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The Covid-19 outbreak has posed massive challenges to our society, and one of the leading players in combating the pandemic was and is the biotech sector. Investors from all fields recognised this very early on, which led to a global investment sum of more than USD 13 billion in biotech companies in 2020. The investments in the biotech sector during the coronavirus outbreak are a prime example of responsible investing: investors helped to control the pandemic and found a revenue stream at the same time. Even though the coronavirus was the decisive trigger for a significant capital flow and significant investments from non-healthcare-focused investors in the biotech sector, the branch has been growing steadily for years. In Germany alone there are more than 700 companies active in the biotech sector, and they generated almost EUR 6.5 billion in turnover in 2020. The growth and the stronger focus on biotech as a way to contribute to a better world gained even more momentum and attention through the pandemic. By Dr Caroline E. Heil
The biotech scene is not the only sector with a strong link to environmental and social impact. To address the most pressing challenges like climate change, biodiversity loss and demographic changes, more and more businesses over all different industry sectors are following a sustainable business strategy. The goal is to have a positive impact on society or the environment (or even better, both) while also benefiting shareholders and driving business success. Long story short, more companies are focusing on the “three P’s”: profit, people, and the planet. This is known as the “triple bottom line concept”. And things seem to click into place now: in the investor’s world, there is a matching movement called “responsible investment”.
It’s a long story, and it needs to be told
The idea of responsible investment is not new. It emerged in the 1970s, when PAX World Funds launched the first socially responsible mutual fund in the United States. In 2006 the United Nations launched the Principles for Responsible Investment (PRI) at the New York Stock Exchange after they were developed by a group of investors, international organisations, industry and society. They were based on the belief that environmental, social and governance (ESG) issues should be strongly considered alongside traditional financial factors to positively affect the performance of investment portfolios. Today, the massive acceptance of the PRI shows that responsible investing is to be considered the new standard. The PRI network of investors implementing defined ESG principles into their investment decision-making process has more than 1,750 signatories globally, representing more than USD 70 trillion. This goes alongside several regulatory changes over the last 30 years pushing responsible investing, showing that there is a new understanding among governments that the financial sector can play an important role in addressing the pressing global challenges.
The good reasons meet the real ones
Responsible investment is an investment approach among all asset classes that explicitly acknowledges the relevance of environmental, social and governance factors as well as the long-term health and stability of the market as a whole for investment decisions. There is growing recognition and data to prove that ESG factors have a positive impact on investor returns as well as on non-financial values. This is why ESG factors are systematically used to complement traditional portfolio construction techniques: to better manage risks and improve returns. There are many examples of the direct financial values ESG recognition has, such as the reduction of long-term risks, lower share price volatility and higher and improved returns. Non-financial values differ from case to case, but can cover topics like reduced emissions, fewer human rights breaches, better working conditions or more transparency and corporate disclosure. An analysis of over 2,000 academic studies carried out by PRI on how ESG factors affect corporate financial performance outlined that incorporated ESG factors are related to numerous positive results, with just one in 10 showing a negative relationship.
Making money, doing good
The idea behind responsible investing is as easy as it is convincing: doing good and making money at the same time is possible. As evidence has increasingly shown that companies with ESG metrics in place tend to be more successful and bring better financial returns, more investors have implemented ESG values in their investment decisions. But we see not only increasing revenues when implementing ESG strategies, but also massive financial losses when ESG metrics are lacking. For example, the Deepwater Horizon oil spill, for which BP recorded a USD 53.8 billion pretax charge or the 2018 Facebook privacy scandal in which Facebook faced billions of dollars of loss from its market value after Cambridge Analytica was able to collect personal data from 87 million users without consent.
Impact investment as a form of responsible investing
Responsible investment, however, is a very broad term covering a number of different investment approaches. Some of the most common investment approaches are socially responsible investment, ESG integration, impact investment, sustainable investment and green investment. The most known investment approach at the moment is most likely “impact investing”: a particular environmental or social objective is followed with the investment, such as the goal to reduce carbon emission, fight climate change or find the cure for a disease. A very important part of impact investing is that investors are following up closely and regularly on the investment and its progress to make sure that the defined impact is achieved. Putting money to work for a good purpose and tracking the positive impact. While impact investment is strongly driven by the wish to do good, it is not an act of philanthropy. The purpose of the investment is still to meet the financial objectives of the investor. As impact investing is seen as one of the main opportunities to reach the UN’s Sustainable Development Goals (SDG), it becomes more and more mainstream. The impact investing scene is growing, and we see that every major global bank and most institutional investors like insurance companies or pension funds come up with impact investment strategies and the goal to drive SDG.
Looking at the impact investment scene, there are many positive examples to prove that an impact movement is going on: UBS as the world’s largest wealth manager, for example, raised USD 6.9 billion for SDG-related impact investments in 2020 and aims to invest a further USD 70 billion in the field by 2025. One of the biggest and oldest players in the impact investment scene is the Netherlands-based investor Triodos Investment Management, who have actively engaged as impact investor since 1995. They manage over a dozen sustainable investment funds with approx. USD 5 billion in assets under management in the fields of renewable energy, sustainable food and agriculture health care, and education. There is also some recent movement in the biotech sector: the biotech investment company MPM Capital has just announced that it raised USD 850 million with its “The Oncology Impact Fund 2”. The goal is to invest in start-ups and listed companies to develop innovative treatments for cancer and other serious illnesses. These are just a few examples on a very long list. To sum up: we see a positive impact movement for our planet, society and the biotech scene.
ABOUT THE AUTHOR
Dr Caroline E. Heil, former corporate lawyer and strategy consultant in food and agribusiness, is CEO of The New Meat Company AG, an impact investment company in the field of alternative proteins that is publicly listed at Düsseldorf stock exchange.