Companies and investors alike are increasingly interested in values-based investing. Learn the three main types of values-based investments, how to communicate your values-based initiatives in the deal-making process, and the logistics of doing so.
ESG Investing: What Is It?
ESG stands for environmental, social and corporate governance. Companies focused on ESG investing positively affect society or act to reduce negative impacts on society through the levers of environmental, social and corporate governance initiatives. Consider a company that runs on solar power to reduce its carbon footprint, donates one product for every sale or pays fair wages.
Impact Investing: What Is It?
Companies that align with impact investing try to make positive change in the world while earning a profit for investors. Think about a company that funnels a percentage of profits into alleviating poverty in the Global South, where it purchases supplies via Fair Trade. The impact is smaller and more direct than with ESG, so can be easier to measure.
Socially Responsible Investing: What Is It?
Of all the types of values-based investing, socially responsible investing (SRI) is the simplest to grasp. These companies take a moral high road by avoiding so-called sin sectors, such as weapons manufacturing, alcohol production, tobacco and e-cigarettes, gambling, fossil fuel extraction, etc. Consider a company that makes parts for wind turbines to reduce dependence on fossil fuels.
ESG vs. SRI vs. Impact investing
How can you narrow which of these valued-based investment approaches makes the most sense for your company?
SRI is the simplest to grasp, but it can be limiting. The main appeal is to do no harm, but there is not a concurrent promise to actively do good.
If having a positive impact on the world is the mission of your brand, then SRI is not the most aligned match. If your brand isn't actively trying to problem-solve and just exists to provide a more friendly or neutral solution, then SRI is well-aligned for your objectives.
When thinking about SRI investing vs. ESG, ESG can be trickier to grasp. Take the example of a coffee company. To demonstrate its ESG compliance to investors, it would want to show the company's environmental impact (are the beans harvested in an environmentally friendly material, or grown without pesticides?), its social factor (does it pay fairly and treat workers well? Does it offer benefits to employees?), and finally the corporate governance angle (who's on the board? Are there any ethical conflicts? Is the company transparent about its business model?).
Complicating matters is the fact that there's no ESG standard to benchmark companies. Despite these challenges, the ESG movement is growing. If the main concern is aligning with the future of investing, while also having a broadly positive effect on the world, this could be the direction in which to grow.
More so than the others, impact investing allows the company to really work toward a goal, such as alleviating poverty in a specific nation where it sources products. The focus is narrower, which reduces the burden of proof. If you have a passion product or want to give back in a certain way through your business, you will naturally align with this type of valued-based investing.
Deal-Making Strategies for Values-Based Investments
Understanding what these investment strategies share and how they differ helps position your company throughout the deal-making process. It will also help you attract like-minded partners to support your growth.
There are two aspects to demonstrating values to investors: corporate storytelling, which intrigues potential partners during a road show, and data that supports the due diligence examination once interest is expressed.
Investors who are intrigued will want to know how it all works: what type of impact is had, how it's measured, what ambitions are and where there are growth opportunities. Reports, facts, figures, and even filing statements such as the proxy statement can demonstrate the company's fit from an SRI, ESG or impact investing perspective.
In a proxy statement, for instance, there is space to clarify your company's approach to ESG issues. These statements can reiterate your commitment to issues or highlight new directions, ambitions and strategies.
Accompanying the interest in values-driven investments is extra scrutiny. Investors really desire to understand the opportunities and the risks during the due diligence phase. Investors want to make sure there is no dirty laundry, such as unfair labor practices or unethical partners. In a worst-case scenario, were something unsavory to be discovered, the deal could fall apart.
Ultimately, this extra level of scrutiny will only benefit companies that are committed to environmental and social good. It can weed out those that are not serious about an SRI, impact or ESG commitment, while shining more light on the players that have demonstrated their ability to do good while turning profits.
The market for valued-based investments has grown rapidly in recent years. Consumers are also interested in supporting companies that align with their ethics. By positioning your growing company at the intersection of values, ethics and social responsibility, you can differentiate your brand on the market and make a positive mark on the world.
Enlist the Help of DFIN
An effective deal requires careful due diligence and an exchange of information. For that, you'll need an effective partner with the capacity to support information sharing and protect sensitive business data. That's where DFIN can help. We offer virtual data rooms to support the deal-making process end to end, and we're here to advise on the best ways to demonstrate your values commitment through data and reports.