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How B Corp can help shape a responsible approach to investing

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How B Corp can help shape a responsible approach to investing
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By Victoria Ferguson, Partner and General Counsel at research-led VC MMC Ventures

The term B Corp may conjure up images of Ben and Jerry’s – a firm as well-known for its altruistic endeavours as its Phish Food. But beyond the ice cream manufacturer, there’s a community of 4,000 companies in 75 countries that wear B Corp certification like a badge of honour.

These firms operate in 150 industries globally, so it’s very much not just an initiative for B2C brands; there’s room for VCs to join too. When MMC became a B Corp in September 2020, just 2.5% of B Corp members were equity investors but we’ve since seen a growing number joining the community since then.

The intricate process of becoming a B Corp

For all the diversity in size, location and sector of those involved, all certified B Corp businesses have one common goal: that business can be a force for good. That really hit home at MMC Ventures, as founders Bruce Macfarlane and Alan Morgan saw an opportunity to build on the firm’s own vision, which is grounded in the notion of balancing profit with purpose and using venture capital as a force for good.

Starting the B Corp application process isn’t something to take on lightly. There are more than 200 questions to complete, including detail on governance structures, environmental impact, recruitment, compensation and beyond. This presents an opportunity to reflect and develop on existing processes while exploring how they can be improved.

An 80-point threshold is needed to achieve certification, so any investor or company considering B Corp would do well to bear this in mind. A lot of the information required is so extensive that smaller businesses may not have it neatly stored. Anything that can be done to ensure processes, systems and documentation is aligned with the questioning in advance will save time when it comes to collecting evidence and submitting it to the analyst for review.

Victoria Ferguson

Victoria Ferguson

Considerations when setting ESG performance targets

The very nature of B Corp makes it an excellent tool to complement internal environmental, social, and corporate governance (ESG) initiatives because it requires companies to uphold standards.

There are of course alternative movements available for investors interested in ethical investing, such as the UN-supported Principles for Responsible Investment (PRI) that looks to encourage sustainable investment. Unlike B Corp, the UN PRI is predominantly geared around an investor’s portfolio, rather than the investor and their strategy. As a tool for benchmarking, it’s valuable, but it all depends on what the investor wants to achieve.

Increasingly, governments worldwide are recognising the significance of sustainable investing in the race to net zero climate change, which has changed the game for businesses and, as a result, their investors. Certain regulations must be adhered to in some cases, like the EU’s Sustainability-Related Disclosures Regulation, which demands investment houses reveal any possibility of ESG risks in investments.

B Corp won’t be for everyone and neither will the PRI or the next alternative. It’s crucial that each company takes stock of the options available and how the components of each suit to their overall business strategies and long-term positioning.

What a responsible investing framework looks like and why it’s important

B Corp certification is an excellent, professional method of measuring company performance and ESG targets. We take that force for good stance seriously at MMC, but it was essential for us that arbitrary targets weren’t enforced upon the early-stage businesses in which we invest – this wouldn’t have felt very responsible if we had dictated their operational direction and perhaps slowed down growth. Instead, we hold ourselves accountable and hope to offer inspiration to the portfolio through our actions.

A responsible investing framework ultimately needs to be aligned with the investment strategy and company management must be on board to help with key decisions. Outside support to implement such frameworks is available, in our case the BVCA Responsible Investment Advisory Group materials assisted us with developing our own. We will continue to learn and develop the framework and how we use it.

During the initial due diligence stage, founders will recognise the added value of working with investors that have an ambitious vision around sustainability and ESG. Once a term sheet is on the table, the investor and portfolio company can make an action plan. Investors often play an active role in supporting portfolio companies to improve their sustainability credentials.

The framework should help investors determine whether there are any red flags, such as pollution or supply chain issues. At MMC, we developed a list of excluded sectors that we will not invest in and this is helpful in sparking internal debate as a team and encouraging engagement.

The B Corp process must be refreshed every three years, so there’s certainly no time to get complacent. So as B Corp companies are forced to keep moving and adapting, this can only improve the operational dynamics of a business and better support customers, so that profit is always balanced with purpose.

www.gawdo.com

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