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Sustainability customer case
Investors are increasingly conscious of social responsibility when it comes to deploying capital. Private capital flows are essential in realising the transition towards a more sustainable and inclusive economy. We increasingly see evidence that responsible and sustainable investing leads to lower risks and better returns. Asset managers can strongly influence the value of their portfolio companies through both their ESG (environmental, social, governance) policies and their impact strategy. “Good for the world and good for their investors (LPs)” is a mantra growing in volume!
ESG is often about the how: Do portfolio companies have a CO2-reduction policy? How do they deal with human rights along the chain? What’s the situation regarding diversity and governance? Impact is about the what: What impact do the portfolio company’s products and services have on people and the environment? Which solutions do they offer for societal challenges? What do they contribute to a sustainable society?
Sofinnova Partners is a leading European venture capital firm in life sciences with a focus on healthcare and sustainability. It has supported the growth of over 500 companies since 1972. From 2019, Sinzer – Grant Thornton has been helping Sofinnova with its ESG and impact policy and reporting. As part of this cooperation, an impact framework and ESG maturity model was developed and implemented. This has enabled Sofinnova to have a finger on the pulse of all ESG related activity across their portfolios, continuously monitoring and reporting on ESG and impact activities, identifying risks and opportunities and implementing steps to address the needs of their portfolio.
The growing diversity of Sofinnova’s portfolio, ranging from incubation and early-stage companies all the way through to publicly listed companies depending on the specific strategy, required a new approach. Why? An incubation stage company with two staff members is unlikely to have a CO2-reduction policy or feel the need to consider building a workforce wellbeing and monitoring system. But these are things that we can expect from a more mature, listed company. Sofinnova’s newly-developed model helps assess the ESG ‘maturity’ of those companies in order to then provide guidance on relevant, applicable development goals and suitable ESG reporting for every phase of a company’s development.
For decades, this has been Sofinnova’s mission. In 2020, the pioneering firm wanted to level up their ESG and impact policy. At the time, the European investment firm, established in 1972, was managing over EUR 2bn in assets with an active portfolio of over 70 companies in the life sciences industry – from very young start-ups to later stage companies. Sofinnova is a data-driven firm, but one that understands the need to invest in relationships, in the communities it serves and in the future. They recognise the importance of ‘human intelligence’ in a world where all too often the focus is only on ‘artificial intelligence’! It was thus natural to make the step toward a more hands on, active approach to ESG and impact. Dr. Robert Carroll, a Partner at Sofinnova and Head of Investor Relations and Responsible Investing, wanted to extend the Sofinnova philosophy of leading by example, getting involved and being innovative in order to maximise growth at each step – and specifically in this case, through ESG and impact related topics, within Sofinnova and each of its portfolio companies. He met Sinzer, a former boutique consultancy firm, acquired by Grant Thornton to strengthen its sustainability practice in 2019, which has been active since 2008 in ESG and impact strategy, measurement and reporting.
Rob: “We invest in life sciences to improve individuals’ quality of life, that is our mission. Our investment strategies are either focused on using life sciences to create the next generation of therapeutics (be that through new medicines or medical devices) or using the science to drive sustainability in large industrial processes – simply said: the health of people and the health of the planet. Our overarching goal is to help people to live long, healthy and fulfilling lives. Since 1972, we have focused on innovation as the driver of positive impact and change. So, our portfolio is full of exciting companies developing ground-breaking therapeutics for patients and revolutionary technology for sustainability. We are always looking for exceptional science and exceptional entrepreneurs. When you consider what we invest in, inherently it has positive impact - We work on improving people’s quality of life. Impact is important to us, but we knew we could do more and following the scientific principal of “if you cannot measure it, you cannot improve it” we set out to find a way to better quantify our impact.
“Sofinnova has a very strong relationship with its investors; our ‘Limited Partners’. We understood their growing interest in quantifying ESG performance and impact, we wanted to deliver the information and progress they needed, and we wanted to help them better communicate to their own shareholders the value created in the Sofinnova portfolio. We knew our investments had impact, but we had never systematically measured it. Regarding ESG, we face the challenge of having a very diverse portfolio, from pre-revenue start-ups with a single employee to established, listed companies. This makes a uniform ESG policy challenging, because the expectations and requirements you have for the different companies can vary enormously. As an investor in innovation and as a company builder we see the value of constantly assessing our performance and identifying where we can raise the bar. It was with this mind set, that to us, it became clear that we needed to shift our ESG and impact policy to a higher level.”
