Therefore, the need for companies helping with the ESG goals is bigger than ever, so based on that we prepared a list of Ten ESG Startups that in our opinion, deserve the spotlight.

PlanA

Based in Berlin, planA is a startup specializing in monitoring CO2 emissions and improving the ESG index through their SaaS platform. Founded in 2017, their main goal is to accelerate the decarbonization of our society and prevent the devastating outcomes of worsening climate change. PlanA also implemented many reforestation, biodiversity, river protection, and local waste management fundraising projects. They offer their software to companies who aim at reducing and managing their CO2 emissions (planA Carbon Manager) and recently incorporated the ESG management module into their product. Plus, they recently secured $10M of Series A funding and opened a new office location in London!

Planetly

Founded in 2019, Planetly is another startup offering a Saas platform to help with carbon management for businesses in order to drive sustainability goals and implement ESG management.  Based in Berlin, the company currently provides their services to over 250 customers, including BMW, HelloFresh, and The Economist Group, and their in-house team consists of 25 different nationalities. In December 2021, Planetly was acquired by OneTrust, to incorporate ESG as a part of the product suite of OneTrust.

Apiday

Apiday extracts the relevant ESG data points and answers automatically for you. Based in Paris, Apiday main product is a SaaS platform for corporate ESG data management. The platform helps to easily collect all ESG data in one place, collaborate with third-party ESG consultants and automate ESG reporting and certification processes. Founded in 2021, the company has been backed by Speedinvest and REVENT, and they secured their ESG.

Verkor

Verkor is a French start-up based in Grenoble that aims to fast-track production of low‑carbon batteries in France, serving the European market. Founded in 2020, it secured a landmark €100 million funding round last July 2021 – less than a year since launch. The funds will go towards the company’s expansion including the construction of the Verkor Innovation Centre (VIC) where the advanced battery cells and modules will be designed to support Europe’s net-zero goals.

Zolar

Zolar is a German solar power systems provider founded in 2016. Zolar helps its customer install solar power systems in their roofs – serving as a single resource for everything needed, from planning all the way to installation. Zolar aims to remove the barrier of the high up-front cost of installing solar power systems in the homes of individual consumers by offering consumers the option to rent a photovoltaic system for as little as €54/month. After 20 years, the consumer can then buy the system for a symbolic Euro and enjoy its benefits for another ten years. In November 2021, Zolar secured €20 million in funding via a special purpose vehicle with Berliner Volksbank, bringing its total funding to date at €59 million. Zolar earmarked the fresh funds for entry into other European markets.

Volta Trucks

Swedish electric vehicle manufacturer Volta Trucks is trying to revolutionize what is called “last-mile” logistics by electrifying and redesigning large cargo vehicles, known as Heavy Goods Vehicles (HGVs) in Europe, for middle- and last-mile delivery in urban centres. This way, collisions and carbon emissions caused by large delivery trucks are minimized. Founded in 2019, Volta Trucks raised €37 million in Series B funding last September 2021, to scale its operations, starting with a fleet of pilot vehicles in London and Paris. This last funding brings its total funding to €60 million.

Carbon Equity

Founded in 2021 and based out of Amsterdam, Carbon Equity is a climate fintech startup that enables people to invest more easily in climate funds. Carbon Equity makes it possible to invest in small ticket sizes starting from €100k. They plan to reduce the ticket size further in the future. In August 2021, Carbon Equity raised €1.2 million in seed funding from Dutch VC 4Impact. Making it easier to invest in climate funds will help make more money available to continue innovation in climate tech.

Calyxia

Calyxia is a French start-up based in Bonneuil-sur-Marne, Ile-de-France addressing microplastic pollution through its biodegradable microcapsules that aim to fundamentally change the way industries utilise microplastics. Calyxia is tackling an EU ban on all ‘intentionally added microplastics’ that will go into effect as of this year. Microplastics are found in controlled delivery products such as those active ingredients in crop protection and fragrances in detergents that eventually find their way into our water systems and are ingested by fish. In September 2021, Calyxia raised €15 million bringing its total funding to €23 million to date.

Biophilica

Biophilica is a UK based start-up. Biophilica converts green waste into a leather-like material which is fully recyclable and compostable, with its first alternative leather product range called Treekind. The leather-like aesthetic and material is non-toxic and contains zero plastic (PU or PVC), and can be used for a variety of product applications, starting with accessories, such as bags, watch straps and wallets. Start-up raised £1.2m in Seed round to bring its plastic-free leather alternative, Treekind, to market. US-based investor Rhapsody Venture Partners, known for their focus on hard tech and experience scaling lab-based innovations to broad market availability, led the round with the participation of Fashion for Good and previous investors from Biophilica’s Pre-Seed round.

