social, and Governance (ESG) performance measurement. They require investors to sift through data sets and acknowledge the environmental and social impacts of their investment portfolios. But there’s an even bigger opportunity at stake.

Robust ESG tracking not only provides valuable insights to support the growth of portfolio companies – it also helps identify market gaps and new investment opportunities.

At Sweep, we believe ESG tracking shouldn’t just tick the “compliance box.” It’s a key part of any decision-making in the investment process – whether it's due diligence or portfolio’s performance tracking.

This white paper explains how the wealth of information coming from ESG reporting contributes to building a more resilient and competitive investment strategy. It can also support private market actors to thrive in the future low-carbon economy.

ESG drives resilience

1. Mitigate risks and uncertainties of fast-evolving global markets

Companies that focus on ESG tracking can better manage risks and build stronger foundations for their businesses – making them more sustainable in the long run. Companies that track Environmental, Social, and Governance (ESG) factors are better equipped to handle global crises.

The COVID-19 pandemic has highlighted the significance of integrating ESG factors into business strategies to ensure resilience during times of crisis. A 2020 study of 1,204 European firms revealed that organizations that track ESG were more equipped to face the crisis compared to other firms. These firms were able to better manage the risk-return trade-off and maintain stock market liquidity. They also had higher levels of cash holdings and liquid assets before the pandemic hit, which helped the absorb the externalities of COVID-19 more effectively than others.

The same is true for mitigating climate risks. Severe weather events such as hurricanes, wildfires, and water scarcity can be devastating for several industries, including manufacturing, healthcare, and agriculture. In 2022, Hurricane Ian left a lasting impact on Florida's key industries, damaging up to 2,800 manufacturing firms and 7,000 healthcare producers, among others. The projected losses were estimated at around $20B.

As weather events are projected to be more frequent and severe in the coming years, businesses must take a proactive approach to managing risks and identifying opportunities for growth. That’s where a thorough tracking of ESG metrics is necessary.

By embracing ESG practices, businesses can enhance their resilience and better weather projected and unforeseen consequences of the global market and climate changes.

New frontiers: Re-thinking investment strategies

We’ve built a world where financial return is king. This money-driven approach is limiting, as health crises and extreme weather events also impact companies’ bottom lines. By taking into account non-financial indicators, such as climate risks or employee well-being, investors will better anticipate the fast-evolving economic environment and build more resilient portfolios.

Among the alternative approaches, Kate Raworth, author of Doughnut Economics, proposes a new way of thinking about economics based on the needs of all people and within the means of the living planet.

Her theory has evolved into a global community Doughnut Economics Action Lab, offering workshops, case studies, and tools, to help companies integrate non-financial indicators into their business strategy.


2. Anticipate existing and upcoming sustainability regulations

The increasing number of sustainability reporting regulations means that companies can no longer ignore ESG tracking. Here are some of the main ones to keep in mind:

  • The Sustainable Financial Disclosure Regulation (SFDR), led by the European Commission, sets out sustainability-related disclosure requirements for financial market participants, including asset managers, investment funds, insurance companies, and pension funds, that provide financial products or services within the EU.
  • The Corporate Sustainability Reporting Directive (CSRD) requires companies operating in the European Union (EU) to disclose non-financial information related to sustainability topics. It applies to listed companies and large companies that fall under at least two of the following three categories: €20M+ total assets, €40M+net turnover, 250+ employees.
  • The UK Sustainable Disclosure Regulation (SDR), led by the UK Financial Conduct Authority (FCA), aims to provide investors with
    more comprehensive, consistent, and comparable sustainability
    information from issuers and investment managers. It requires these organizations to disclose information related to the ESG risks and impacts of their investments and activities.
  • In the US, the Securities and Exchange Commission (SEC) requires publicly-traded companies, including financial organizations, to disclose material climate-related risks and impacts in their financial filings. This includes the potential physical risks associated with climate change, as well as the transition risks related to changing market conditions, new regulations, and technological innovations. Financed emissions should be included in the disclosure.

From meeting LPs and regulatory reporting requirements to anticipating market and climate-related risks, it’s clear that ESG tracking has become a key asset to inform investment decision-making and future-proof the business models of portfolio companies.

