Patrick Sheehan, Managing Partner at ETF Partners, examines the growth of the impact and sustainable investment markets.

ESG, impact, sustainability, responsible investment; over the past few years we have all heard these words increasingly often. As their popular usage has soared so has the confusion around what exactly they mean and what practical function they are trying to describe. Into this confusion, various groups have sought to use ESG as a label to market quite disparate products. Others have pushed for clarity via the use of classification systems or ‘taxonomies’. As a result, there is a new industry around the provision of increasing amounts of data. The view is all too often that if some data helps deliver some clarity, then more data, even if it is not yet clear why, must surely deliver more clarity. Frankly, although well-intentioned, this is becoming decreasingly helpful, often a bureaucratic cost to business, and occasionally even destructive. The ideas and ideals driving the rise of ESG/impact/sustainability/responsible investment are too important to let suffocate in such weeds, so we need to start using far simpler, clearer language and methods of accountability.

The lens though which I look at all this is that of a venture capitalist, working with innovative small companies that almost always have a clarity of purpose, an overwhelming need to focus resources onto their mission, leaving little desire or capacity to spend time on anything perceived as bureaucratic or having limited practical utility.

The idea of promoting good practice around environmental, social, and governance issues (or ESG) has a different heritage. Essentially ESG was coined by quoted market investors trying to achieve compliance with good practice in very large public companies and across giant portfolios. It is a world away from venture capitalists who deal with small companies and very practical issues.

Environmental, social, and governance are three different topics. While there can be overlap, often they are independent, so the idea of capturing a single score of ‘goodness’ is not always helpful, and often misleading. Further, since ‘goodness of compliance with best practice across a range of issues’ is not the same as being impactful, or really making a difference, it is often used, and sold, in misleading ways – both unintentionally and sometimes cynically.

Back in my world working with exciting young companies, we face increasingly large and diverse information requests under the headline of ESG. Each is valid with good individual reasons and needs, but these usually have little to no practical value for our fledging companies. They do not encourage behaviour change but are more frequently seen as an information tax on entrepreneurs who are already trying to make a positive difference in the world.

So, we find ourselves as venture capitalists increasingly as gatekeepers, protecting our family of companies from ‘bureaucracy’ so they can focus on what really matters, whilst also trying to service the needs of our clients and investors. While those needs are real, it is often not clear what, if anything, the collected information will be used for.

For clarity I am not saying that ESG is a bad thing – but rather that there needs to be an accompanying simplicity and clarity of language when it is used. More data does not necessarily deliver more clarity. Indeed, there should be far more focus on reduction and on only seeking data for which there is specific utility. A good test is to make sure we all understand, in plain language without acronyms, the purpose and use of any requested data. This perhaps uncomfortable drive towards simplicity will, I suspect, help drive far more practical and positive outcomes.

While large organisations can cope with, and probably need to report on numerous metrics, ESG as it is today is something of a sledgehammer being misapplied onto the small acorns of venture capital. What is needed for start-ups is to keep things as simple as possible, and to apply all that effort onto helping them succeed.

Our mission, at the Environmental Technologies Fund, is to enable sustainable innovation. Clearly, we still need to be mindful of social issues and good governance, but our core focus is on nurturing positive environmental impact. In our eyes, there is simply no need to measure the water consumption of a ten-person software company because, when it comes to water, those ten employees are mainly just drinking it! Nor is there much practical utility in comparing CO2 footprints across our portfolio of companies. What does it say about a shared mobility operator compared to an energy storage facility? What does matter is the difference these companies, which are rooted in purpose, will make in the world through their innovation and success. That is impact, not ESG. They are worlds apart. As venture capitalists we focus on impact; explaining it, measuring it, and most of all ensuring it happens.

So, how do we do this? The adoption of very simple KPIs to measure the desired and expected outcome from the success of a business (as well as financial performance) is growing and evolving, and this is hugely beneficial for young companies. Each company’s purpose is different, so naturally each company has its own KPIs. Indeed, we refrain from standardising KPIs across our portfolio and instead focus on things that are relevant to each business and expressed in the language of that business. This gives a practical way of showing the achievement of the specific outcome that each company intentionally aims for.

The use of ‘impact KPIs’ sits very well with the types of companies we like to invest in. We set out to find people who have a real sense of mission about achievement of change in the world. Purposeful people. Intentional people. Take Zeelo, the shared mobility operator. Their purpose is to get people out of cars. Or Phenix, which is on a mission to end food waste. These intentions are simple, focused and easy to understand and get onboard with. This clarity of purpose and meaningful intention goes further. It is, after all what you want to hear from a good leader, and there is a pretty good correlation between purpose-driven entrepreneurs and entrepreneurs who believe in good governance and social outcomes.

In short, we focus on measurable impact without jargon. Data is less important that outcomes, and simplicity, though harder to achieve than detail, is more useful in enabling great outcomes. We also focus on helping entrepreneurs driven by a sense of purpose. Or, in the words of the Dalai Lama, those who want to be the change they want to see in the world.