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What is sustainable investing and how can startups access it?

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As part of the startup community, what should you know about sustainable investing? At Future Summit 2021, an event organized by Social Innovation Solutions to inspire and prepare leaders for the future, Linda Zeilina, CEO and founder of The International Sustainable Finance Centre (ISFC) offered a bird’s eye view on the dynamics of sustainable finance. 

Overall, the 6th edition of Future Summit, taking place between 15-21 November, has been placing particular emphasis on building a knowledge base around the implications of the climate crisis and solutions for sustainable development. So far, the event has included sustainability education modules, highlighted the role of new technologies for social good and ecological impact, and brought in sustainability experts from academia, startup communities, business, NGOs, and international organizations to discuss current challenges and solutions.

Linda Zeilina launched ISFC in 2020, during the global pandemic, to address the big gap in terms of expertise and capacity to work on sustainable finance. Based in Prague, the organization is built on 3 pillars: generating knowledge and creating solutions through research, building capacity and understanding across CEE, and connecting interested parties, as well as skeptics. They also want to help operationalize the current climate ambitions and regulations so that everyone understands what they mean in practice.

The Recursive reached out to Linda for additional insights on takeaways for startups and investors, as well as on the outcomes of COP26 for the sustainable investment ecosystem.

Linda Zeilina, CEO and founder of ISFC
Linda Zeilina, CEO and founder of ISFC

What is sustainable investing, and what are the key influencing factors?

Sustainable investing aims to balance traditional investment, focused on matching capital with opportunities that carry risks proportionate with financial returns, with environmental, social, and governance-related (ESG) considerations to improve long-term outcomes for a wider range of stakeholders. 

After having gained momentum over the past few years, sustainable investing is here to stay. A key driver of the change towards this new path in the investment landscape is the emerging of a new generation of asset owners, people with different expectations of how their money will be invested. Although financial returns remain important, people are now also concerned with the responsibility and transparency of their investments, Linda emphasizes.

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Policy is another major driver, especially in Europe, such as through the sustainable finance agenda and taxonomy, she added. These are world-leading policies, which shape how markets behave. 

As a consequence, supervisory authorities are increasingly trying to understand what information they need to mitigate the risks that arise from the shift in policy, or in business models. 

What can SMEs do today to prepare for future sustainability reporting requirements?

Linda also notes that sustainability reporting requirements for companies are rapidly changing.  The newest Non-Financial Reporting Directive extends the requirement to disclose sustainability risks and impact from companies with 500+ employees to all large enterprises, as well as SMEs with securities listed on regulated markets.

It will not be long until all SMEs would have to integrate some form of sustainability-related disclosure as part of their business performance reporting, Linda believes.

So, how can companies prepare effectively, so that they can save money once compliance is mandatory?

“SMEs can use a proactive approach and start with the basics: collecting data about their greenhouse gas emissions, energy intensity, and data about their labor force, for example. 

A lot of the initial analysis such as identification of what data points are needed can be done in-house by using free online resources. It is a common misperception that sustainability data gathering is costly. There are plenty of small startups that have been able to assess their performance and provide data,” Linda shares with The Recursive.

While it might be imperfect at the start, setting up this basis will help companies better understand their business impact and potential risks.

How and where can startups look for sustainable investing capital?

“If you are a green business, that is already a big selling point, because the real economy currently does not have enough investment opportunities that are aligned with the EU’s taxonomy and proper solid ESG environmental, social and governance criteria,” Linda shares.

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From here onwards, interest in sustainable investing is only expected to grow, led by favorable legislation and regulation, which also act as incentives for investors to lower their risk and deliver long-term value.

With the EU leading the change, anyone sitting in the EU is in a good space. Moreover, startups with cleantech solutions coming from Central and Eastern Europe may be ideally positioned to raise the interest of impact investors, giving the region’s needs to decarbonize the energy sector, she further notes.

Entrepreneurs should think more outside of the box when it comes to finding capital, starting with positioning themselves better, showing that they fit the narrative:

“You will need to go and meet as many people as you can. If you’re starting a business, meeting people is super important. So, proactively find events, opportunities to speak, to be seen. How can you do PR cheaply? In terms of small investments to help you with that, there are a lot of opportunities, but it will take time to sit and sift through them,” Linda advises.

What should investors keep in mind regarding sustainable investment?

Already, as part of EU’s Sustainable Finance Disclosure Regulation financial market participants and financial advisers need to share product information regarding sustainability for both ESG-related and non-ESG products. 

Among others, SFRD classifies funds in three categories: those who do not integrate any kind of sustainability into the investment process (Article 6), those who promote environmental and social characteristics among others (Article 8), and those who have sustainable investment as their objective (Article 9). 

Such directives indicate the increasing preference for more sustainable funds and the disadvantages that funds without sustainability considerations will face in the marketplace. The perspective of investing in stranded assets and thus losing money in the long-term is forcing investors to better understand the risk element of their portfolios.

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For investors looking to enter the space of sustainable investing, Linda Zeilina from ISFC had some further advice:

  • “Start from the investment philosophy and strategy: what is the most important set of criteria which will be used to evaluate investment opportunities? 
  • It is key to understand a company’s real-life environmental and social impact because the existence of policies does not mean that they translate into action. Using ESG ratings can be a shortcut, but unfortunately, the ratings have a low correlation and greenwashing is still an issue. 
  • Because of this, looking for businesses that report on their sustainability performance and have transition plans is a great approach, because it means that there is data and KPIs to assess over time.”

.  .  .

The afterglow of COP26 and what to hope from future summits

“Sadly, COP26 was a disappointment. It was dominated by a lot of noise from business and finance, mainly focused on pledges and announcements of intentions, without much in terms of concrete pathways and actionable steps. 

The only positive aspect is that sustainable investing is entering mainstream finance space, which means more resources and research will be dedicated to understanding better how to assess impact, how to decarbonize portfolios, and how to actively engage businesses to promote decarbonization. 

The hope for COP27 is to see greater attention paid to biodiversity, and a global agreement to finally phase out coal. I think the greatest hope is for more ambitious commitments and actions at COP28 or COP29, which will see a lot more private sector and public pressure for governments to act,” Linda concludes.

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Antoanela is a Sustainability Communications Specialist and Deputy Editor at The Recursive media. From these roles, she is helping organizations communicate their latest sustainability goals, strategies, and technologies. She writes about climate tech, ESG, impact investment, sustainability regulation, and related topics.