Sunswap

Sunswap offer a zero-emission alternative to diesel Transport Refrigeration Units (TRUs) with energy prediction, Adaptive Battery CapacityTM and solar power, replacing diesel powered refrigeration. Sunswap secured investment of £3m from Barclays and the Clean Growth Fund, enabling it to accelerate the development of a fully electric, zero-emission alternative to diesel-powered Transport Refrigeration Units.

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Unless businesses act now, climate change will deeply damage economies, increase scarcity, drain profits and job prospects, and impact us.

Moreover, we already know that private sector innovation (with public support) accelerates the kind of rapid change we need, like nothing else. Studies directly correlate sustainable business practices, share prices, and business performance. Therefore, companies that develop robust Environment Social Governance (ESG) standards have better profitability. Those companies also have more robust financials, happier employees, and more resilient stock performance.

What Are the Consequences of Climate Change?

When it comes to climate change, money talks. Through regulations, incentives, and public/private partnerships, governments hold the keys to transforming and building the green economy. Similar to the industrial and information revolutions, governments must incentivize their citizens, businesses, and institutions to build a resilient future. Ultimately, governments will empower green business practices as not only an ethical option but also the lucrative one.

What actions would help fight climate change?

Renewable Energy
To begin, we can systematically replace our primary, fossil fuel burning energy sources. In contrast to fossil fuels, solar power, wind, geothermal, and biomass are renewable and clean energy sources that would reduce our carbon footprint.

Sustainable Transportation
We can adopt new, eco-friendly transportation methods. For example, we can reduce our carbon footprint by switching from fuel-operated to zero-emissions vehicles.

Air Pollution Prevention
Reducing fossil fuels and putting restrictions on industry emissions will help us reduce air pollution.

Recycling and Waste Management
We need to reconsider our consumption patterns and adapt our production methods. It is every individual’s responsibility to limit their use of non-degradable materials and recycle and repurpose where possible.

Sea and Ocean Preservation
Our oceans absorb greenhouse gases, which leads to ocean acidification, harming marine life. Along with reducing our carbon dioxide emissions, we should prevent overfishing and unsustainable development in coastal areas.

What can companies do to support the Earth Day and ESG mission?

Companies can support Earth Day by implementing an ESG strategy that follows and tracks Carbon footprint, reduce it, raise GHG awareness, and manage resources responsibly. Companies are discovering that it is no longer a choice between going green and growing long-term profits. Moreover, companies found sustainability is the path to prosperity. For humanitarian and business reasons, companies of all sizes must take action and embrace the benefits of a green economy.

Moreover, to further explain Earth Day and how it is connected to ESG, we have prepared a couple of examples of companies with ESG incentives.

Intel is a rarer example of a US-based company aligning its short-term incentives with ESG metrics. The company responded in 2019 to investor requests that it further disclose the ESG metrics included in the plan. These include metrics related to diversity, inclusion, employee experience and, as of 2020, climate change and water stewardship.

Danone links both its STIP and LTIP to ESG factors. Its annual variable compensation is weighted over three elements – economic (60%); social, societal and environmental (20%); and managerial (20%). In 2020, the social, societal and environmental portion Danone awarded based on strong employee sustainability engagement results, Danone’s 1.5° climate commitment and continued strong results on the CDP Climate survey. Meanwhile, Danone receives an “A” rating for three consecutive years.

Shell has included “sustainable development” metrics in its STIP for a number of years, including safety performance and upstream/direct GHG performance. In 2019, Shell responded to pressure from activist shareholders by including an “energy transition” metric in its LTIP (weighted 10%). The metric is based on a “mix of leading and lagging measures”: reduction in Shell’s net carbon footprint (a new carbon intensity measure that includes customer emissions), as well as growth in Shell’s power, biofuels and carbon capture efforts.

To sum up

Today, companies face increasing pressure to disclose decision-useful information on their sustainability performance. They also face a growing mix of regulations, standards and frameworks governing what and how to report. ​

To navigate this complex landscape of requirements, companies can seek ESG advisory. Our team at VX Associates will help you navigate the ESG climate and guide you every step of the way.

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The European Commission presented the EU green deal as a new growth strategy to address and tackle the most significant climate issues. Its main objective is to make the EU climate neutral by 2050 and reduce greenhouse gas emissions by 55% by 2030. The EU green deal plan will mobilize €1 trillion to support sustainable investment over the next decade, and it will develop a framework for private investors to facilitate sustainable investment. In that context,  the EU taxonomy is a classification system that clarifies which activities are considered environmentally sustainable. Providing clear guidance on determining whether or not an activity is considered as sustainable, helps companies to shift their investment where it is needed and protects investors from greenwashing.

