Private Equity companies are not usually associated with movements to help the planet achieve global goals. Yet just as traditional investment houses and venture capitalists have turned their attention to focus on companies that might make a difference so, increasingly, have PE firms.
In some ways it could be argued that they are perfectly placed to help companies align themselves to global goals, as they can leverage experience and expertise across their various client companies.
Yet in the pursuit of profit some have turned a blind eye to practices which while not illegal are certainly controversial. PE companies have also been slow to recognise how reputational issues are starting to impact the value of companies as consumers and businesses seek to move support and investment to firms that are seen to be making a difference.
One company that believes that PE firms ought to be at the vanguard of ethical capitalism is Stockholm-based Summa. It only invests in companies it sees as contributing positively to the areas covered by the UN Sustainable Development Goals (SDGs)
Here Reynir Indahl, Managing Partner, Summa Equity, details its approach and highlights how its portfolio companies are having an impact.
What’s the story behind Summa? What inspired you and was it always set up to focus on sustainability/ethical capitalism, or did you evolve that way?
My inspiration for founding Summa was the 2008 financial crisis. I was working at Altor Equity Partners at the time, and it took me by surprise, as I did not see it coming. I started really digging into the causes, including discussions with Nobel Laureates Joseph Stiglitz and others. The answers made me worried and pessimistic about not only the volatility and challenges in our economic system, but also the negative impact on the environment and the increasing social inequality. I became very disillusioned and decided to leave the private equity industry.
Then, through working with LGT Venture Philanthropy and Lightrock, a pioneer in impact investing, I became enthusiastic about how great companies with innovative solutions will be the drivers for forging a more positive path. In a volatile and uncertain world, our challenges are our best and largest investment opportunities. I founded Summa in 2015 with the core belief that those companies that develop innovative solutions to these challenges are the ones that will outperform. I wanted to prove that there doesn’t need to be a trade-off between doing good and achieving strong returns; it is co-linear and a win-win.
How do you align your vision and outcomes to the Sustainable Development Goals? What processes do you go through to ensure that the companies you invest in match your ambitions?
All companies have a positive or negative impact on externalities, ranging from climate change, to environmental degradation or social challenges. Therefore, to ensure that the companies that Summa invests in are maximising positive externalities, while minimising negative, we integrate sustainability and ESG into all stages of our investment and value creation processes.
Our first requirement in deciding whether to invest, is that the company must contribute positively to the areas covered by the UN Sustainable Development Goals (SDGs). Then, we also need to think commercially, to see that the company and its solutions can be scaled up to be a leader, ideally globally, within its niche. We also use ESG as part of our risk assessment to understand which stakeholders are affected by the company and in which manner, to properly assess both potential negative and positive externalities. We believe this approach serves to benefit our investors by capitalising on ESG opportunities and protecting value through reducing and managing risk. As part of this, we evaluate future climate change risks under the various IPCC (Intergovernmental Panel on Climate Change) emissions scenarios, as this may impact future value at exit for our companies.
Once a company is acquired, in the value creation phase, we place equal importance on revenue growth and driving increased positive contribution to the SDGs, so that the two are co-linear. Hence, we believe we have a more expansive and sustainability-focused value creation plan than other investors or buyers, and our targets for value creation are likely to be higher. It is fundamental to our investment thesis that a company’s positive impact on society and the environment should be a driver of value creation.
Can you give examples of companies that you have worked with that made a difference?
Norsk Gjenvinning is Norway’s leading environmental services group. Under Summa’s ownership, Norsk Gjenvinning, together with New West Gypsum Recycling, developed a solution for gypsum waste and opened a gypsum recycling factory, which has been instrumental in reaching EU targets for recycling construction waste. In Norway, gypsum waste is one of the largest waste streams in the construction industry with around 80,000 tons generated annually. Furthermore, before the factory, only 42% of construction waste was recycled in Norway, a long way from the EU target of 70% by 2020. Gypsum waste ended up in landfill despite having a potential recovery rate of over 90% and recycled gypsum powder having a very high quality. Through the joint venture, the factory recycled 50,000 tonnes of gypsum in 2020, not only reducing landfill but also minimising the need to produce and transport raw materials from Germany.
Another example is Olink Proteomics, which Summa acquired in 2019. Olink has developed technology that drives precision medicine by improving the understanding of the interaction of proteins and human disease, which is key to improving treatment and patient outcomes across many disease areas. To achieve precision medicine, we need to study proteins, but the complexity of proteins and the limitations in available technology have held back progress in the field of “proteomics”. Olink has solved this problem by developing technology which can quickly and accurately measure many hundreds of proteins from a small sample. The technology is used mainly by pharmaceutical companies and clinical and academic researchers in vital work to understand the variations of biology between different people, and therefore develop more effective treatments. Summa has been active in scaling Olink and finding ways to maintain a high level of growth and innovation, despite the impact of Covid-19 effects on its customers.
