Interview with Jannic Horne about ESG and impact investments

ImpactNexus was founded at the beginning of 2021 as a spin-off of the Borderstep Institute in Berlin. The company’s software products are currently aimed at investors who want to manage the sustainability of their portfolios. In this interview for the website StartGreen, co-founder and CEO Dr. Jannic Horne talks about current developments in sustainability regulation. He elaborates on why measuring the sustainability of startups is currently becoming increasingly relevant.

The original version of this interview was published in German on the website of the Borderstep Institute of Innovation and Sustainability.

ESG and Impact: What’s the difference and why are these topics becoming increasingly important for startups as well?

While ESG (Environment, Social, Governance) focuses on minimizing risk, impact investing is more about taking a long-term view of one’s impact. Impact investing aims to achieve a significant positive social or environmental change with the investments made. ESG criteria are now applied to look for non-financial risks that can have a material impact on the value of an asset.

Today, there are good reasons for both large companies and small companies such as startups or SMEs to look at ESG and impact. Investors consider ESG as a significant risk factor when considering new investments. Startups that are strong in ESG are considered safer companies because they have a lower risk of civil litigation or government fines, for example. In addition, more and more investors are specifically looking to make a positive impact. Particularly with regard to climate change, the number of impact investments is rising sharply. Climate tech, for example, is the fastest-growing startup sector in Europe, growing 10-fold in four years. In 2017, $1.1 billion was invested in the sector. In 2021, the investments stand at $11 billion. However, the benefits don’t stop at better access to capital: for example, the issue is becoming increasingly important both on the customer side and in the area of recruiting qualified personnel and can represent a decisive competitive advantage.

What is the situation on the side of the investors? What motivates them to become active in these topics?

Private capital plays a central role in shaping the transformation to a sustainable future. Legislators have also recognized this, which is why the regulatory environment at EU level for the financial sector is currently undergoing fundamental change. The EU Disclosure Regulation (SFDR) is particularly important here. The regulation, which came into force in March 2021, obliges financial market participants and advisors to incorporate ESG criteria within the entire process from disclosure obligations at the company and product level to advising clients, on investment decisions and risk management. From January 1, 2023, the corresponding reporting requirements will also be applied. The regulation will therefore also oblige venture capital players to underpin any decision-making processes relating to the product and company level from the point of view of sustainability.

In what ways does ImpactNexus become active here?

We help investors such as VCs or private equity firms and their portfolio companies to reduce the complexity of these developments and make sustainable decisions in a simple way. For portfolio managers, this means that they can gain insights into the ESG risks of their investments in no time at all. Simple reporting features help them as does the ability to track key sustainability performance metrics across the portfolio. Thus, many important steps have been taken to meet the demands of various new regulatory requirements.

What sets ImpactNexus apart from other software vendors?

What’s special about our solution is that we don’t just target investors, we take the portfolio companies by the hand with our software and help them. Our approach makes it easy for both the companies and their supporters. In addition, we are using AI processes to build a unique impact database that contains the social and environmental impacts on countless products and services. This will enable us to evaluate the impact of companies in an increasingly automated way. By the end of 2022, we will complete a first automated assessment for climate impacts. We will then successively add other important sustainability topics. In addition to the assessments, our tools also provide concrete suggestions for improvements to more sustainable measures, materials or processes.

“Impact” is part of the start-up name: How do the aforementioned themes connect to the concepts of impact measurement and management?

Like important international players, we ultimately understand the topic of impact as the overarching task. However, the precise measurement and management of impact based on the business model requires a very deep examination of a company’s own processes. This is a lot of effort. In addition, the measurement of impact very often takes place after the fact – often by then, considerable damage has already been done to people and the environment. Our solution enables early intervention in this process and models any effects. This makes impact management much easier. Measurement is then still necessary afterward. In our view, however, both are needed – good forecasts and then actual empiricism.

Are there any specific tips on what investors and startups can do to address the problem in a straightforward way?

Investors should ask themselves early on whether they want to address sustainability in their portfolio primarily as a risk factor or actually analyze the impact of the entire portfolio. According to the objective, one should focus on evaluating the appropriate targets and metrics for each company. Here, it is advisable to focus on the metrics that are particularly important. In other words, those that have a supposedly high sustainability impact. For a manufacturing company, for example, this might be annual greenhouse gas equivalent emissions. For a digital startup, however, the focus might be on diversity metrics, for example.

At ImpactNexus, we are working on successively further automating all relevant processes and enhancing them with intelligent recommendations on potential improvements. To this end, we are currently working on projects with DATEV as well as a research project as part of the national climate protection initiative. If you would like to learn more about this, you can find out more on our website and easily make an appointment for a demo.

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