The EU taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) play a key role in reaching the objectives of the European green deal.

Criteria for Environmentally Sustainable Economic Activities

According to Article 3 of the Regulation, an activity qualifies as sustainable if it substantially contributes to one or more of the six environmental objectives set out in the Regulation. Furthermore, the activity does not significantly harm (DNSH) any of the objectives and it should be carried out in compliance with minimal safeguards, e.g. The International Bill of Human Rights and OECD Guidelines for Multinational Enterprises. Lastly, the activity needs to comply with the technical screening criteria that the Commission has established.

For each of the six environmental objectives, the Commission will issue delegated Act with detailed technical screening criteria. A first delegated Act on sustainable activities for climate change adaptation and mitigation objectives was published in 2021. Therefore, it has been applicable since January 2022. We expect the second one to be published later in 2022, while for the other four objectives, delegated acts are announced to be published later on for application in 2023.

The process of determining whether an economic activity is considered sustainable can be summarized in 4 steps: identification of activities, technical screening criteria, DNSH criteria and social safeguards criteria.

What Companies Fall Under the Scope of the EU Taxonomy?

The EU Taxonomy applies to entities divided into three groups: undertakings that fall under the non-financial reporting directive (NFRD), financial market participants that offer financial products (asset managers, life insurance, occupational pension providers etc.) and lastly, the Regulation applies to EU and its member states measures, that set out requirements for FMP or issuers regarding financial product or corporate bond being labelled as environmentally sustainable.

Reporting Requirements for Financial and Non-Financial Undertakings

As of January 2022, financial market participants need to disclose the proportion of their activities that are considered “taxonomy-eligible economic activities “or “non-eligible “in their turnover, capital (‘CapEx’)  and operational expenditure (‘OpEx’) and total assets. In other words, large entities are not required to assess the Taxonomy – alignment of these activities in 2022. Furthermore, given the technical standard criteria which are at the moment only established for the first two environmental objectives, entities are required to report only on the activities contributing to those 2 objectives. Taxonomy-eligibility reporting in the first year of reporting should prepare undertakings for their alignment disclosures requirement, expected as of January 2024 for the previous calendar year.

Non-financial undertakings shall follow the same rules as for FMP for the year 2022. However, as of January 2023 non-financial entities should report the activities that are considered aligned with the EU Climate Delegated Act ( supplementing EU taxonomy regulation by establishing the technical screening criteria for determining the conditions under which economic activity is considered to substantially contribute to an environmental objective).

Impact on Companies’ Strategy and Business Model

It is important to emphasize how the EU taxonomy does not prevent FMP to finance or invest in activities that are not eligible to the Taxonomy. Likewise, not all economic activities which might contribute to mitigating climate change or support transition are mentioned by the Taxonomy at the moment.

However, EU taxonomy together with the other regulatory measures ( SFDR, NFDR, ECB guide on Climate-Related Risk, etc.) will most definitely lead to a major shift of capital into financing sustainable activities. Therefore, companies that do not change their business models to support or contribute to mentioned environmental objectives, will most probably lose their relevance in the market. Already now we have examples of large institutional investors, like Allianz and others, which have announced to shift their capital into green assets or companies that substantially contribute to a net-zero economy within the next 20 years.

Even the entities that do not fall under the scope of the Taxonomy, like SMEs, will be impacted indirectly. For example, as of 2022 and onwards, European banks will be required to disclose the so-called “Green Asset Ratio “which is the ratio of a bank’s loans and securities meeting the EU taxonomy. This will also include loans to SMEs. Therefore, corporates that are not obliged to disclose information under the EU taxonomy will need to agree on terms to exchange this information with the bank since they will be subject to the Regulation.

The EU Taxonomy will Continue to Develop

The EU Commission clarified how the Taxonomy expects to evolve. For example, technical screening criteria are still missing activities that are important to include within the Regulation. Transition activities – those for which there are no technologically and economically low carbon alternatives – must be reviewed every three years to establish whether they are still considered “transitional “ones. Clearly, the current six objectives may also change depending on the upcoming political discussions and findings.

Indeed, there are many uncertainties and questions regarding sustainable financing and the implementation of accompanying regulatory measures. All market participants need to be aware of how this sustainable transition process will affect companies at all levels. Therefore it is a priority to tackle this challenge by ensuring your company is undertaking all necessary steps to comply with the current requirements and prepare for the upcoming changes. Companies that are at the moment legally out of the reporting scope will not necessarily escape from it. The reason is that some of the financial counterparts they will have will be subject to this legislation.