“Impact has always been in our DNA. Sofinnova has applied the rules of good governance since its inception in 1972. It is a long-term signatory of France Invest’s Charter (Investor Commitment to Growth Charter) and we have always focused on ESG related topics within our portfolio companies. For many years we have conducted annual surveys of our companies and as a result of this and the regular discussions at the company board level, we had an overall understanding of what those companies were doing in the broad field of ESG. We monitored that and reported on it. But it was an open circuit – we collected data, analysed it and reported on it – but did not have a coordinated, structured approach to drive change at a granular level. We wanted to take things a step further when it came to our own responsibility: feeding back ESG insights to the companies and identifying actions and improvements. But how? There are many ways of measuring ESG and impact topics – it is a relatively new field. So, what is the best way? And how to measure? And above all: how do you make the progress: how do you create impact?”
“We wanted a smaller, ‘boutique’ consultancy, that focuses specifically on this and, above all, has some years of experience in practice. Knowledge is transferable – experience is not; you have to gain that in person. And we wanted an agency where the people personally believe in what they do. We looked at Sinzer and at what they had done. I called and spoke to Emma, who described the various ESG and impact projects they had done in recent years, that was convincing. The team proved a perfect fit with the Sofinnova culture and with the task we faced. The references from Sinzer’s other clients were also really good – that helped as well!”
“What stood out to me was that Rob kept emphasising that he needed to be convinced that this was not only going to be an exercise in ‘greenwashing’. He really wanted to improve impact and not just dish out ESG verbiage. That is how we see it too, so it was a great first meeting. And although you were sceptical, Rob, I think you had really done your homework. You knew very well what it was you had to do and what it definitely should not be. We were on the same page about the approach: make it realistic, start small. And then you can scale up. We know that it is a difficult phase, to get the ball rolling internally. You really have to get the investment teams on board. That can be achieved by making it a straightforward and simple process, but delivering clear benefits; everyone is busy and yet you still want them to do new and different things. The idea to ‘Keep it simple’ is another principle we shared. And although a simple process is the most difficult to make, we agreed immediately that is what had to be done.”
Rob: “We searched for meaningful ESG data to report on to our investors. Our portfolio covers the entire life sciences spectrum in companies; from new and small to larger more established firms, across different therapeutic areas, including biopharmaceutical focussed companies and medical devices through to the work our Industrial Biotech team do in sectors as diverse as Food, Agriculture, Chemicals and Materials. We had to find something that worked across the spectrum and delivered figures we could consolidate into meaningful analysis. Quite a challenge!”
Emma: “If you use ‘standard’ ESG metrics, that often delivers data that is not very useful for the smaller companies. Questions about a CO2-reduction policy, for example, or a gender pay-gap policy for employees: for a start-up with three people working from a small, rented office, there’s not that much to report on yet; while from a company that is on the verge of being listed, you can expect them to have these things in order and more. And at the same time, you want to stimulate the start-up to think about these things before they scale-up. It has to be customised. For Sofinnova’s material ESG themes, we plotted relevant KPIs for that broad spectrum over the four stages of ESG maturity. In other words, we use the same indicators for all of the companies in the portfolio, but that we expect different ESG scores per growth phase of the companies because they are more or less ‘mature’ in this area. This means every company gets an appropriate score and relevant next steps that it can work on.” Rob: “With the experience Emma and her team have, and our appetite to bring it all together and develop a functional, practical system, it was a very enjoyable process. Sinzer is always open to suggestions and applies these where possible. We were able to give everything thorough consideration and came up with a great solution: this maturity model serves our needs perfectly.”
Rob: “Take energy, for example: converting to a green electricity source is a good step for start-ups. The more mature version of that is the move from CO2 neutral to ‘net zero’ or even CO2 negative. Companies in the more advanced phases of their development and growth have the means to do that, and often are more significant emitters of GHGs vs earlier stage companies and so the objective is even more relevant. In the incubation, or start-up phase, you are busy just getting the company up and running before anything else. We help our companies to think about ESG early on, so that they can develop the mindset, awareness and sensitivities that will scale up in parallel to the growth of their company. ESG requires you to set concrete goals to work towards. Each of the KPIs has a far-reaching goal of pushing companies to really do something extraordinary, but it is always achieved through a number of small manageable steps.”
