ESG vs Impact Investment. Bad and Good or Just Two Different Worlds?

By Konstantine Karczmarski

You have probably noticed that the words “ESG” and “impact” are used by somewhat different people and sometimes those who represent the impact are fierce critics of the ESG-ers. Meanwhile, there seem to be no contradiction as these two concepts belong to two very different domains. “ESG” is a corporate word, while “impact” belongs to the entrepreneurial mindset. ESG is about improvement, impact is about bringing, sometimes radical, change.?

As corporations grow big, it becomes more and more difficult for them to change their business models so the big ones have no other way than to resort to tweaking elements of their business processes and technologies to achieve ESG improvement and introduce good practices. It could be better but there is nothing bad so far. And here comes one of the reasons for justified rage of systemically thinking notable figures like Terrence Keeley (ex Black Rock). ESG goals trickle down to the middle management, who are driven by KPIs compatible with compensation packages and annual reports and all of a sudden ESG becomes malignant, ranging from greenwashing to enormous investment misallocation. A cruel question then: can buying ESG stocks force corporates to adhere to common sense and make the world a better place??

What kind of investment can balance this unfortunate abuse of good intentions? Let’s take a look at several industries to understand what the real impact might mean and why ESG doesn’t help with it??

Fashion industry. You may decrease pollution and recycle and increase salaries of workers, but the biggest factor of unsustainability is overproduction. If we analyze revenue sharing across the value chain we’ll discover that overproduction and subsequent overconsumption is not a bug, it’s the feature of the system. Reduce overproduction by half and the impact will be bigger than the effects of all typical ESG policies combined.?

Fruits and vegetables industry. The hundred-years-old supply chain and distribution system influences prices and quality so much that no matter how green your aspirations are, you won’t make neither farmers nor customers happy and healthy. Rebuild supply chain and distribution and you’ll get a “fruits and vegetables - based civilization”.?

Healthcare and wellbeing ecosystem represents a universe of goods and services that is extremely difficult to navigate unless you have a serious surplus of money and time. Build personalized data-driven patient journey and you’ll make the population surprisingly healthier.

Media - both social and mainstream - utilize business models that stimulate degradation and disinformation and there can be no legislation that can change it. Change content monetization models and you’ll get happier people.

These were just a few obvious examples.?

Re-painting this gloomy picture is what impact is about. So where is the solution that doesn’t fight “evil”, but creates good? Yes, as in the old formula? “evil is the absence of good”.?

Some may say “a new startup unicorn will emerge and save everybody”. It won’t, because any such startup will initially represent only one element of a non-existent cross-industrial value chain. It will shine in all it’s revenue-less beauty for awhile and then join hundreds of other inglorious revolutionaries at the cemetery of innovations. But what if we reverse-engineer the desired outcome/impact? We will see several types of required elements of success. Startups that represent key-enabling technologies and criteria for the missing solutions, agressive mid-size companies that drive technological change, large industrial players who support ESG-based transformation and can benefit from it in case all those smaller players are present and interconnected. Does this approach create contradictions between large corporations and others? On the contrary, it aligns interests of everybody, keeping healthy competition sacred. Moreover it keeps ESG within the boundaries of common sense.?

And finally, why does the title of the article contain the word “investment”? The proposed approach provides a different process and different risk-adjusted returns to investors. Firstly, since we understand the sought result agreed upon by participating larger players from complementary industries, the risks are significantly reduced. Secondly, investing in a portfolio of interconnected companies that represent one vertical, but are free to participate in others provides a great degree of flexibility. And thirdly, this approach allows us to invest into? startups that do not? and may not ever have any serious commercial traction and that are not overvalued. Where is ESG investing in this picture, you may ask? When you have the impact planned, ESG investing comes naturally.?