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Carbon footprint is a measure of total anthropogenic emissions of GHGs resulting from a business, activity, product or service. This measurement covers the accounting of seven greenhouse gases which contribute to global climate change by trapping energy within the earth’s atmosphere. In order to reduce an organization’s carbon footprint, it is crucial to allocate emissions by their source. By doing so, an organization can focus on a specific aspect of its business and undertake necessary steps to reduce its GHG emissions.

Understanding carbon footprint

GHG Protocol classifies greenhouse gases into three categories – Scope 1,2 & 3. It is safe to say that there is no company that operates without contributing to all emission categories. Scope 1 accounts for all direct emissions that occur from sources owned or controlled by the company. For example, fuel combustion and emissions from company-owned vehicles. Scope 2 category accounts for GHG emissions from the generation of purchased electricity that is consumed by the reporting organization. Investing in energy-efficient technologies and/or switching to less GHG intensive sources of energy can greatly reduce Scope 2 emissions.

The last category, also known as “value chain emissions” (Scope 3), is an optional category to disclose. It accounts for all other indirect emissions that occur from sources not owned or controlled by the company. As such, they are the most difficult ones to calculate due to several factors. Those include defined operational boundaries, large amount of data to process, data availability and/or data uncertainties, unclear reporting guidance, and others. Examples of Scope 3 activities include business travel, employee commuting, extraction and production of materials, end-of-life treatment of sold products, etc. Regardless of measurement complexity, to set realistic net-zero targets, organizations need to consider these emissions. They represent the largest portion of the corporate carbon footprint. The way to tackle Scope 3 emissions will greatly depend on the organization’s sustainability goals and wider corporate strategy.

GHG classification system

According to the GHG Corporate Protocol, all organizations are required to quantify Scope 1+2 emissions while disclosing Scope 3 emissions is not required when reporting. As previously mentioned, organizations are encouraged to take into consideration Scope 3 to fully understand the GHG impact of their operations. As for Scope 1 and 2 quantifications, GHG Protocol provides detailed guidance and requirements on reporting Scope 3 emissions in GHG Protocol Corporate Value Chain Accounting and Reporting Standard.

Reducing indirect emissions over a company’s value chain is certainly the best way to address challenges. However, some companies may go for a less complex option which is carbon offsetting. The concept of carbon offset is to neutralize Scope 3 emissions organizations cannot eliminate. That is possible by investing in projects that reduce or store carbon – tree planting, solar cookstoves, wind farms, etc. Although this option sounds like the most convenient and least complex one to choose from, carbon offset is not a long-term solution. In a way, the opportunity to offset organizations’ emissions allows big businesses and individuals to continue with unsustainable practices. Therefore regardless of the emission calculation complexity, organizations should make an effort and decarbonize their value chain by making sustainability their top priority.

Understanding a full GHG emission impact of a company is the only way to focus an organization’s effort on the greatest GHG reduction opportunities and consequently, achieve internally set sustainability goals.

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We’ve researched the most recent ESG and sustainability trends for business in 2022. Here is what we have found.

Impact Measurement and ESG

Many companies are just starting on the sustainability journey, and this involves steps on measuring sustainability impacts. Moving forward, the top sustainability categories to examine include greenhouse gas emissions and energy. Does your business have a positive or negative impact on society, the environment and the economy? Sustainability is a component of a company’s broader ESG efforts. That is why mapping all potential ESG issues helps prioritize initiatives based on the level of impact.

Although ESG impact is hard to measure, it is not impossible. Companies can measure their CO2 emissions, and the impact created by the greenhouse gases. Therefore, CO2 emissions are an example of ESG impact that companies can measure in the form of a carbon price. Much harder to capture and compare are impacts on biodiversity and habitat.

Companies should measure their impact on sustainability and the environment. However, they should also take a step further and focus on deeply understanding the issues of their core activities. As an example, when Nike was critiqued for its suppliers’ labour practices in the 1990s, it took the time to interview 67,000 workers to explore the issues through their experiences. From this, the company was able to create a longer-term strategy involving disclosure, partnering with other brands to improve working conditions, and mobilizing community support.

Circular Economy

Companies and their leaders should explore how to incorporate circular economy into their product lifecycle. That said, CIOs should take a closer look and rethink their product strategy, vendor choices and end-of-life disposal process. In terms of environmental impact, a product has a production cost linked to the choice of raw materials, therefore – in a circular perspective – it will be necessary to certify its origin and the ethics of its production.

