The investor community has realised that ethical investing, or the incorporation of environment, social and governance metrics, in their portfolio companies is good for businesses, participants at the VCCircle Limited Partners Summit, comprising general partners and limited partners, observed during a group discussion on Tuesday.
While discussing the importance of ethical investing during the breakfast session, the GPs and LPs exchanged notes on how the investor community could deepen its engagement with ESG metrics and instil good governance.
The thrust to improve ESG norms in investing is largely coming from global development finance institutions and pension funds, besides other limited partners. For instance, the general partner could sign an agreement with limited partners to enforce compliance of ESG-linked goals in all their portfolio companies.
Broadly, the investors discussed how the government, the investor community and the entrepreneurs can each play a role in improving the environment, social and governance framework.
Most investors at the table were of the view that their portfolio companies had improved profitability by incorporating ESG metrics.
One of the participants also shared his experience on how an anti-sexual harassment training session had a positive impact in his own firm, besides how a logistics company improved its productivity by treating truck drivers and other employees better.
An investor said that out of the three portfolio companies that had been a let-down for the fund, two had failed because of governance issues.
Alluding to the Nirav Modi-Punjab National Bank scandal, the limited partners at the session felt that certain practices within the financial services sector were putting investors off despite the fact that the sector was crucial to their investing goals.
The investors were of the view that it was better for fund managers and entrepreneurs to imbibe ethical investing as part of their culture, instead of looking at it as points to be ticked-off ahead of an investment.
However, some felt an ESG consultant or an ESG manual can make the process more tedious and introduce delays. It is better that ESG goals are intrinsically part of the firm and the GP-LP framework, and not enforced in a prescriptive manner, they felt.
Linking ethical investing to economic goals, such as ‘carry’ for fund managers, could be one of the ways to imbibe ethical investing. It has proven to be a success, one of the investors said.
Carry is the profit that a fund manager earns after returning the principal amount and the hurdle back to their investors or the fund’s limited partners.
One section of investors felt that funds need to develop strong filters to ensure capital is deployed within the ESG framework. As an extension to this thought, one investor felt that it was beneficial to avoid highly regulated sectors to avoid issues around governance and corruption.
However, several others at the table felt that investors were in a position to instil strong governance norms within the entrepreneurial community, which would eventually be beneficial. Portfolio companies need to be trained to report deviations in ESG goals instead of hiding them.
The breakfast session at the VCCircle LP Summit was a closed door discussion where the panellists did not wish to be named or identified citing examples.
The breakfast session at the VCCircle LP Summit was a closed door discussion where the panellists did not wish to be named or identified citing examples.
