Northzone News
17 July 2023
13 min read
Words: Anna Skarborg, Northzone

Measuring what matters: Northzone ESG Annual Report (2022)

At Northzone, our impact as well as environmental, social, and governance (ESG) considerations stand at the core of our operational ethos. We recognise their importance as investors and seek to influence the broader ecosystem.

As a firm, we’ve taken several initiatives to expand our impact and ESG agenda, but we’re “only” 40 people and our individual contribution, though meaningful, is inherently finite in its reach. This understanding amplifies our focus on the real game-changers: our portfolio companies. As they employ thousands of people every year and roll out products and services globally, they represent our most significant avenue to support transformative impact.

In this year’s portfolio survey, we have consciously evolved from an emphasis on diversity to a broader framework that encapsulates our overall portfolio impact and the wider framework of ESG performance. This transformation is fundamentally rooted in our dedication towards cultivating a more transparent and exhaustive dataset that serves the entire ecosystem, and a way for us to be held accountable for our own progress.

We’re conscious that there is plenty of room for growth and fine-tuning when it comes to the metrics we track, yet we firmly believe that the transparent sharing of our outcomes is a crucial inaugural step, for both our organisation and the industry as a whole.

We have now made our impact ESG reporting publicly available, contributing to the wider ecosystem, which can be accessed below. We’ve broken down below some of our key insights and listed them below for a more streamlined understanding.

Benchmarking and inspiring action

As minority shareholders in early-stage companies, we typically don’t advocate for establishing specific targets for our portfolio. We know that each company develops differently and we believe that driving impact and responsible leadership is only truly beneficial if it comes from within the organisations themselves. Instead, we use our role as investors to offer on-demand support, provide industry benchmarks and roadmaps to guide our companies and inspire action.

To this end, we have designed the results of our annual survey as an interactive tool where our companies have the ability to see their own performance in relation to not only overall Northzone numbers but also to other companies at different stages. We believe it provides a valuable framework for our companies to see how they relate to peers and a way for them to be inspired by others’ progress.

ESG is process driven — it focuses on the how — the internal principles, processes and practices that dictate the way in which an organisation operates, or behaves. Impact is outcomes driven — it focuses on the what — the social or environmental outcomes of an organisation’s operations or behaviour.

Our potential positive impact

Before looking closer at portfolio ESG considerations, it is important to understand what potential positive impact that these companies have. We continuously assess this by looking at whether our companies’ mission statements and business models directly align with any of the 17 Sustainable Development Goals (SDGs).

In 2022, approximately 90% of our portfolio had a direct correlation with at least one SDG, based both on the number of companies and the volume of invested capital. Our greatest potential positive impact were in Industry, Innovation and Infrastructure (SDG 9) and Responsible Consumption & Production (SDG 12).

This observation primarily signifies two key insights:

The majority of our portfolio companies actively consider their role in shaping a more sustainable future right from the inception of their business models and include it in the company mission. This is a positive sign and shows that our companies overall want to be an active part of the solution, already from the start.
However, while mission alignment with SDGs provides a promising indication, it’s not a sufficient indication of actual impact. The fact that 88% of our companies have SDG-aligned mission statements does not make us an impact investor. Rather, we see these as areas where our companies could potentially make meaningful, positive contributions to global sustainability efforts and where we should support them.

Although powerful to understand the interdependencies of global development, the SDGs were not drafted to categorise impact companies and therefore, should not be used as the sole impact criteria. To understand whether the investments are actually impactful, the Global Impact Investment Network (GIIN) offers important, complementary defining guidance. The GIIN positions impact not as a “benefit”, but on the same level playing field as financial return and defines impact investments as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial”.

We believe that it is important to emphasise this more outcomes based definition as more capital is looking to be deployed in the impact space.

The EU SFDR’s definition is also helpful as it defines a “sustainable investment” as an investment into an economic activity that either demonstrates a contribution to an environmental or social objective, or contributes towards an economic activity identified within the EU Taxonomy while doing no significant harm and promotes good governance (SFDR 2019/2088 Article 2.17).