With respect to the circular economy, design thinking has an impact on product development. Product designers are asking how to provide value to consumers using a minimum amount of material. Understanding the possibilities associated with circular economy requires the expertise of many company departments as well as business partners.

Companies should rethink their impact and how their product fits into the circular economy, not only to meet consumer needs but also to think of their financial opportunity. Research by Ellen MacArthur Foundation, Towards the circular economy, suggests that each year some $2.6 trillion worth of material in fast-moving consumer goods—80 per cent of the material value—is thrown away and never recovered.

The organizations and companies who successfully incorporate circular economy into their product strategy stand to capture considerable value for consumers.

Supply chain sustainability

While conventional supply chain management focuses on the speed, cost and reliability of operations, sustainable supply chain management adds the goals of upholding environmental and societal values. Creating a more sustainable supply chain will be a critical initiative for most companies – and a complex and difficult challenge. The supply chain plays a great role in the ESG and sustainability trends. Increasingly, companies will need to connect the data gaps to help achieve sustainability goals across the supply chain. As an example, if the company wants to improve their supply chain sustainability, it should have several goals in mind such as; shipping finished goods more efficiently, proactively predicting logistics challenges and improving on-time performance. That will require building AI algorithms and logistic apps that could predict supply chain sustainability.

There are various expected and unexpected benefits of applying sustainability across the supply chain. As an example, back in 2009. Walmart announced the creation of a sustainability index. They rolled out in three phases including a sustainability index for suppliers, a life cycle analysis database, and a labelling system. This provides the consumer with the environmental measurement of the product they are purchasing (Bustillo 2009; Walmart n.d.). In the end, the various sustainability initiatives at Walmart have been positive public relations, and activities such as energy reduction have resulted in significant cost savings.

Research by Iowa State University on Supply Chains suggests, that the sustainable agriculture initiative requires the company to maintain a close relationship with
its raw-material/food suppliers.

Innovation has and will drive supply chain sustainability in the years to come. Two ESG and sustainability trends that will keep the momentum going in this area are the circular economy and data-driven supply chains.

Carbon footprint – ESG and sustainability metric

The dilemma facing companies is how and what to disclose about their carbon footprint and other ESG metrics. Furthermore, emerging frameworks for greenhouse gases are asking companies to be thorough in capturing the full extent of their emissions. In addition, some of the largest banks are starting to explore how they can channel indirect investments out from more carbon-intensive industries toward industries that are actively reducing emissions.

How can companies present these results across various indicators? Although, emissions may be more tradeable on carbon exchanges, making meaningful changes on other Scopes could also help improve relationships with regulators, investors, employees and citizens. There are three scopes of emissions and each company can define the scopes they choose to offset. Therefore, your company can choose any of the Scopes, such as using recycled plastics, meat deduction etc. American Express, for example, recently revealed their plan to roll out a credit card made from recycled ocean plastic.

To sum up, companies need to assess their entire value chain emissions impact. That said, companies should identify where to focus their reduction activities in order to get a truly meaningful outcome.

ESG and Sustainability trends – Green IT

IT structures and services that prioritize sustainability are important as part of the larger climate action movement. Companies should prioritize Green IT as more stakeholders are seeking ways for businesses to migrate to more sustainable energy solutions. Therefore, many companies are working to consolidate data centres and migrate to the cloud. Meanwhile, others are investing in autoscaling workloads to minimize their energy footprint or building AI systems.

On the other side, the government in Europe is giving companies a push towards sustainable and greener IT. As an example, EU Commission has proposed new regulations since 2021 for batteries, given their important role in net-zero emissions.

Impact sourcing

Sustainability is a critical aspect of a company’s ESG efforts, but it’s not the only one. Addressing workplace bias and creating better diversity, equity and inclusion strategies has become a critical focus for many organizations. Those require programs for gender and racial diversity, to include people with disability or others who face challenges in the traditional hiring process.

In the companies, the HR department should help with this process and advise on how they can support this program. These programs may include but are not limited to include people without a degree, or with a lack of credit scores. Therefore, the programs should include training programs, and support to new hires to be successful in their job.

Companies can benefit from impact sourcing by gaining talent, and an engaged workforce. In many cases, impact workers have higher motivation levels than the traditional workforce which leads to lower training costs. For example, there are over 155,000 unemployed graduates in South Africa. Over 35 per cent of graduate youth (age 15-29 years) in rural India are unemployed. Through impact sourcing companies tap into this alternate pool to augment talent supply.