Finally, in 2019, Summa Equity acquired Infobric, a software and hardware company with the purpose of improving health and safety, sustainability and productivity in the construction industry. Productivity in the construction sector has increased by only 2% over the past two decades – in fact, no sector has performed worse. At the same time the sector is responsible for more than one in five of the fatal accidents at work in the EU and accounts for 40% of the EU’s total energy consumption and 35% of its greenhouse gas emissions. All this means there is a significant opportunity to improve safety, labour rights, efficiency and sustainability through digitalisation. Summa has helped Infobric maximise this opportunity by doubling revenues during our first year of ownership, through six software acquisitions and steady double-digit organic software revenue growth, inPriova addition to having established a new management team and significantly broadened its offering. This has allowed Infobric to advance from only tackling challenges such as undocumented labour, to a full suite of health and safety and productivity software for assets, tools and machinery.
Private Equity sometimes gets negative press for being a little too ruthlessly finance/results-focused? Is that perception going to change? Are there other PE companies that are also putting purpose first?
I believe PE ownership is one of the best forms of ownership and governance, as it is focused on long-term value creation. PE-owned firms have excelled during the Covid-19 period, as their ownership approach means that they are close to their portfolio companies, supportive, and agile in making changes and enabling decision-making.
However, PE firms have been slow to understand that the negative externalities created by their portfolio companies are not just a reputational threat but will also have a material negative value implication. Hence, the focus on purely financial results, has been too one-sided with some major blind spots.
Now, we are starting to see more private equity firms follow our lead by introducing ESG elements into their investing strategy, while some, such as EQT, are taking a fully integrated ESG and sustainability approach. Firms are starting to realise that putting sustainability at the core of strategic and operational decisions is now a requirement for remaining competitive and continuing to achieve outsized returns.
Covid-19 has definitely played a part in showing the impact that externalities can have, and made more firms consider the threats posed by climate change, resource scarcity and social changes. Investing in solutions doesn’t just made sense reputationally, it is the best way of building a future-proof portfolio, as well as attracting the best talent and satisfying the needs of investors.
What do you see as the biggest issues/challenges in ESG investing?
Greenwashing is still a serious issue, with many firms still treating ESG as a tick-box or marketing exercise, rather than putting it at the core of how they drive value and taking it as seriously as financial targets. Sustainability targets should be material, linked to the core purpose of the business, and correlate and be co-linear with financial targets. All leaders should be held accountable for reaching sustainability goals, and incentive structures should also reflect these priorities, in the same way as financial goals.
Another big issue, connected to the above, is that there is currently no consistent way of measuring and quantifying ESG impact, to properly hold companies to account. The EU Taxonomy is a positive development, which will bring greater standardisation to ESG reporting, but investors, organisations and regulators must aim to go further to move from box-ticking to showing real-world impact relating to those externalities that are material to each individual business.
Finally, there is now a consistently strong focus on the ‘E’ in ESG, however we need to put more focus on the ‘S’. Especially in the aftermath of Covid-19, which has exacerbated the rising inequality that we were already seeing, along with the increased polarisation in society and loss of trust in big business. We need to regain that trust and be seen as improving the social side as well.
What type of industries/companies do you think you can have the most impact on?
We have a thematic focus aligned with three of the biggest megatrends highlighted by the SDGs: Resource Efficiency, Changing Demographics and Tech-Enabled Solutions.
Within Resource Efficiency, Summa focuses on five segments that help to solve the world’s resource efficiency problems: Aquaculture and agritech, recycling, circular economy, energy transition, and water treatment and infrastructure. All five of these tackle different problems that need to be solved, including the need for sustainable food production, more efficient handling of waste and reduction of GHG emissions.
Our investment strategy in healthcare is centered around three universal challenges; cost, quality and unmet patient needs, where society’s failure to solve them leads to the development of an unsustainable global healthcare system. We look for companies and market niches that have the potential to move the system in a positive direction globally and that can make significant contributions over a long period of time. We refer to this investment strategy as “The Future of Healthcare”.
On the technology side, given our conviction that tech is a critical enabler for a sustainable economy, we have selected three areas where we see technology as having a meaningful impact, namely to: Improve health and well-being; drive sustainable productivity; and ensure compliance and transparency.
Finally, on a more personal level, the challenge that I am seriously concerned about is the loss of biodiversity. With the other challenges mentioned, I see quite a lot of positive developments and solutions, however the rapid loss we are seeing to biodiversity is even tougher to address. For that reason, we have, through the Summa Foundation, made a significant commitment to improving the big migration in the Maasai Mara and protect and regenerate ecosystems in the region.
Which of the emerging technologies – 5G, blockchain, ai etc – excites you most from a ‘purpose-investor’ perspective and why?
The biggest potential is in measurement and transparency. Measure what matters, and what gets measured gets improved. Blockchain, sensors, and artificial intelligence can enable full visibility of externalities throughout the value chain. This can be environmentally through GHG or circularity of resources, or socially to understand the social injustice in the production of goods and services.
Do you have B Corp status? If not why not?
We hope to have our B-Corp certification quite soon. I think all PE firms and their portfolio companies should be B-Corp, and as Mr Tata said: “the community is not just another stakeholder in business but is in fact the very purpose of its existence.”