Certain consumers seeking out companies that have socially responsible products and services or that have a focus on environmental, social and corporate governance (ESG) is nothing new. Recently, however, evidence has emerged suggesting that investors, both retail and institutional, are increasingly taking these social factors into account when making decisions about how to allocate their investments.
According to a recent study by the Responsible Investment Association, the Canadian market for responsible investments has grown by 49% over the past two years and has surpassed $1.5 trillion in assets under management. This suggests that Canadians are becoming more willing to support social causes not just through their consumption choices, but also through their investments.
While currently the majority of assets under management in the responsible investment segment are held in public companies, private companies can leverage this shift in consumer sentiment to increase their appeal to outside investors and potential acquirers who consider ethical or socially responsible factors when making investment decisions.
In the United States, there is evidence of this type of strategy already paying off for private companies. For instance, there are several venture capital firms who concentrate on investing in companies that have an ESG or ethical business focus. Most notably is DBL Partners (the DBL stands for double bottom line) which was an early-stage investor in both Tesla Motors and SolarCity. In Canada, change has been less significant and there are fewer institutional investors focussing on the ESG space. However, several Canadian investment advisors have added socially responsible investment funds to their rosters and some online brokerages now have the capacity to sort and filter stocks based on ESG factors.
The Canadian market
These trends provide two takeaways for private Canadian companies. First, companies that already have a focus on socially responsible products or practices should emphasize these attributes when considering a change of control transaction. Even if a potential acquiror does not have a specific focus on their ESG reputation, by highlighting its socially responsible credentials, a target may be able to extract a higher price from an acquiror.
Second, companies with a socially responsible focus should keep apprised of financing opportunities geared towards this niche. While private equity or venture capital funds with a specific focus on responsible investing may not be as prevalent in Canada as in the United States, the increased amount of interest in this area by Canadians suggests that such financing opportunities may be available in the near future. In the meantime, other financing tools such as equity crowdfunding or financial cooperatives may be attractive to socially responsible businesses.
The author would like to thank Mark Bissegger, Articling Student, for his assistance in preparing this legal update.
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