26 January 2021 - Newsletter

Impact investing and ESG: Impact-oriented investing in the healthcare sector

Impact investing and ESG are growing increasingly important. By all appearances, the trend towards impact-oriented and sustainable investment is unstoppable. Reason enough to talk to a company that since its inception has been pursuing an investment approach focused on financial returns, on the one hand, but is also concerned about the social impact of the investment, on the other.

Since 1993, SHS, the Tübingen, Germany-based healthcare investor, has been investing in growth companies and small and medium-sized enterprises to facilitate the development of products and services that benefit society as a whole. SHS has thus been pursuing impact investing long before this term existed.

In the next issues of this newsletter, Dr. André Zimmermann will examine the topic of ‘impact investing/ESG’ in greater detail. To kick this off, we asked the business development expert and Head of ESG at SHS a few questions about impact investing.

Editorial staff: A study issued in June 2020 by the German Federal Initiative on Impact Investing and the University of Heidelberg came to the conclusion that impact investing and ESG are on their way to becoming mainstream trends. How do these two approaches differ from one another?

André Zimmermann: Roughly speaking, ESG (Environmental, Social, Governance) investing must take environmental, social and corporate-governance factors into consideration. This is typically done by process of elimination. While the OECD has issued guidelines on the topic, these are not globally binding. Impact investing distinguishes between an impact-first approach, under which social or environmental gains rank higher than financial returns, and a finance-first approach. The finance-first approach as pursued by the SHS emphasises financial returns but imperatively takes social and/or environmental conditions into account as well. ESG and SRI (Socially Responsible Investments) investing are also impact-investing strategies in the broadest sense. The public debate also tends to group the various investment approaches together under the term ‘sustainable investing’, at times even confounding the terms. A clear distinction in the terminology used would be desirable. But the fact is: Impact investing is on the rise, and return and impact can indeed go hand-in-hand. For nearly three decades, now, SHS has been showing how this is done.

When did ESG and SRI become topics for debate?

The term SRI (Socially Responsible Investing) first emerged in the early 1990s. The underlying idea has been around for much longer, however. 200 years ago, for instance, Methodists in the USA and their founder, John Wesley, ruled out investments of money ilnvolving gambling, weapons, tobacco and alcohol. The term ESG Investing first came up in 2005 in connection with a study entitled ‘Who Cares Wins’ and published after then-UN Secretary-General Kofi Annan asked 50 of the world’s largest financial institutions to reflect on how the concept of sustainability could be brought to bear on the world’s capital markets. The term Impact Investing was introduced in 2007 by the Rockefeller Foundation. The aim was to describe a new type of investing that aimed at generating financial returns and a positive social and environmental impact at the same time.

How large is the market volume in the segment of impact investing?

The study mentioned at the outset, by the German Federal Initiative on Impact Investing and the University of Heidelberg, assumes a volume of nearly 6.5 billion euros in Germany for impact investing in the broadest sense. This comprises ESG, SRI, Finance First and Impact First. There is major momentum for growth here, as the importance of sustainable investing and funding is increasing among all players. The healthcare sector in which the SHS operates plays a central role here, as does the field of climate protection. Over the course of the coronavirus pandemic at the latest, together with the concomitant search for a vaccine, we have seen how important impact investing is.

What are the main sectors of interest for impact investing and ESG?

ESG is actually relevant across all industries; the focus here is on identifying and reducing ESG risks in the context of an investment. Particularly suitable candidates for impact investing, as we understand the term here at SHS, are the sectors that can have a positive impact on a social and/or ecological level, such as healthcare and life science, clean energy, education and sustainable agriculture.

What is the orientation of the SHS fund? Is it based more on ESG or on impact investing?

Investment decisions at SHS have been guided by ESG criteria for nearly thirty years. As one of the leading industry investors in the fields of healthcare, life science and medtech, however, the strategy SHS pursues is clearly one of impact investing. Looking at the portfolio companies against the backdrop of the current pandemic, it is quite clear that it includes companies that can really help us get this virus under control.

Could you please offer two or three examples of this?

Take GNA Biosolutions, of Munich, which a few days ago was granted special approval by the authorities for its highly accurate coronavirus tests. Or c-LEcta GmbH, whose enzymes are required for the development of a coronavirus vaccine under certain vaccine programmes. And in the field of logistics for highly sensitive liquids, products by our portfolio firm Single Use Support are in the course of becoming something like the industry standard. It is successful developments like these that also make us a little proud as investors.

What attitude do investors in the SHS fund adopt towards ESG and impact investing?

Impact investing and ESG have long since ceased to be an exotic topic. Both topics have definitely gained in importance over the past ten or fifteen years, including among the institutional and private investors at SHS. Today, these include well-known family offices, pension funds, benefits schemes, banks and savings banks, churches, health insurers and industrial firms. All these investors want to combine two objectives: solid financial returns and an impact in the social and/or environmental field. This is what we refer to as a ‘double-bottom-line goal’.

Where there is light, there is also shadow. How can an investor recognise ‘greenwashing’?

If companies essentially only talk about the positive aspects of their business activity, to the exclusion of all the negative factors, that should get your attention. That’s because an approach like this isn’t realistic! The development goals of the UN specifically target an open discussion of the environmental and social deficits of companies. We need companies that address the problems and challenges of their business environment and are willing to initiate change. It is only with an attitude like this that the transition to a sustainable economy can succeed.

How do you recognize reputable ESG or impact investments?

If an industry investor or investment company has been successfully active for many years or even decades in selected sectors (e.g. healthcare/life science/medtech or clean energy) – if it has achieved target returns while at the same time achieving social/environmental improvements in the sense of the ‘double bottom line’, that is a clear sign of a reputable investment.

What are SHS’s plans for impact investing in 2021?

First off, there is reason for hope that this year, thanks to joint efforts worldwide, we will be able to get the coronavirus under control with a variety of vaccines. I think it’s great that German companies and German venture capital are also playing a decisive role here. As far as SHS is concerned, we are always in search of promising investment opportunities in healthcare, the life sciences, diagnostics and digital health. As the coronavirus pandemic has shown, this sector is set to gain in importance. At the moment, SHS is still investing from SHS Fund V. However, the next fund, SHS Fund VI, with which we will consistently pursue our impact investing approach, is already in planning.

Thank you for the interview.