To sum up, ESG and sustainability trends are here to stay and are already adapted by companies worldwide. Undoubtedly, IT teams will turn to technology in an effort to tackle sustainability and other ESG concerns. However, IT can also lead to high amounts of energy use, as is the case with supply chain challenges. Still, with helpful ESG measures and frameworks, and advice from the consulting companies these challenges can be overcome. It is time for your company to take action, and make progress.

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Sustainable finance is defined as investment decisions that take into account the environmental, social, and governance (ESG) factors of economic activity or project.

As a report, A Vision for Sustainable Finance suggests; “For ambitious financial reforms to be achievable and sustainable they must be fair and inclusive; their long-term success will be dependent on Europe’s ability to guide international standards. Reforms must address public as well as private finance norms, including institutional architecture and governance.”

However, the current crisis in Europe is making sustainable finance in Europe challenging. In order to manage trade-offs between short- and long-term economic support Europe will need to further develop its approach to financing climate transition. It will need to balance the transition risk and challenges faced by Central and Eastern Europe with the physical risks and impacts faced by Southern Europe, to ensure that no region is left behind during the economic transformation of the coming decades.

Financial flows towards a sustainable economy

Large pools of public and private capital will be required to make the investments that are needed for Europe’s economic transformation. The European Investment Bank and other national and regional public banks have a crucial role to play in the recovery. With the support of national and local governments, they can both ensure that capital flows to the right places.

The European Commission is assessing the potential development of a taxonomy of environmentally harmful activities to reallocate capital away from activities that are not in line with sustainability objectives. A growing number of financial institutions including the European Central Bank have voiced their support for the development of such a taxonomy.

The framework for sustainable finance can make it easier for public authorities to raise sustainable capital. The EU is already taking significant steps in this regard. Under the 2021-2027 Multiannual Financial Framework (MFF) and Next-Generation-EU (NGEU)5, the Union aims to spend up to EUR 605 billion on projects addressing the climate crisis and EUR 100 billion in projects supporting biodiversity. Of the EUR 750 billion allocated for NextGeneration-EU, 30% will be raised through issuance of NGEU green bonds. As the ‘EU climate bank’, the European Investment Bank Group has also taken important steps to support the transition.

Some Member States are still to be convinced that the transition is viable without further investment in fossil infrastructure, notably in Central and Eastern Europe where coal continues to play a key role.

Sustainable Finance Trends in Europe

In recent years, there has been a steady increase in sustainable investments in Europe, driven by both the public and private sectors. Incorporating sustainability considerations into investment strategies and business decisions has accelerated in the past few years. This is reflected in the steady increase in green bond issuance and in the growing integration of ESG assets into investors’ portfolios. Green bonds from private-sector issuers are still a small proportion of the broader corporate bond market in the EU (2%), though. In equities, there is evidence that ESG-oriented assets have outperformed conventional shares in the last two years. Barriers to ESG investment remain, however, with a lack of standardised information and risks of greenwashing.

Investor interest in sustainable finance has continued to rise: investors are increasingly integrating ESG assets into their portfolios and are considering ESG factors alongside traditional financial factors.

We expect a shift in asset allocation and bond selection toward investment strategies and companies that transparently disclose their ESG profile, risks, and opportunities. This is the time for everyone to pilot test the Sustainable Finance proposals in the market, for investors to ask and for corporates to disclose guidelines and build internal ESG experts on the many facets of EU Sustainable Finance.

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Governance criteria assess qualities of government leadership via indexes on corruption, rule of law, press freedom and political rights. The Governance Index gives equal weight to all four criteria. Croatia scores on Governance index 44.00, Corruption index 43.8, Rule of law index 56.5, while the Press freedom is index 0.0 and Political rights 90.5.

At the EU level, asset management companies will need to start announcing how they integrate ESG factors into investment decisions. In 2019 Croaita’s IPOS has adopted Supervisory Guidelines on the integration of ESG factors into investment and risk management of pension funds.

Bloomberg’s Environmental, Social & Governance (ESG Data) dataset offers ESG metrics, and here is how we can look at companies and how they are currently standing in terms of ESG practices.

As shown in the chart by Bloomberg, InterCapital Research in 2019, HT leads the list with an ESG score of 61.97, followed by Ad Plastik with 45.76. We noticed that many companies from Croatia are already publishing many ESG and sustainability reports. This is considered important not only from an environmental and social standpoint but also for companies to embrace a sustainability culture and position themselves in the market as leaders in sustainability. That said, ESG Investments in Croatia are becoming important part of any investors strategy.

Why does the financial sector play a key role in sustainability?