ESG drives brand differentiation

1. Attract top founders and talents

A commitment to sustainability is becoming a selling point in negotiations as new deals are often targeted by multiple funds.

Companies also face increasing pressure from employees and consumers, who value companies that address issues that go beyond business.

In the UK, 70% of employees expect their employer to take action on societal issues. Nearly 40% of millennials in the US have chosen a job because of a company’s environmental commitments. To attract and retain employees, it's essential for companies to create an inclusive culture and put sustainability on top of the agenda.

Consumers are also increasingly mindful of company values and tend to support brands that align with their beliefs while boycotting those that cause harm to society or the environment. In fact, 57% of consumers are willing to change their purchasing habits to reduce their environmental impact. Therefore, a business – and its investors – that places ESG considerations at the forefront can drive profitable growth by adopting sustainable business practices and building a loyal customer base.

And with the rise of sustainability reporting regulations, ESG tracking will help portfolio companies to prepare for extra financial disclosure requirements.

How to start tracking ESG metrics across your portfolio

1. Identify your ESG data across your fund and portfolio

Start by defining what information you need and how to best gather them. This includes environmental data, such as your carbon footprint and natural resources use; social data, such as labor issues and human rights; and governance data, such as corruption policies.

2. Assess the materiality of your portfolio

This will help identify and prioritize ESG issues that are the most critical to your organization. For instance, a VC firm with a health-focused thesis will stir their efforts on improving the S of ESG.

  • The International Sustainability Standards Board (ISSB) defines financial materiality as material issues as those “that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to an investor."
  • In the EU, the notion of double materiality was introduced in new sustainability regulations, such as the CSRD. This means businesses should consider both how their business is impacted by sustainability issues (outward impact) and how their activities influence society and the environment (inward impact).

Double Materiality.png

3. Collect the data from your investments

You should aim to collect unbiased company data – meaning reliable sourcing from companies directly, and cross-referencing data with trusted sources, such as company reviews and financial news.

4. Track your current portfolio using the following ESG framework

Screen your current portfolio using the same metrics, and set up a system to screen future acquisitions and investments for sustainability characteristics. Doing so can help you identify investment areas that may be violating sustainability best practices, while also finding positive areas for sustainability impact, which you might consider expanding.

Are you a VC fund looking to start tracking ESG metrics across your startup portfolio? Check out this handy guide, gathering learnings and insights from Europe’s tier-one VC firm Balderton Capital.

2. Attract forward-thinking investors

Over the past few years, ESG issues have gained significant attention among LPs, leading many investment firms to incorporate them into their investment decision-making processes. The 2022 Atomico State of European Tech Report found that 35% of LPs opted not to commit to a GP relationship due to ESG concerns.

This study by INSEAD revealed some of the metrics they focused on:

  • Top three environmental metrics: carbon emissions, renewable energy, and waste production.
  • Top three social metrics: number of employee injuries, diversity, and staff turnover rates.
  • Top three SDGs topics: Climate Action, Affordable and Clean Energy, Quality Education.

Fund managers have also received increasing demands from LPs to take a holistic approach to investment strategies, including environmental and social performance indicators.

On top of financial performance, an increasing number of LPs place a greater emphasis on environmental and social considerations. And investment firms looking to raise new funds must prepare for opening both financial and extra-financial books.

Learn from fellow ESG practitioners

Some industry leaders have started to mobilize and share best practices on how to act on ESG data. This includes:

  • VentureESG: A community-based non-profit initiative from VCs for VCs to push the industry on good ESG. They gather a community of 300 VC funds and 90 LPs from across the globe, working to make ESG a standard part of due diligence, portfolio management, and internal fund management.
  • ESG VC: Led by a steering group of funds and industry bodies, it has
    developed a venture-ready ESG measurement framework, which
    asks early-stage companies to answer 48 measures against
    ESG objectives.
  • Principles for Responsible Investment: A UN-supported network of investors, it aims to promote
    sustainable investment through the incorporation of environmental,
    social, and governance variables.
  • France Invest: Supports members in their transformation towards a sustainable
    business model and provides an ambitious dynamic for
    private equity.
  • British Venture Capital Association: Promotes private equity and venture capital’s role as committed responsible investors, building value in businesses for investors, society and a greener future.
  • Invest Europe: One of the world's largest associations of private capital providers,
    representing Europe’s private equity, venture capital and infrastructure investment. They aim to promote a better understanding of how to invest capital and expertise into improving businesses and generating returns for investors, free from unnecessary regulation and constraints.