Rob: “And, ultimately, that delivers financial added value when it comes to the sale. Buyers are looking for ESG factors when they look at companies: is there good governance, a track record of safety? Are their staff motivated, enthusiastic and aligned with the success of the business? Increasingly we see buyers considering ESG factors in the due diligence hence making it an implicit value creation lever we want to have access to, as that, of course, flows back to the investors as enhanced performance on our exit. Everyone wins!”
Rob: “We checked our maturity model at each stage of its development, with our investment managers and brave CEOs who volunteered to act as test subjects! They are the ones who ultimately have to use it. They took to it with ease, making the adoption smooth; it was instinctively logical and easy to use, with a minimum effort, maximum return philosophy apparent. We’d found a winning formula. The ‘keep it simple’ rule, which Emma mentioned before, works.”
Rob: “Yes, definitely: it may seem deceptively simple, but it brings very concrete results. It steers our companies on several levels. If you ask all portfolio companies to change to a green energy supplier, and there’s ~70 of them, then that little step suddenly has large impact. The same goes for the other KPIs. Implementing a policy for equal opportunities recruitment: when you do this consistently with each company and it is multiplied by all the companies in the portfolio and multiplied further by all the portfolios and strategies on the Sofinnova platform, there is a significant multiplier effect. This is the Sofinnova view: we have the ability to amplify small actions by applying our responsible investor strategy across all our portfolios and in doing so, can achieve real world impact, with each step.”
Rob: “Managing companies with ESG and impact in mind is ultimately a ‘living’ process – it does not stop after a once annual review, it grows, it evolves, and best practises are always being enhanced. Equally, the requirements of the market are constantly changing - SFDR and the EU Taxonomy are on the way: new regulation around ESG. We have to be able to react and adapt to ensure we can comply with the new regulations. Our ESG and impact model has been developed in such a way that it can be adapted to the changing environment, the needs and the objectives of the responsible investor.”
Emma: “The field of ESG and impact reporting is still in development. Now we have the new SFDR and EU Taxonomy, but the some of the reporting criteria are yet to be released. Still, asset managers cannot sit still, because LPs and other stakeholders increasingly request ESG and impact information. And improving the ESG and impact results also helps to improve the financial value of the portfolio. If you are a front-runner in ESG and impact, you are in the driver’s seat when it comes to questions from stakeholders and applying new standards. That is exactly what Sofinnova is doing now.”
Rob: “That means that we cooperate, also with the other General Partners (GPs). You could see them as competitors, but it is an important part of Sofinnova’s philosophy to work together and collaborate. In the end, it’s a team effort. We lead the formation of our syndicates, working with other fund managers and strategic investors in order to support the growth of our portfolio companies. We seek to partner with investors with complementary skill sets, but similar philosophies. If we do not work in a cooperative and collaborative manner, our portfolio companies get lost in competing objectives and priorities and needing to report to multiple ESG surveys every year or deliver impact information to each of their investors separately, that is not conducive to our goal of having them create lifesaving products. Sharing our approach and having a harmonised approach with other investors is an important way of driving efficiency. Equally, we share best practice and ensure there’s knowledge exchange between each of our portfolio companies.
Rob: “Impact has a long tradition here. The companies we invest in were always involved in impacting people lives. At Sofinnova our employees are as diverse as the patient populations we serve. The change is that we can now clearly express the impact of our companies and how our responsible investment approach drives change in our companies. It also institutionalises how we drive change.”
Rob: “In five years, I think ESG is something we won’t talk about anymore: it’ll become something that we ‘just do’. That sounds boring, but it would actually be a huge change. It will become the new normal. We don’t make a big deal about doing financial DD – its expected. Today this is a new way of creating value in a company and if you are not doing it, clearly, you will be missing out. Investors, investees and acquirers will expect it.”
Emma: “Sofinnova’s ESG maturity approach is innovative, but they also have a dedicated impact fund. This fund will be classified as an article 9 fund under SFDR, but more importantly; the impact objectives and results are considered in the same way as financial return objectives. Not many asset managers do it that way.”
Rob: “That’s right, in our impact fund for example we align our creation of ‘impact profit’ the same was as we do for ‘financial profit’.” We want our investors to have the confidence that we can deliver on our promises.