EU Commission has recognised the financial sector as the key player in implementing ESG in Europe. As the president of HUP, Ivana Hazic states; Investing in ESG is the fastest growing asset class in the world and opens thousands of new funds each year that invest exclusively in sustainable companies. Investors became the initiators of change, followed by governments and large financial institutions.  There is notably a high level of investments in ESG companies. Multiple types of research show that companies adopting ESG standards have better returns and less risk in the long run.

In Croatia, we have over thirty companies listing their nonfinancial reports on HR PSOR.

Our approach at VX Associates is to help you adapt to existing and future regulatory changes at EU-level. That enables us to anticipate and understand the issues in the rapidly evolving ESG landscape, allowing us to develop innovative solutions for and with our clients.

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Just over 10 years ago, JPMorgan and the Rockefeller Foundation, together with the Global Impact Investing Network (GIIN), published a report claiming that impact investment was an emerging asset class that would reach between $400 billion and $1 trillion in assets under management by 2020.

In 2020, the market reached roughly $715 billion in assets under management, according to GIIN. The International Finance Corporation (IFC) put the estimate even higher: $2.1 trillion.

According to Global Impact Investing Network, impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets and target a range of returns from below market to market rate, depending on investors’ strategic goals. There are four key elements:

■ INTENTIONALITY: Impact investments intentionally contribute to social and environmental solutions. This differentiates them from other strategies such as ESG investing, Responsible Investing, and screening strategies.

■ FINANCIAL RETURNS: Impact investments seek a financial return on capital that can range from below-market-rate to risk-adjusted market rate. This distinguishes them from philanthropy.

■ RANGE OF ASSET CLASSES: Impact investments can be made across asset classes.

■ IMPACT MEASUREMENT: A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance of underlying investments.

Impact investment has attracted a wide variety of investors, both individual and institutional, which include Fund Managers, Development finance institutions, Diversified financial institutions/banks, Private foundations, Pension funds, and insurance companies, Family Offices, Individual investors, NGOs, Religious institutions.

Croatian early-to growth-stage startups with an environmental and social impact benefited from the country’s first social impact fund: the €30 million strong, Feelsgood Fund, launched 3^rd October 2019 in Zagreb. The European Investment Fund (EIF) contributed to the Fund with €15 million, almost entirely covered by the European Fund for Strategic Investments (EFSI), the core of the Investment Plan for Europe, or the Juncker Plan.

Feelsgood Social Impact Investment Fund was founded by Dinko Novoselec, Renata Brkić, Domagoj Oreb, Pierre Matek. Feelsgood is designed to invest in Croatian and Slovenian ventures that have typical private equity/venture capital for-profit-aims like commercial business models. Led by the strong management team and ready to scale, but in addition, can and will deliver measurable social impact. Feelsgood is spotting and supporting businesses that can find a way to address, if they already have not, one or more of the 17 Sustainable Development Goals and make a measurable impact on a conscious sustainable strategy of their business models. Feelsgood Social Impact Investment Fund Portfolio is consisted of Mindsmiths, BE ON, TDA, Agrivi.

Why does Impact Investing Matter?

Regardless of where one lands on the spectrum, impact investing provides a tool for achieving social good with a wider array of assets than traditional philanthropy. Private foundations in the U.S., for example, can achieve social good with not only their 5% required annual payout, but also with the 95% endowment corpus that remains invested. To put this in perspective, U.S. foundations make annual grants totaling $60 billion, while holding assets totaling $865 billion.

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ESG investments are growing rapidly, comprising about 25 per cent of all funds under professional management, according to various estimates. At the same time, there are people who believe that you cannot make money through sustainability, social justice, and ESG investments. That said, it is time to establish some ESG standards for investors. The goal of ESG investing is to provide suitable returns and benefit the greater good. One of the ways it does this is by minimizing risk.

ESG portfolios not only have outperformed traditional financial assets this year but also a data analysis prepared by Morningstar concluded that almost 60 per cent of sustainable investments delivered higher returns than comparable funds over the past decade.

ESG investing has often been defined, not so much by globally accepted and agreed definitions and standards. Furthermore, several terms come into play for ESG investments. That includes: sustainable investing, impact investing, socially responsible investing, and more. Many investors think they can “do good” by investing with one of these objectives in mind.

While that may be true, industry experts have come to the conclusion that ESG investing needs standards. ESG reporting and data may help align what managers say they are doing with ESG outcomes.

How ESG investing is different

ESG is most like SRI in that it focuses on investing in publicly traded companies. However, ESG investors actively opt in to companies because of the impressive environmental, social, and governance attributes they’ve demonstrated. Sometimes, ESG homes in on companies’ material issues, which depend on their industry. For ESG investors, charitable giving is not usually a financially material aspect to consider. But climate change, along with its causes and effects, is a financially material issue, as global warming will substantially impact every company everywhere.

