Fin Capital: ESG incorporation in venture capital investment

Fin Capital is a global asset management firm focused on business-to-business (B2B) financial technology investments. We manage over US$1.2bn in AUM and invest across the full lifecycle, from pre-seed to publicly listed companies, within four strategies – Regatta (pre-seed), Flagship (early stage), Horizons (growth) and Constellation (publics). Environmental, social, and governance (ESG) compliance underpins our mission to build a legacy for our investors, founders, firm, and team members. To establish a robust reporting framework and ensure ongoing firm-level and portfolio accountability, we became a PRI signatory in July 2020.

Why we take an ESG incorporation approach in our investment decisions

Since inception we have been dedicated to upholding ESG standards in our investment process, which we feel differentiates us with company founders, provides operating value and drives durability and outperformance in our portfolio companies.

Our proprietary ESG framework focuses on portfolio companies’ social mission and impact metrics (aligned to the Sustainable Development Goals (SDGs)), governance structures, financial controls, external audit, CFO/controller leadership hiring, board oversight committees, regulatory adherence, and people/culture planning alongside diversity, equity and inclusion initiatives.

We have observed outperformance from those companies that make meaningful progress on their ESG metrics in enterprise value accretion, CAGR, employee retention, and reduced financial/legal/regulatory issues.

How we undertake ESG incorporation in due diligence and post-investment support

Our partners implement dedicated ESG compliance processes and technology in our due diligence, portfolio engagement and performance monitoring throughout the lifecycle of a company.

In our due diligence, we incorporate ESG criteria comprised of 10 elements as part of an Investment Scorecard that is used by our investment committee to make a final investment decision.

These include the existence of a corporate code of ethics, the assignment of ESG responsibility to a member of the management team, diversity characteristics of the company’s workforce and an estimate of the company’s carbon footprint.

We assess companies across these 10 metrics, assigning a score of 0, 0.5, or 1 (No, Partial – needs improvement/guidance, and Yes respectively). Companies should score at least 6/10 for us to progress to an Investment Committee decision.

Indeed, a lack of alignment and initial ESG foundation have led us to pass on several companies. As a B2B software investor, we must also examine downstream impacts to consumers and businesses in our due diligence. We do this by mapping a company’s business model to relevant SDGs, such as those covering income inequality and poverty, health and wellbeing and gender equality.

Once we have completed our upfront diligence, our investment documents (term sheets and financing agreements) require companies to affirm their commitment to adopt a formal ESG policy – for which we provide a template – and support ongoing quarterly reporting.

The company founders we interact with view our ESG focus positively and embrace making consistent improvements, creating a richer dialogue and culturally-aligned long-term relationship between us.

We monitor our companies on a quarterly basis to ensure they are adhering to and making progress against the 10 ESG metrics and the relevant SDGs identified. If we observe any gaps, we facilitate a discussion with management teams and provide resources to address them and drive improvement across ESG metrics.

To do so, we leverage our relationship with Standard Metrics, a company (and portfolio holding) that helps private companies centralise financial data and investor reporting transparently.

Further, we recommend specific consultants (such as Align Impact), membership organisations (such as the PRI), resources (e.g. SASB), and technology solutions (such as Metric and Aligned Metrics), that can help efficiently quantify and track ESG metrics to drive improvement.

We believe ESG metrics are as important as financial measurements – failure to make progress on both will impact the potential for follow-on investment from our firm.

Example: Investment in a financial management start-up

Fin is an investor in Greenlight, a company providing financial solutions to families in the US. The company provides a digital platform that helps parents teach healthy financial skills and habits to their children while providing them access to financial services. Greenlight’s mission is to “Shine a light on the world of money for families and empower parents to raise financially-smart kids.”

Greenlight is one example in our portfolio of a double bottom line (social and financial) business that aligns directly to four SDGs (Quality Education, Good Health and Wellbeing, Decent Work/Economic Growth, and Reduced Inequalities).

Making financial products available to children is an educational opportunity that involves significant complexity and social, legal, and regulatory risks.

As a result, it was critical that we understood the company’s vision, technology controls, and compliance processes for mitigating those risks ahead of investing. To do so, our due diligence process included discussions with founders and employees, conducting direct family and channel partner references and reviewing the relevant regulatory rules and legal guidance from our counsel.

We approved the investment after identifying and communicating the ESG gaps that the company would need to start addressing and reporting on quarterly, beginning in September 2020. These included principally adopting a formal ESG policy and tracking on our specific metrics, including DE&I considerations at the board and management team level.

Greenlight’s progress in these areas is measured, reported on and discussed regularly across its increasingly diverse leadership team. As with other portfolio companies, we provided Greenlight with detailed advice, along with technology and consulting resources to tactically close the identified gaps. Through our active engagement with the company, it now has robust ESG policies and practices in place.

Since our investment, Greenlight’s ESG metric score has already shown improvement and we will continue to monitor progress going forwards.