Building a sustainability function within a VC fund — first steps and learnings

This post has been authored by Mathew Joseph, Sustainability Director at Kinnevik and Steering Committee member at VentureESG. This forms part of a series of case studies from the VentureESG community.

Introduction:
This is a note on how we built the sustainability function at Kinnevik. Our intention is to share our learnings and takeaways, enabling our peers within the community to accelerate their learning as they embark on their own sustainability journeys. If you don’t have time to read the whole post, the
most important take away is to work towards full integration of your sustainability function into your investment team and processes. This will help the organisation achieve its strategic objectives without having separate workstreams related to sustainability. What you will read about here is a
focus on building a sustainability function that is strategic and operational. I do not cover regulatory compliance or reporting requirements, although I appreciate these are important for some funds and their stakeholders. I would also like to point out that this is based on our experience at Kinnevik, a listed investment company based in Sweden. For those who are less familiar with Kinnevik, we pivoted at the turn of this century from creating businesses to investing in strong business models, founders and teams.

The early days:
Back in 2014, after spending a decade at Kinnevik with our portfolio companies as a CFO and COO, I was asked to set up a function within Kinnevik to answer a question from our Board — “What are we doing to ensure the companies we invest in are built as long term sustainable and profitable
businesses?”. Tasked with answering this question during the fall of 2014, I set out to develop a framework and approach for what, today, we call the sustainability function. During the first year, we made a lot of mistakes and had more failures than successes. This helped us shape our sustainability strategy and approach. In hindsight, the best decision I made was to defer hiring a team, since I had not iterated the right approach to engage with our portfolio companies. I had to transition from being an operator to an owner, which was much harder than I expected. Some of the management teams within our companies were surprised that an investor was interested in the
long-term sustainability of their business. Very often, Kinnevik was the first company that asked companies about sustainability initiatives.

Defining Sustainability:
Sustainability, ESG (Environmental Social Governance), Responsible Innovation or whatever a fund decides to call this function could comprise of a broad range of topics. To remain relevant to portfolio companies, leadership teams should pick and focus on topics that are most important and relevant to them and where their teams can add most value to businesses. At Kinnevik, we chose the ESG Framework to drive our sustainability strategy and set specific goals related to diversity & inclusion and greenhouse gas emissions. We set and track KPIs to measure progress and provide updates to our Board and publish these results every year.

Tone at the top:
At Kinnevik, our main shareholders, our Board and our CEO are fully committed to sustainability. We believe that the only way we can truly deliver long term value to our shareholders is by building businesses on strong sustainability foundations. Instead of recruiting a sustainability team, we asked all members of our team to commit ten percent of their time to drive sustainability initiatives within the portfolio companies they were responsible for. Over time, we linked a portion of our team’s variable compensation to the sustainability performance of their companies. Setting the right tone at the top is critical to the success of a company’s sustainability strategy. It is vital to ensure that sustainability workstreams are strategic and not set up to meet demands from stakeholders, such as limited partners, regulators etc., which could result in tick-the-box initiatives. Some of the negative sentiments around ESG today arise from box-ticking approaches that are adopted by some companies.

Growing pains:
As we were early adopters, it was important to get internal and external buy-in from our stakeholders who were going to be impacted by our sustainability work. We had robust discussions with these stakeholders as we set out our strategy, targets and defined our approach. Kinnevik aims to create a culture where everyone is encouraged to express themselves, and we considered their
valuable feedback when designing our approach. While it was challenging to go through these growing pains, it taught us a lot about how our stakeholders viewed sustainability initiatives. This was important in the early days and helped us tailor our approach to our companies. I am often asked if we have found the perfect approach. The answer is obviously no — but we have improved significantly over the last seven years, and we expect to continue to evolve over the next seven years.

Expanding the team:
The sustainability team sets Kinnevik’s sustainability strategy and supports the investment team with executing these initiatives within our portfolio companies. During 2018, we announced ambitious targets for improving diversity & inclusion within Kinnevik and our portfolio companies. At our AGM in May 2020, we set out ambitious targets to achieve net zero greenhouse gas emissions from Kinnevik’s operations and reduce the intensity of emissions by 50 percent within our portfolio. We expanded our team to help support our investment teams and companies on a wider range of topics under sustainability. Today, we have a team consisting of myself and three other people at Kinnevik who spend a portion of their time on sustainability. We continue to encourage all members of the wider Kinnevik team to support sustainability initiatives within Kinnevik and at our portfolio companies.

Key learnings from our journey so far:
There are many learnings from the recent years (I could dedicate many posts to them!), and we continue to learn and evolve. My top three learnings are:

• Set the right tone at the top within your organisation. Understand and agree on the “why” before working out the “how”
• Be strategic in your approach to sustainability and integrate sustainability strategy into business strategy. If something does not make sense for the business, don’t invest time and resources on that initiative
• Create bespoke sustainability strategies and roadmaps that are fit for purpose for your companies
• Allocate necessary resources within your firm to help drive sustainability initiatives within your organisation and with your companies

Qualities to look for in a sustainability lead:
I am often asked: “what is the right profile for someone to lead a sustainability function within a fund or investment company”. It is hard to pinpoint specific qualifications or experiences. Neither I nor anyone in my team have ever worked with sustainability before we built our function out at Kinnevik. Based on what we have experienced, some qualities that are helpful to have are:

• Operational experience of running businesses — this will help build initiatives that are operationally sound and not just good on paper
• Creativity and flexibility to create bespoke plans that suit individual businesses while aiming towards to a common goal
• Gravitas to lead conversations around sustainability with strong personalities and the ability to listen to scepticism and take in feedback, which can help shape your sustainability strategy

Looking ahead:
The dream situation would be for me to make myself redundant. This would happen when the investment teams lead sustainability initiatives within their portfolio companies. We have made significant progress over the past seven years. Our function is unrecognisable to what it was in 2014. My hope is that is it will be unrecognisable seven years from now. To quote Robert Frost — “miles to go before we sleep”!