Measuring what matters

In order to create action-oriented impact and ESG understanding, we have chosen to design our annual survey based on our portfolio materiality assessment. This is a weighted compilation of the most important ESG areas in the industries that we invest in. By doing this each year, we can consistently guarantee that our metrics remain pertinent to our portfolio.

In 2022, our companies’ most pivotal ESG topics were Responsible Product Design, Employee Health & Wellbeing, Data Privacy & Security, and Diversity & Inclusion.

And as a first and perhaps most important finding of the survey, we were very happy to find that our companies are starting to measure what matters. A majority (over 70%) have implemented initiatives focusing on critical areas such as employee wellbeing, data management and anti-discrimination measures.

While the majority of companies don’t have a dedicated individual to steer these crucial policies, we’ve seen a rapid adoption of ESG leads as well as environmental and social topics being incorporated in management roles. As we move forward, this is a key area where we can offer strategic guidance – and assist our portfolio companies in driving change, more specifically by learning from what others have done and adding dedicated talent.

Interestingly, we are also seeing that most companies have some environmental initiatives in place already from very early stages, the most common ones being Virtual meet policy and Waste recycling. This also represents a great potential value-add of us as investors going forward, harnessing learnings from implementing and following up these initiatives and distributing to the portfolio.

Diversity and gender pay gap recommendation

Expectations of founders in understanding and responding to the challenges societies face are rightly high, especially when it comes to VC-backed companies. For us, building a gender-diverse team is core to business models being future-proof. We, ourselves have a 50/50 gender split in the investment team, and a majority of female staff across the entire business – hopefully inspiring our founders to do the same while actively looking at increasing our exposure to female-founded companies.

Across our active portfolio, we’re seeing encouraging growth in gender diversity: 15% of our founding teams, 17% of our board members, and 19% of senior management identify as female. While we know it’s not enough, we’ve seen this dataset improving through the years and know our companies are deploying serious strategies to improve gender balance.

We’ve also measured Unadjusted Pay Gap this year, a brand new metric, as we address the gender gap. Our initial findings show that employees identifying as male earn 17% more than women, regardless of role or seniority – this is slightly better than the industry’s 23% average (source: Ravio) and has still obviously room to grow. We are recommending that all our companies start measuring their unadjusted gender pay gap in 2023 as we believe it’s a very actionable number. We will be working closely with our portfolio company Ravio to support the portfolio on how to measure and address this gap going forward.

It’s also worth highlighting the EU regulatory framework stepping up on these matters: under the Transparency Directive, companies with more than 250 employees will be required to share information about how much they pay women and men for work of equal value, and take action if their gender pay gap exceeds 5%.

Carbon footprint and moving beyond offsetting

Northzone has been a member of Leaders for Climate Action (LFCA) and has been offsetting our business travel since 2019. In 2022, we undertook a full carbon footprint for the portfolio and set an internal carbon fee. Instead of going for traditional carbon credits, we’ve decided to donate this fee to the Milkywire Climate Transformation Fund together with our friends at Spotify, Klarna, PANGAIA and many others. The fund’s goal is to achieve maximum long-term CO2 reduction.

Even though most of our portfolio companies are pure software-based businesses, we believe that all should strive to be part of the climate solution as early as possible by understanding their carbon footprint. 35% of our companies calculate their carbon footprint, which we will extend to the entire portfolio over time. We will also focus our efforts on reduction pathways, as we believe it has an immediate impact on reducing their footprint.

We believe this move maximizes our impact beyond the “neutrality” concept. Further, we believe that collaboration and innovation are key to solving the climate crisis and this setting allows us to support and track the results of catalytic research in new reduction and removal techniques.

Charting the path forward

This 2022 survey brought many actionable insights to us as investors and we hope that it can also benefit the industry at large. In response to these findings, we’ve launched dedicated internal work streams to guide portfolio companies seeking to excel in key areas over the coming years, including ESG responsibilities, carbon footprint analysis, diverse hiring, gender pay gap analysis, data privacy as well as other areas of tailored on-demand support.

Our aim is to continually refine our approach, leveraging our learnings to become more founder-centric and action-oriented in the coming years. Always making sure that we measure and follow up on what matters to our portfolio. Thanks for reading!