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2022 was a year of transition and consolidation for Environmental, Social and Governance (ESG) investing. On the one hand, regulatory changes and significant global economic headwinds saw European equity ESG funds underperform their benchmarks by 5%, worse than the 4.6% recorded by their traditional rivals.
However, most analysts agree that these metrics only dampen the case for ESG led investing based on short term ROI alone. The facts are that climate change is not going anywhere and the energy transition will drive sustainable fund returns over the long term. As Sarah Merrick, CEO of Ripple, who raised £2.1m on Seedrs last year, says: “There are very few sectors like ClimateTech where the fundamentals of massively accelerating demand are quite as clear and present.”
That’s why the world of venture capital is telling a different story when it comes to ESG. While global overall investment activity sunk by 57% in 2022, ClimateTech funding achieved an all time high, with 25% of all venture funding globally going into the sector according to a PwC report. That same report found that investors globally are set to embrace ESG investing on a massive scale and predict that it will soar 84% to $33.9 trillion by 2026 – equating to 21.5% of total assets under management or more than $1 for every $5 invested.
We’re seeing evidence of this across the investment ecosystem. The world’s largest sovereign wealth fund in Norway said it would vote against companies that don’t set net zero carbon targets, overpay top executives, or lack diversity on their boards. Meanwhile, exchange traded funds (ETFs) aligned with ESG outcomes accounted for 65% of all net inflows into ETFs in 2022 – which suggests that investors are recognising the inevitability of long term structural change.
And the markets only reflect what’s happening in industry. For example, looking at technology adoption curves, a recent BloombergNEF report suggested that clean energy has a tipping point that 87 countries have now reached. This is a fact that car companies seem to have picked up on – almost every major manufacturer intends to stop making internal combustion engines within 20 years.
At Seedrs, these broader ESG investing trends are reflected in the investment behaviour we’re seeing on the platform. In 2022, 47% more sustainability focused businesses (103 up from 70) received investment on the platform YoY, raising from 40% more investors. In particular, the Clean Energy sector thrived with investment growing 154% from £15.7m to £40.1m, with 58% more businesses raising from 37% more investors. And according to our summer investor survey, ClimateTech is the #1 sector of interest on Seedrs. That all explains why last year we saw alumni businesses in this sector like QED Naval, Solivus and Ripple return for another round on Seedrs to run highly successful campaigns, raising millions from our investors and their communities. At the same time, we also welcomed many innovative new businesses, like Gazelle Wind Power, who raised over €3.8m on Seedrs.
How to approach ESG investing
There are several key ideas to consider when looking to make investments on Seedrs in campaigns that are demonstrating strong ESG credentials.
Firstly, it’s crucial to understand that paying attention to ESG is more than being a climate crusader but rather about picking businesses that are building products and services that will help us to adapt to an ever changing world. Those companies are likely to see their fundamentals strengthen over time as their offering becomes more vital and consumers become increasingly conscious.
Secondly, diversity, equity and inclusion (DEI) will be a crucial factor in allowing businesses to thrive, innovate and adapt moving forward. It is becoming an increasingly important line of enquiry for investors looking at the long term prospects of an organisation and having a strong record on DEI will also mean that businesses are better positioned to attract world leading ESG talent.
Finally, in terms of portfolio management, diversification is key. 80% of the companies that have ever raised on Seedrs have either exited (going public or private sale) or are still trading. That means investing in a variety of sustainable businesses across a range of sectors is the best way to approach building a portfolio.
But don’t just take our word for it. At Seedrs, we’ve been working in partnership with leading Venture Capital (VC) funds for years, pioneering an innovative way of allowing money to flow into the startup ecosystem by allowing eligible individual investors on our platform to participate in funds that invest in some of the UK’s most exciting early stage startups. Here, some of those Fund Managers give us their perspective on ESG investing in 2023:
Emma Steele, Partner, Ascension Ventures: “I see 2023 as the year for mission driven founders proving to the world they will outperform the market, by driving value through their social and environmental focus. There is a big opportunity to focus on early-stage investing where the economics are more favourable and more likely to weather the medium term macro storms. Also, the best companies are formed in downturns so now is not the time to take your foot off the gas as an early stage investor.”
Louis Warner, COO, Founders Factory COO & General Partner, G-Force Fund: “One of the sectors we see thriving is Climate Tech. The north star and unanimously agreed global target of reaching Net Zero by 2050 is driving governments, legislators, asset managers, investors, businesses and consumers to act, not only because these problems need to be solved, but also because there are significant financial returns to be made, and early results are promising. The scale of the challenge in the transition to a low carbon global economy is seeing huge influxes of capital and talent into the sector, and there are encouraging examples of this investment starting to make progress.”
Alexandra Clark, Founder & Principal, Sentient Ventures: “While 2022 was a difficult year in general due to the global economic crisis, events have also shone a light on the need for a sustainable and secure food system, after the food supply chain has been severely disrupted by various factors including the pandemic, war, and the impacts of climate breakdown. Sustainability and impact are now very much on the radar at a government level, and we are seeing more investors recognise the importance of natural capital and the need to include impact metrics such as ESG into their investment criteria.”
To support ambitious and fast-growing startups with a focus on sustainability raising now, visit our Sustainability hub.
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