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Balancing act: The growing importance of delivering both financial returns and measurable social and environmental outcomes

As a heath impact fund, Cross-Border Impact Ventures’ current investment vehicle focuses on investments in business that have the potential to transform the lives of millions of women and children. Annie Thériault, Managing Partner, explains how ESG and impact considerations are key to the firm’s investment processes…

How are you and your clients integrating ESG considerations into your firm’s decision-making processes, and what steps are you and your clients taking to ensure ESG factors are effectively managed within portfolio companies?

Our current fund, the Women’s and Children’s Health Technology Fund, is a health impact fund. As such, we prioritise investing in companies with technology offerings that have the potential to generate a life improvement for at least one million people in emerging markets within a decade of investment, while still meeting typical venture capital return expectations by commercialising their technology in North America and Europe. The companies we invest in are Series A/B companies in early revenues (typically less than $10 million) and therefore, our ESG screens are performed to uncover areas of the business where companies may need to focus to maintain or gain market leadership positioning for the long term. It’s really an integral part of our investment work and aligns with our company’s philosophy. We want our entire portfolio to generate strong financial performance and health impact, and choose to invest in companies that also demonstrate a genuine commitment to strong ESG principles. We see it as both driving performance and mitigating risks.

What ESG-specific opportunities are emerging in the private equity industry in the near future, and how are you positioning your firm to take advantage of them?

We are seeing more and more foundations moving their entire portfolios towards impact investing. The movement is slow, but the trend is being driven by the fact that the foundations that have been dabbling in impact investing for a few years are pleased with the results. These foundations want to see true, deep and measurable impact as well as financial performance. We are also seeing funds of funds launching with similar priorities. ESG is just one integrated layer of diligence for these investors.

That said, it’s not a movement we’re seeing broadly for larger firms that are still more focused on ESG factors than impact initiatives,. This is one of the reasons why we also use and promote the use of ESG analysis in our investment processes.

How are you and your clients creating investment opportunities that generate measurable social and environmental outcomes while delivering financial returns?

In our sector of women’s and children’s health, social impact aligns with deeper market reach, so creating measurable social outcomes doesn’t trade-off with delivering financial returns. It’s really never been one or the other. However, what it does require is expertise to determine which opportunities offer the most impact relative to returns and risk. When we look at the risk/reward/impact paradigm of our investment opportunities, we’ve found that reward and impact are highly correlated. The women’s and children’s health markets are also large and in need of investment capital after decades of underinvestment, so there are many opportunities for us to consider.

In what way does the approach to risk management in the context of ESG and private equity investments differ from traditional risk management?

At the venture stage, we conduct a much more in-depth evaluation of companies compared to larger businesses reaching the private equity or public company stage. For example, it’s not uncommon for us to meet every single employee of a company! One of the key differences is that we can go much deeper in evaluating ESG parameters, but must also right-size the systems companies use to monitor and manage these factors.

What is your view on the current regulatory environment for ESG in private equity? What challenges do firms face to ensure compliance?

As an Article 9 fund in Luxembourg, we have certain reporting requirements relative to ESG, and our investee companies don’t always have the data to provide the answers. We work closely with management teams to establish the relevant processes and policies to be able to report the data we require and believe this sets them up well to grow to become world class businesses.  Sometimes, this requires a bit of convincing, but most of the time, companies are thankful because they get to leverage the data they collect for us when dealing with other investors, grant applications, and ultimately their own reporting.

The other challenge we face is that compliance isn’t always clear. We aim for the 70/30 rule and think of our reports as being an MVP which we can improve over time as guidance becomes clearer. We don’t let perfect get in the way of getting started!

Annie Thériault, PhD, CFA, ICD D, Managing Partner, Cross-Border Impact Ventures – Annie Thériault, Managing Partner at CBIV, has been immersed in impact investing, venture capital, royalty financing, and capital markets throughout her career. As a venture capital investor and venture advisor, she worked with high-impact companies to mobilize more than $100 million in non-dilutive capital. Annie was previously a director on the boards of several North American venture-backed companies, is an advisor to crowdfunding fintech company FrontFundr, and, prior to the launch of CBIV, was Chief Investment Officer at Grand Challenges Canada. Annie obtained her PhD in Management from the Rotman School of Management at the University of Toronto, is a CFA Charterholder, and holds the ICD.D designation. She also has a master’s degree in Business Economics from Wilfrid Laurier University and a Bachelor of Science with First Class Honours in Chemistry from Mount Allison University.

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