Growing with ESG: A ScaleUp Investor’s Approach to Responsible Investing

ESG (Environmental, Social, Governance) is everywhere you look in the investing world. Regulators are increasingly focused on it, including the SEC, which recently announced the formation of a Climate and ESG Enforcement Task Force and issued a risk alert highlighting its observations from recent examinations of investors’ ESG practices. Institutional investors now expect it from their general partners and have developed a number of tools to evaluate general partners, including the ILPA Due Diligence Questionnaire, which now includes a section devoted to ESG. Additionally, general partners are refining their thinking about what ESG means for their portfolios and how they can put it into practice. Companies are increasingly embracing ESG as a way to attract and engage investors.

As a ScaleUp investor, Insight has been building ESG into its investing practice since it first adopted its ESG policy in 2015. Since then, we have continued to refine the ways in which we integrate ESG as a critical component of accelerating growth within our portfolio. Below, we provide an overview of Insight’s multi-faceted approach to ESG and some of the lessons we’ve learned as an investor building out an ESG program. 

Define an Internal Engagement & Strategy

Our program starts with internal engagement and strategy. Insight has a dedicated ESG committee that includes team members from across our organization. This cross-functional approach ensures that our ESG strategy and process is informed by a 360-degree perspective of our stakeholders and tailored to our ESG program’s core priorities. Our ESG committee sets our ESG program’s priorities by clearly identifying the topics within ESG that are most relevant to our strategy of investing in software ScaleUps and that align with our values. Finally, our ESG committee reviews the results of the portfolio and ESG activities, identifying opportunities for improvements in our process.   

Conduct Due Diligence

The second aspect of our program is ESG due diligence. At the pre-investment stage, we partner with Malk Partners, a seasoned and highly regarded ESG advisor, to conduct comprehensive due diligence and evaluations of ESG risks on all new portfolio investments. Insight integrates these diligence findings into its investment thesis and factors them into its investment decision.  

One lesson that we’ve learned is that for ESG diligence to be useful, it needs to evaluate risks through a lens that is relevant to the company’s business. Does the company collect personal data on its customers or other third parties? If so, we then dig into their data-privacy policies and practices to ensure the company has designed its program to comply with an ever-increasing list of data-privacy regulations, including GDPR, CCPA, CPRA, and the VCDPA. Do they rely upon third-party reseller channels for their products, particularly in far-flung jurisdictions? Then we closely examine their policies and training programs around ethics and compliance to uncover any potential ethics or compliance risks, such as bribery or money laundering.

Involve Management 

Identifying ESG risks is great, but it is only impactful if concrete steps are taken to implement ESG-friendly policies and procedures to improve that risk posture. The next aspect of Insight’s ESG program involves direct and ongoing engagement with management at the portfolio company level. Insight starts this process immediately post-closing and maintains regular check-ins throughout the investment holding period to ensure that management not only understands our recommendations but actually puts them into practice. We have found that our companies are most successful when there is direct engagement with management immediately upon investing, when we provide resources to the portfolio, such as form policies and other practical guidance, and where the company demonstrates ownership of and commitment to improving its ESG posture by allocating dedicated resources to drive implementation.  

As is clear from the above, portfolio engagement is critical to implementation. The investment team members are our primary interface with management within the portfolio, and so it is important to sensitize them to our ESG priorities, how ESG fits into our investment process, and how to use their positions with the company (often at the board level) to encourage active engagement in our ESG program.  

Identify & Meausure KPIs

Finally, identifying KPIs is critical to measuring the success of our ESG program and refining our process.  As we’ve written before,  there are many KPIs we use in our investment process to evaluate the strength and likely success of our software investments. Similarly, we can use KPIs to measure the success and impact of our ESG program. For example, Insight tracks diversity data across its portfolio companies to measure the impact of diversity, equity, and inclusion programs it encourages its companies to adopt, and we’ve identified several KPIs to assess whether the implementation of these policies over time improves both the diversity of our portfolio’s workforce and also related metrics, such as their retention and turnover of employees, a critical component to growing a successful company.  

In today's environment, it is integral that companies and investment firms develop, define, and scale their ESG strategies and realize their impact on business and society. 

Andrew Prodromos Managing Director and Chief Compliance Officer More By The Author