ESG drives innovation

1. Secure the long-term performance of portfolio companies

Firms that invest in significant ESG issues can generate intangible assets, reduce liabilities, and create future economic benefits. This study led by BAIN & Company and EcoVadis shows companies and private equity funds can realize financial returns while accelerating their ESG transition. It found a positive correlation between ESG ratings of portfolio companies and their internal rate of return (IRR) and multiple on invested capital (MOIC). ESG considerations are key levers of financial performance.

Another example is sustainable procurement practices. Creating a more sustainable supply chain can give companies a profitability edge, with margins up to 3% higher than those of businesses that don’t focus on their suppliers' ethical, environmental, and labor practices. This can also help portfolio companies to anticipate new regulations, including the EU's Corporate Sustainable Due Diligence Directive (CSDD) and climate-related risks previously mentioned.

Ultimately, capital market actors work to create value by allocating capital efficiently. To navigate market, climate, and regulatory changes, it’s key to include ESG indicators in due diligence and portfolio reporting processes.

ESG activities_2.png

ESG bashing: How to move forward

⁠In the US and Europe, the topic of ESG has been under scrutiny, with a growing movement accusing companies of using ESG reporting only for branding purposes, rather than making an actual difference. Historically, there has never been one single-method to track ESG, which led organizations to measure impact with whatever means they had at their disposal. For large organizations, with thousands of data points to collect, resources are often spent on collecting and reporting, rather than taking action to improve ESG performance.

But new sustainability reporting regulations are a first step to bringing clarity to data identification and reporting. And with new ESG tracking software, companies can now streamline data collection and disclosures. This will give them more time to leverage ESG insights to make decisions that’ll contribute to improving their performance.

2. Identify investment opportunities in the future low-carbon economy

Investment firms should use ESG data to identify future investment opportunities by taking a long-term holistic view – both of ESG issues and the business as a whole.

If we take Governance metrics like a company's culture, it can help indicate resilience and reputational risk. No company can perform well with a high employee turnover rate and a toxic work environment. Therefore, screening Governance performance, such as data on employee absences and results from a company satisfaction survey, can help better assess the viability of a potential investment.

On a macro level, ESG considerations can help investors identify and capitalize on future opportunities, as per this Harvard Business School study.

Capital allocation is key. You need to choose the type of companies you want to help grow. At Mirova, we focus on companies that can contribute to the green transition, such as agroforestry and agritech," says Phillipe Zaouati, CEO at Mirova.

The opposite is also true. ESG tracking can also prevent them from investing in dying industries. According to the PRI, companies with poor ESG practices may experience negative impacts on their long-term value, which may not be accurately reflected in stock prices. Short-term investors may not give enough weight to a company's ESG practices, leading to inflated stock prices and overly optimistic earnings forecasts for companies with a history of ESG incidents. This highlights the ESG value of taking a long-term view when assessing a company, as it can ultimately impact a company's financial performance and overall future.

The Sweep platform enables you to respond to Limited Partners (LP) and stakeholder requests with easy-to-use carbon and ESG reporting tools. We help financial actors disclose extra-financial information following SFDR, the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), and/or the Global Reporting Initiative (GRI) guidelines.

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Sweep can help

Sweep is a carbon and ESG management platform that empowers businesses to meet their sustainability goals.

Using our platform, you can:

  • Conduct a thorough assessment of your carbon footprint.
  • Get a real-time overview of your supply chain and ensure that your suppliers meet your sustainability targets.
  • Reach full compliance with the CSRD and other key ESG legislation in a matter of weeks.
  • Ensure your sustainability information is reliable by having it verified by a third party before going public.

See how we can help you on your sustainability journey