Investing in a Sustainable Future – ESG discussed at HHL SpinLab Investors Day

What indicators do investors look for when they talk about sustainable investing? Are there any standard criteria taken into account? How do VCs make sure that their startups are serious about their impact? Is sustainable investment = impact investing? The fifth edition of SpinLab’s and HHL’s Investors Day was all about ESG, sustainability issues  and the future of the German investment market.

Together with top-notch speakers, participants could learn from their experiences in leading towards meaningful strategies, discuss concerns and get insights on best practices. Accompanied by 14 startup pitches and personal as well as hybrid networking sessions, the event was one of the first in-person experiences after a long time for many investors that joined the event.

Photo: Daniel Reiche

The responsibility of venture capitalists

Investors have a tremendous impact on shaping how the markets develop. With their money allocation, they often decide which technologies and companies will progress technologically and conquer markets – which is why it is of utmost importance to discuss how to go about this responsibility. In recent years, most VCs have become aware that sustainable investments receive more and more public awareness, which brings up the question of communicating in a transparent manner. Thus, the concept of Environmental, Social, and Corporate Governance (ESG) provides central factors to evaluate and measure the impact of the sustainability performance of corporates and investors. Opening up the discussion to foster a deeper understanding of what is considered sustainable, how to develop proper strategies and put them into practice were the main discussion points of the day. So what did we learn?

Learning #1: ESG is not up for discussion – it is a must

Alexander Thees from KfW Capital had a clear statement regarding ESG: For KfW Capital those criteria are mandatory for investment decisions. Being an ESG complaint does not mean that you can claim that you are doing impact investments, as it is the bare minimum of what VCs can fulfill to act in a responsible manner. Bernhard Mohr from Evonik Venture Capital agrees: “I would expect that from every fund. As a VC, we take a lot of risks – most of the time, environmental and governance topics are taken care of, whereas the social part is not in place yet”, he notes. According to a panel discussion, the German market seems to be behind the UK and US when it comes to social responsibility, especially regarding diversity and inclusion topics like female representation on the decision-making level. The question is: How does one measure ESG and impact? Is there a blueprint for making those criteria visible? 

Learning #2: The most common problem in the German VC market is its transparency

Nowadays, it is not enough to tell that you are ESG compliant – you do have to prove it by providing insights into your actions. Being intransparent bears the risk of making you seem untrustworthy. This is one of the main issues that cause the public to assume that VCs might not act responsibly, even if they do. This means that both management and their staff have to continuously show that they commit to the stated policies, which also requires extra communication efforts. Direct action on an individual level out of intrinsic motivation matters a lot, e.g. joining the Leaders for Climate Action movement or simply avoiding unnecessary traveling, etc. 

Having those criteria in place and communicating openly on the actions you take to fulfill them not only attracts young professionals that are highly demanding regarding these measures but also set a statement towards the market and startups that try to receive funding. 

Photo credits: Daniel Reiche

Learning #3: There is no standard approach to measure impact - neither for LPs nor GPs

According to Robert Günther from Henkel Ventures and confirmed by many panelists, it is difficult to standardize a criteria catalog for ESG, as each investment opportunity is highly individual on both the levels LP-to-GP and GP-to-startup. Trying to understand whether a fund or direct investment is compliant or not takes a lot of effort and in-depth discussions with the GPs or founders. Nonetheless, it has been proven to be a solid approach, as proofing compliance is more than just ticking off boxes. “It is mostly based on a gut feeling and no-go criteria that will help to understand their attitude towards a responsible strategy”, as he admits. Understanding the interdependencies and educating oneself on what it means to act in alignment with ESG and sustainability measures will help to assess opportunities, says Luis Haneman from e.ventures: standard KPIs are something they gave up early. More importantly, understanding the intrinsic motivations behind the startup idea is key. “If it is baked into their DNA, which means it can not be separated from the startup without having a completely different company afterward, it’s a clear indicator that they are serious about it”, Bernd Klosterkemper (Ananda Impact Ventures) adds. At the same time, in the near future, ESG has also be operationalized in concrete frameworks that provide guidelines for investment managers and analysts as well as founders. One of the forerunners to develop such a scheme is btov, whose principal Gerrit Jurilj shared experiences on a project with reputable business schools with the aim to create a practical tool to implement in fund operations.

Learning #4: Being ESG compliant or especially sustainable does not affect performance (in a bad way)

Evonik Venture Capital has quite some track record to look back at – and they have clear evidence that ESG investments are performing extremely well. Other panelists supported this finding. Companistos Investment Manager Nicolaus von Schlieffen even states: “If you don’t invest in sustainable business models, you are doing something very wrong”. As he states, those startups performing best on their platform are those that have a clear position towards their impact on the world. Maren Eckloff-Boehme from Brightpoint Group added that being non-compliant bears high risks in the long run – not only financially but also when considering its implications for society and the environment in general, which will of course affect the investment market as well. Fortunately, considering the potential risk of penalties that might arise by state regulations, investing in responsible opportunities seems to be the only future-proof strategy.

Timur Sirman from Magnotherm, one of SpinLab's current startups. Photo credits: Daniel Reiche

Learning #5: Besides investors, startups are responsible

Not only do VCs have to take a close look at the criteria they want startups to fulfill – it goes both ways. Startups should investigate which strategy the potential investors follow. Furthermore, regulations need to be established to nudge both startups and investors, making sustainable decisions the “new normal”: This eliminates the fear of facing first-mover disadvantages. Most positive or negative environmental and social impacts will be caused by the startups themselves, not by the investors. Therefore, only requiring something through contracts, that the founders do not believe in, won’t have positive effects.  

Learning #6: Better is good – no one has it figured out yet

At the end of the day, the investor folks concluded that there are no real blueprints on how to implement ESG and impact investment measurement (yet). For now, trying out different approaches and exchanging experiences seems to be the way to go – however, figuring out how to make these strategies more tangible should be one of the main goals within both the political as well as corporate agenda.

Robert Heinecke from Breeze Technologies. Photo credits: Daniel Reiche

PITCH COMPETITIONS

Next to the open discussion rounds, participants had the opportunity to listen to a variety of pitches ranging from medical sensors providing needle-free drug delivery to a revolutionary magnetic cooling system. SpinLab’s current class, three startups from central Germany as well as startups from the current DataMarketServices project pitched in front of about 140 investors – digitally and in person. In collaboration with the audience votes the jury, consisting of Andreas Schenk from seventure, Elfi Lange from MBG Sachsen, and Niels Müller from Rheingau Founders, awarded SpinLab startup Breeze Technologies as the winner of the “Best Pitch” contest sponsored by the City of Leipzig, which was endowed with 5.000 Euros. Meshmerize from Dresden won the “Best of Mitteldeutschland” award endowed with 1.500 Euros and provided by the KARL-KOLLE-Stiftung.

Jury member Elfi Lange from MBG Sachsen. Photo credits: Daniel Reiche

At the end of the day, after having the chance to see some of the technologies in action on startup booths, the participants were able to get to know each other more in-depth by joining the networking time with dinner and drinks. Take a look at our recap video to get some more impressions: