The investment gap to achieve many of the sustainable development goals, and targets of the Paris Climate Agreement, numbers in the trillions. We have high ambitions for ways to reimagine our global systems and societies for the better, but, without the funding to back it up, that is all these will ever remain. Ideas.
Governments across the world have committed up to $100 billion every year to achieve many of the SDGs by 2030. But there are other actors who have the ability to support this process. What can private investment companies do? With assets valued in the trillions across the world, this industry has as much power and resources as many small states.
So what is the role of private investment companies in achieving sustainable development by providing sustainability finance?
My name is Mathew Joseph, I lead Sustainability at Kinnevik. I believe that sustainability is the future, both for us at Kinnevik and for the investment sector more broadly. We believe that companies that are built on strong foundations of sustainability are the ones that will deliver true long-term value to its shareholders.
For those who are not familiar with Kinnevik, we are an investment company listed in Sweden and have permanent capital which enables us to be a true long-term investor. We typically invest in companies across multiple rounds, and some companies have been in our portfolio for decades. Our portfolio brings together holdings in companies active in over 60 countries, with a combined turnover of nearly SEK 85bn and 40 000 employees.
What are the challenges of the investor community to meet sustainability goals set by the global community?
The number one challenge is the lack of clarity on expectations and goals set by the global community. Often, investors focus on short term financial objectives, thinking that will be the most important criteria on which they are judged. I think, in the long run, investors are going to be judged not just on returns, but also on the positive impact the companies they invest in have on society and the world around them.
There are some who believe that sustainability goals come at the cost of financial returns. In my opinion, sustainability goals and financial returns are linked and go together in the long term. This means that to deliver consistent long-term returns; one would have to embed sustainability principles into business operations.
Given the importance of sustainability, what is Kinnevik doing to integrate sustainability into its operations?
Sustainability is an essential part of who we are as a business. We believe that we cannot create a long-term business that delivers long term value without sustainability at its core. We integrate sustainability into everything we do, across our entire investment process from pipeline to investment management. We have sustainability due diligence that covers a lot of factors within E, S and G, which makes sure companies are aligned with our values and sustainability principles.
How does Kinnevik prevent companies in your portfolio from greenwashing their reports? How does Kinnevik make tangible steps toward sustainability rather than token ones?
Greenwashing is becoming an issue with the amount of focus from stakeholders on sustainability. The first thing we do as an investment company is to ensure our house is in order, that we ourselves are not greenwashing. We have set out our strategy, set targets and report on progress in a transparent manner every year.
For example, we have put in place clear targets in relation to improving diversity and inclusion and reducing emissions both at Kinnevik and within our portfolio companies. These are measurable targets where we disclose progress in our sustainability report every year.
We are an active investor. We partner very closely with our companies to support them on sustainability workstreams. We sit on the boards of most of our companies and have good visibility into their sustainability efforts. We work closely with Founders and management teams of our companies to design initiatives that are relevant for the size, stage and nature of the business.
If a company is ignoring or missing targets, how does an organisation such as Kinnevik deal with that issue and ensure they do take action on sustainability?
I often question why some companies do not make expected progress across their sustainability initiatives. There are two reasons. Firstly, most teams are dealing with a host of other issues which take precedent in the short term. Secondly, some sustainability initiatives may not be relevant for the business due to their stage, size, industry, resources etc.
Very seldom have I come across companies or founders who think our sustainability agenda is irrelevant or doesn’t create value. With that said, we recently had a case where we were not able to obtain the founders’ support for our sustainability principles. As things progressed, we lost the deal in a competitive process. While it was painful in the short term, we clearly were not the right investor for that business, and they were not the right company for us. In short, where we have a complete mismatch on sustainability principles, we do not proceed with the investment or deploy additional capital into the business.
Lack of Finance
The lack of finance clean solutions is an issue in many places, especially in the developing world. What is the wider investor community doing about the lack of resources available, and what can be changed to drive the sustainability agenda home in the sector?
There are two parts to this.
Firstly, how does capital make its way toward business working for a cleaner future? Secondly, how do companies that are in fragile states, or difficult to operate countries mostly in emerging markets, attract capital?
To the first question, there are an increasing number of funds set up and capital allocated to pursue these opportunities. It is less of an issue today than say ten years ago. If one can demonstrate they are a commercially viable business solving a problem for society, there is a lot of capital chasing such opportunities. That said, there are some very early-stage businesses that have not proven their product-market fit or their financial viability that find it difficult to attract capital. However, any business will face such challenges, if they are unable to prove their product-market fit and/or commercial viability.
To the second part of the question related to capital going to companies in emerging markets or fragile states. There are certain pools of capital, though extremely limited, that goes into these markets. With the frequent change in tone and sentiment related to investments in emerging markets many investors outside those geographic areas tend to avoid risks associated to these markets. Consequently, there will be comparatively, smaller amounts of capital going into fragile states.
Is it possible to balance the needs of the economy with those of the environment and society? Or will economic priorities always come first?
In my opinion, financial returns and sustainability initiatives are in the long run tied to each other. I gave you the example of a company that we’ve had in our portfolio for decades. I do not think we would have managed to have a consistently successful company over a few decades if we did not build this business around our sustainability principles. Every business no matter what they do will have sustainability initiatives that are relevant for them. In the long run, it would be difficult for me to see how these two objectives contradict each other.
The $1,000,000,000,000 Problem
There is a trillion-dollar hole in sustainable finance across the world if we’re going to meet the commitments of the Paris Climate Agreement, SDGs, and other global agreements. What is it that the private investment community can also do to help meet the financial gap to achieve sustainable development?
There are impact funds that are now specifically focused on positive impact in society. With that said, I’d be surprised if there are any funds or private investment companies that are not thinking about it today.
As we get closer to 2030, we’re going to see a significant amount of capital being earmarked for businesses that are working with sustainable development. If you look at the last couple of years, the largest investment organisations in the world have gone out with very specific sustainability commitments. For example, moving money away from heavily polluting industries to cleaner alternatives. The investment community is going through significant change with an increasing proportion of funds aligning their investment philosophies around sustainable investing. Like most things in life, demand will create supply. In this case, capital will be deployed to fill this hole.