Northzone News
31 July 2024
8 min read
Words: Northzone

Measuring what matters: Northzone ESG Annual Report (2023)

In early 2023, we took a significant step towards greater transparency by making our annual ESG reporting public. This initiative aims to foster engagement within our portfolio, promote transparency in the broader ecosystem, and hold ourselves accountable. For the second consecutive year, we are sharing our findings and progress through a public dashboard, highlighting some key insights below.

We have continued to expand both our team and our ESG initiatives, with the goal of influencing and guiding our portfolio companies through our own journey and learnings. Our commitment to leading by example is reflected in the range of new initiatives we have implemented this year.

Some of the newer initiatives we’ve included this year:

Gender pay gap.
Our analysis revealed an overall unadjusted gender pay gap of 7.02%, with a very minimal adjusted pay gap. However, when looking at the investment team it’s important to highlight that we have a negative unadjusted pay gap which is very unique in our industry. It’s important to note that the gender pay gap does not indicate unequal pay for equal work, but rather reflects the gender composition of our team and the level of representation in senior roles.
Parental policy.
We recognise the importance of supporting employees during significant life events, such as the birth or adoption of a child. We recently updated our parental leave policy to be globally standardised across all our offices, including 6 months paid leave for primary and 3 months paid leave for secondary caregivers and a return-to-work program.
Carbon footprint.
We have taken further steps to address our carbon footprint. We will continue to support Milkywire’s Climate Transformation Fund, with another donation based on our internal carbon fee. We do this as we believe that our carbon compensation should be linked to creating maximum climate impact, and that collaboration and innovation are key to solving the climate crisis.

Other initiatives. We updated our policies around sustainable travel, information security and cybersecurity, and started initiatives such as an annual wellness day (inspired by some of our portfolio companies!), a coaching stipend and increased healthcare coverage.

Our portfolio companies potential positive impact

As part of our Sustainability due diligence, we continue to screen our portfolio companies through the lens of Sustainable Development Goals (SDGs) and annually compile and weigh the results of our overall portfolio. As noted in last year’s survey, a vast majority of our companies are mission aligned with at least one SDG. This alignment doesn’t necessarily mean they identify as impact companies, but rather that their missions are closely linked to creating a better society.

Unsurprisingly, our portfolio continues to have a strong focus on Industry innovation and infrastructure (SDG 9) and Responsible Consumption and Production (SDG 12). Interestingly, we are seeing the effects of our focus on Health Tech investments and consequently Good Health and Well-being (SDG 3), rising to become one of the most important SDGs in our portfolio. This shift is highlighted by new additions such as Unobravo, Heltia and Tandem Health in our portfolio.

To help our portfolio companies navigate the complex landscape of ESG issues, we have developed sector-specific materiality maps for our primary investment sectors. These maps serve as valuable tools to identify the most relevant ESG issues in their industry so that they can better address and communicate their key ESG opportunities and risks from the very start.

We update these maps annually and weigh material ESG matters according to our invested capital. Based on our latest analysis, the most critical ESG areas across our portfolio were:

Responsible Product Design (including AI considerations)
Data Privacy & Security
Diversity & Inclusion

As we expected, the fast paced developments of generative AI have further highlighted the importance of responsible product design. This will be a core focus of our portfolio support throughout 2024 and has been included in this year’s annual survey as a separate metric to track more closely moving forward.

Annual survey findings

For our 2023 Impact and ESG survey, we introduced two significant changes.

Firstly, we expanded the scope of the survey to include Seed companies. In total, 70 companies were invited to participate, and 62 companies (88%) responded to the best of their abilities. This represents a substantial increase of 24% from last year’s participation rate.

It’s important to emphasise that our portfolio survey is voluntary, and we acknowledge there is significant room for improvement and refinement in our overall reporting framework and the metrics we track. We also understand that this voluntary nature may introduce potential bias, given the variability in the number of active companies reporting each year. Therefore, we remain committed to pursuing complete coverage and transparency in the coming years.

Secondly, we included two separate material segments based on our annual materiality review: “AI” and “Geopolitical stability”. These additions reflect our commitment to staying on the pulse of emerging trends and challenges that may impact our portfolio.

Our 2023 reporting dashboard can be accessed in full here, transparently sharing our process and outcomes.
Password: Northzone2023

Below, we highlight our key findings for easier digestion.

Carbon emission

Despite much of our portfolio being software-based businesses, 18% of them currently calculate their carbon emissions. We believe all companies should strive to be part of the climate solution early on by understanding their carbon footprint, so we will continue to encourage full portfolio coverage.

Interestingly, the challenges faced by carbon-offset-markets are visible in our data. While 25% of participating companies had some form of carbon offset scheme last year, this has dropped to 9% this year. This decline is partly due to the inclusion of earlier-stage companies in our survey, but it also indicates a clear trend, underscoring the importance of revitalising Voluntary Carbon Markets or finding alternative industry solutions.

That said, while carbon offsetting has decreased, travel limitation measures have increased, serving as an alternative approach to addressing carbon emissions.

Data privacy and security

We were positively surprised to see our focus on data privacy and security reflected in the data. The percentage of companies with someone in charge of data privacy has increased from 8% in 2022 to 63% in 2023. This is an important improvement!

Measuring impact

31% of surveyed companies are measuring their potential positive impact in some way. While we are curious how this compares to other generalist funds, for us, this was an encouraging number. We plan to follow up with more detailed questions next year to better understand these initiatives.

Female Representation & Gender Pay Gap

Although reported numbers show a small increase in female founders, we acknowledge that there is still progress to be made on this front. We have also seen an increase in board representation, bringing us up to 30% compared to the industry average of 17%.

The portfolio unadjusted gender pay gap has shown a growth since last year. However, this is influenced by the larger scope of companies and greater participation from earlier-stage businesses. Despite this, our pay gap remains lower than the industry average of 25%.

Female representation is always close to heart, and we continue to facilitate portfolio workstreams and events on this crucial topic. As an example, we recently invited a group of senior female engineering & product leaders to our office for a panel and group discussion, highlighting several key insights from the Ravio pay equity report published earlier this year.

We have also partnered with Witsend (a senior women in tech community) to increase the top of funnel hiring of senior women, across our portfolio and network.

AI and ethical considerations

2023 was a landmark year for AI, prompting us to include it as a new materiality focus in our portfolio review. The survey reveals that 44% of our companies incorporate AI in their core business strategies, with applications ranging from predictive modelling to health screening and financial management.

For companies not building AI-centric products, AI is still used to enhance internal productivity. Encouragingly, close to 60% of AI-using companies have already implemented measures to ensure ethical usage, though this remains an area for continued development and support.

Geopolitics

Given the geopolitical instability of 2023, we also examined its effect on our portfolio. While 8% of companies reported a distinct influence on their business, 55% did not experience it as a significant factor. Among those affected, common issues included high inflation, increasing cost of capital, and a decreased talent pool due to conflicts in certain regions. Some companies also experienced delays in hardware production and rising electricity prices.

We also found that 16% of companies conduct ongoing geopolitical risk assessments (some adding that it’s part of their supply chain assessment), while 34% do not, indicating an area for potential improvement in risk management strategies.

No company is the same, yet there is so much to learn from each other.

This year’s survey has provided us with numerous actionable insights and learnings, and we hope that sharing our perspective and approach can benefit the industry as a whole. Our portfolio support is guided by our companies, and it’s evident that there is a desire and readiness to engage in discussions and workgroups related to ESG and impact.

Our goal remains to consistently refine our approach, measure and follow up on what matters to our portfolio, and continue to find and back founders that will change the future.