A high degree of surveyed investors noted that the lack of concrete governance and managerial systems are key factors that may halt or deter them from investing in a given venture. The area that would deter investors the most is the lack of a mission statement that stipulates the company’s impact creation. The next major roadblocks are a lack of systems that would ensure legal compliance, and a lack of communication processes that inform stakeholders how the company will address potential adverse impacts, as seen in Figure 12.
Startups that fail to incorporate and develop these systems and criteria risk losing out on potential investments, as these criteria are closely tied to investors’ willingness to pay. However, as the largest inhibitors are to be found in the general communication practices of startups, addressing these potential risks would not be difficult for most.
On a positive note, our data indicates that structures around sustainability management and the importance of governance in relation to impact creation and responsible business conduct (RBC) are making their way into the general due diligence process of the investment cycle.
In other words, sustainability is maturing in relation to investment deals, and startups that are able to capitalise on these developments will be favourably positioned in the coming years.
It is interesting to note that areas which tend to have a higher significance for the professionalisation of impact and RBC<span class="superscript" >10</span>, are considered as less important. 14% of investors would not be deterred from investing if a startup does not have a policy on RBC, while the number is 18% if a startup does not have a process for engaging its business relationships, in relation to managing their impacts.
In terms of the quality of an investor's due diligence process, this can prove to be an inefficient approach, compromising the assessment of a startup’s sustainability approach. We believe that this is primarily because of two interrelated factors:
Formulating and implementing a policy on RBC shows that a company is taking specific action towards sustainability and anchors commitment directly into its organisational fabric. Moreover, the structure of the policy, if it is in line with the minimum standard on RBC, will do the following: take the venture’s business model into account; communicate its due diligence process in relation to identifying and mitigating potential risks of adverse impacts; and stipulate its expectations towards business relationships in relation to the management of adverse impacts. In short, a policy is generally considered one of the first steps towards the implementation of necessary sustainability measures and processes.
Impact is by nature transcending. Businesses can cause, contribute to, or be linked to both positive and negative impacts. For this reason, it is important that businesses engage with their stakeholders and business relationships in order to map and assess how impacts materialise across their operations, supply, and value chains, as this enables the business to better respond to the impacts that it contributes or is linked to, but has no direct control over. Engaging and communicating with business relationships is therefore an underlying process for proper impact management
Data from our study shows that investors find certain criteria that constitute a proper impact management structure to be relevant to their investment process. In general, the feature with the highest aggregate relevance score (combined very relevant and relevant answers) for investors is the ability to set sustainability targets that stipulate positive impact creation on a product/service level. This is closely followed by the intent to work on the basis of science-based goals in relation to their goal setting, and the incorporation of impact into the company’s core functions by formulating an impact thesis (Figure 14).
The criteria that investors find slightly less relevant are: setting general metrics and baselines for impact creation; communication of impact creation to stakeholders in a quantifiable manner; and lastly, setting metrics and baselines for reducing potential adverse impacts.
However, if we only take the responses of “very relevant” into account, the picture is a bit different. By this metric, the most important feature is a startup’s ability to formulate an impact thesis that is relevant to its business model and operations, followed by the process of setting baselines and metrics for impact creation. The three last criteria: communication, setting science-based targets, and setting sustainability metrics and goals related to the impact creation of their service/product, all have a percentile share between 22 and 23% - implying that they are equal in relevance to investors.
From the data we have, it appears that if investors had to rank their most important criterion, most would point to the formulation of an impact thesis as being the single most important aspect. The rest of the criteria would be more up for debate, as investors seem to find them relevant, but not necessarily crucial.
The increased focus on the ability to set product/service level goals and metrics for impact creation, as well as the process of formulating an impact thesis, highlights that a higher level of emphasis and detail is placed on how a startup’s business model and revenue streams are directly tied to impact creation. Moreover, the intent to work from the basis of science-based goals, underscores that goals and the context around impact creation are important aspects for working systematically with impact and sustainability. This tendency seems to be in line with the growing focus on the necessity of working from the basis of science in relation to business development and impact creation.
What these three developments (impact thesis, product/service level metrics & science-based goals) showcase is that investors pay close attention to sustainability both as a business driver and in terms of what societal and scientific consensus agree to be necessary actions. Extrapolating this further, we can infer that investors will place even more emphasis on the actual processes that ensure sustainability in a business setting as sustainability matures as both a business driver and management concept.
The increased focus on the connection between business and sustainability highlights a maturation process and could drive the implementation of sustainability as a mainstream management principle. However, there is still a lack of focus on the necessity of identifying, reducing and mitigating adverse impacts.
Investors still care about these areas, just not as much as the positive impact potential. This results in a kind of favouritism, and therefore risks compromising the necessarily holistic approach to impact management. Impact is as much about ensuring, incorporating, and measuring positive change as a factor of the business model as it is about creating a responsible and efficient operational context, establishing internal processes, and assessing how certain activities and procedures can negatively affect the planet or a business’ stakeholders.
Any business that creates adverse impact as part of its positive impact creation will naturally offset its own positive contribution. In the future, investors should place higher significance on the principle of “doing no harm,” and take the standardised approach to impact management into account.
This approach builds upon three interrelated frameworks, referred to as the ABCs of impact: A - act to avoid harm, B - benefit stakeholders, and C - contribute to solutions<span class="superscript" >11</span>. Together, these frameworks create a more balanced perspective across mitigating negative impacts while increasing positive outcomes.
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