Greenwashing. Impact washing. Integrity. Authenticity. With huge inflows of capital into sustainable investment strategies, investors, managers and regulators need to be speaking the same language about ESG and impact.
This week I caught up with Jim Roth to talk about exactly that. Roth has an unusual CV among private markets investors. After around a decade in academia and then the public sector, in 2007 he co-founded LeapFrog Investments, a firm that shaped the private markets impact investing landscape and is still a leader. Since 2019, Roth has been building up Zamo Capital, a specialist investor that backs emerging impact firms, providing them with the capital and knowledge to scale.
During the discussion Roth shared his four steps to mitigate greenwashing. Unsurprisingly given Roth’s background, the steps are strongly impact flavoured. For LPs they serve as a quick DD checklist; for GPs as mini road map. Here they are:
Test number 1: The sniff test
First things first, says Roth, is to trust one’s gut and ask whether an investment or a strategy smells right. “There is no science to it, but it’s kind of a sniff test,” he says. “In theory you could spin almost anything to be impactful: anything that produces income and employs people, and anything that has any marginal resource saving in any production process.” Because of this, human judgement comes into play and the first of the four steps is to ask oneself: does this sound like spin or does it sound real?
Test number 2: The measurement framework
The second test is about measurement, says Roth. Specifically, it is about the framework used.
“My advice to managers is to use the one system of measurement that looks like it’s the most widely applied: that’s very broad and accepted by large numbers of very large GPs and LPs. My personal preference is for Iris+, because it’s been taken up by lots of large financial institutions.”
Roth also warns against the use of in-house measurement frameworks: “The challenge with that is you’re always going to have a problem of marking your own homework; you’re always going to do well.” As the industry resources have developed, the justification for in-house methods has diminished.
Test number 3: Tie profit to purpose
The third test is whether the fund invests in businesses or assets where there is co-linearity between profit and purpose. In other words, does the conventional financial incentive align with the intended positive externality. Roth gives the example of an insurance company serving low-income people: the more successfully that product serves its customers, the more likely the low income person is to renew and maintain the insurance safety net. Or a manufacturer focused on reducing the use of natural resources in its production process. The more successful it is in reducing its resource usage, the more profitable it becomes. This co-linearity between profit and purpose also helps ensure that post-exit, the impact is maintained; subsequent owners are disincentivised from moving to less sustainable or impactful products or practices.
Test number 4: Managing against targets
The fourth test is whether the GP works with management teams to set targets and actively manage against those targets. “It is making sure, for example, that the board sets the targets, and that those targets are reported to the board, and that the board is robustly engaging with management about what it can do to improve the impact,” says Roth. “That’s key.”
How would you amend Roth’s anti-greenwashing steps? Let us know: email@example.com