The ESG investment movement has every reason to be optimistic in the short term. There is growing investor and stakeholder momentum for the goals of expanded disclosure, improved corporate governance, and measurable plans and impacts, especially for climate change.

When rationalizing ESG investing with the greater SRI industry, it’s important to remember that ESG is also a stakeholder-centric theory, which argues how companies treat all their stakeholders will impact their long-term success or failure. Moving ahead, ESG investing has experienced a great deal of traction within the financial world.

ESG returns

According to Morningstar, investors can build global portfolios tilted toward high-scoring ESG companies without compromising return.

Companies with low levels of gender, racial, and other forms of diversity across workforces, management teams, and boardrooms lose out on intellectual capital and valuable perspectives.

On the other hand, companies that excel at engaging their employees to achieve per-share earnings growth more than four times higher than rivals, according to Gallup. Compared with the companies in the bottom quartile, those in the top quartile when it comes to engagement generate higher customer engagement, higher productivity, better retention, fewer accidents, and 21% higher profitability.

Plenty of data backs up the notion that high-ESG companies are also well-run, ultimately producing financial results comparable to or superior to their low-ESG peers.

Ethical investing has come a long way since SRI was a small niche in the investing universe.

Millenials adapting ESG

According to US SIF’s 2018 Report on Sustainable, Responsible, and Impact Investing Trends, total SRI assets jumped 38% to $12 trillion since 2016 in the U.S. alone. A frequently cited reason is that millennials consistently show a tendency to crave social responsibility, whether it’s in the products they purchase, the organizations they work for, or their investment portfolios.

Millennials are a massive generation, comprised of at least 71 million individuals who were born between 1981 and 1996 in America alone. Millennials represent $600 billion in annual spending in the U.S., a figure expected to grow to $1.4 trillion annually by 2020, according to Accenture.

Most millennials have yet to weather a major economic downturn before and so their investment strategy remains untested. In the event that we see a recession, ESG-related sectors could take a significant hit – especially if younger investors bail on their ESG investment theses under pressure.

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According to PWC recent research, over 1200 tech startups have arisen to the market. Investment in climate tech has grown at almost five times the rate of the overall global venture capital market, with similar growth seen in numbers of deals.

Consumer demand for sustainable business practices has rocketed. The first generation of ‘climate tech unicorns’ have emerged, with companies including Tesla, Nest, and Beyond Meat showcasing the importance of disruptive consumer brands that also deliver substantial sustainability impact.

Channeling sustainable investments is a critical challenge for the global financial system. Sustainable finance has, therefore, become an integral part of how many financial services firms operate.

What is sustainable digital finance?

According to The World Economic Forum, the definition of digital finance refers to the integration of big data, artificial intelligence (AI), mobile platforms, blockchain, and the Internet of things (IoT) in the provision of financial services.

Sustainable finance, on the other hand, refers to financial services integrating environmental, social and governance (ESG) criteria into the business or investment decisions for the lasting benefit of both clients and society at large.

WEF believes that blockchain represents a core element of sustainable digital finance — a new paradigm that combines emerging technology with environmentally conscious business models.

Moreover, blockchain technology along, with artificial intelligence, mobile platforms and the Internet of Things combined with ESG objectives, could help governments and organizations reach sustainable goals.

In addition to that, technology can also help raise consumer awareness about the environmental and social implications of consumption and allude them to more conscious sustainable choices.

Consumers behaviour affects sustainability

Consumer behaviour can affect investors’ decision to incorporate sustainability into investment decisions. A clear ESG commitment can also attract Millenials, as sustainable consciousness consumers. A 2019 Morgan Stanley Institute for Sustainable Investing survey of high net worth investors found that 95% of millennials were interested in sustainable investing.

In Switzerland, Deloitte research suggests that 42% of millennials started or deepened a business relationship because of a company’s positive impact on society or the environment.

Sustainable products are starting to demonstrate higher growth rates than their non-sustainable rivals. In the US, sustainability-marketed products make up just 16% of the consumer packaged goods market but are responsible for 55% of the growth.

The shift to digital persists across countries and categories as consumers in most parts of the world keep low out-of-home engagement. Food and household categories have seen an average of over 30 per cent growth in online customer base across countries.

Lastly, WEF believes that sustainable digital finance will play an essential role in efficiently channeling this capital to fuel innovation, growth and job creation, at the same time supporting the transition to a sustainable, low-carbon economy. The future is now, with the wake of COVID-19, digital sustainable finance could focus investors on more sustainable economic opportunities.

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