For more than a decade, tech companies have demonstrated their ability to catch most of the economic growth, which suggests that we entered a winner-takes-all economy. At the same time, we are coping with multiple and pressing climate and social challenges. We are already outside the Paris Agreement trajectory and social disparities are widening. The increasing occurrence of climate issues and the growth of social inequalities are the symptoms of a more global issue: the misalignment between economic growth and common good.
Thus, companies have a major role to build a more sustainable world. Through employment, use of resources and social influence, the companies driven by the objective of building a more sustainable world can accelerate the change dramatically. Accelerated by the digitalization of the world, tech oriented businesses have the ability to bring innovative solutions for climate and social issues and to increase their reach by scaling quickly.
1. The digital trend
Software and tech are still eating the world. Marc Andreessen penned his famous “Why Software Is Eating the World” essay in The Wall Street Journal ten years ago. Today, the idea that “every company needs to become a software company” is considered almost a cliché. No matter your industry, you’re expected to be reimagining your business to make sure you’re not the next local taxi company or hotel chain caught completely off guard by your equivalent of Uber or Airbnb.
These companies have built new monopolies / oligopolies in their respective markets such as advertising and content for Alphabet, social media for Meta, cloud and retail marketplace for Amazon, OS and enterprise software for Microsoft, customer relationship management for Salesforce, retail and payments for Alibaba... Thanks to their dominant position these companies are now able to generate important amounts of cash-flows from their operating activities to finance new products and services and to disrupt new sectors. The fact that Amazon spends more in R&D than the whole Italian economy or that Apple is worth more than the top 100 British companies are two signs amongst others of the power of these new tech giants.
Tech's strong consensus has translated in 2021 into a massive performance divergence with the rest of the economy, whether these companies are listed or not. Perhaps the most dramatic manifestation of this phenomenon can be seen in the year-end picture of the US indices. The weight of the five largest market capitalizations in the S&P 500 (Apple, Google, Facebook, Amazon and Microsoft) represents 23 percent of the index as of January 1st, 2022 but also 12 percent of the index's profits. Never before has a stock represented more than Apple in this index, which is supposed to represent the entire US economy. Without these five technology stocks, over a three-year period, the index would barely be up..
The recent correction witnessed on the Nasdaq stock index does not diminish the importance of the analysis: their market share, profit generation, growth rate and accumulated war chest make them powerful and essential players, which are, by the way, accelerating the digital transformation of the world through their own development.
2. The impact trend
The market is already very active with an estimated 1,000+ European already funded companies striving to build a more sustainable world (source: Crunchbase); and this number is growing significantly with strong transition dynamics from “classic” businesses. In the United States, some unicorns already exist in that segment like Rubicon, a software platform providing full-service waste management and recycling.
Now all economic players (government, employees, customers, suppliers) assess if and how a company has a positive or negative contribution to the climate and social issues.
Nevertheless, the sanitary crisis brings to light the unsustain ability of this economic model: until now, tech created wealth for only a small number of people (founders and engineers), sometimes threatened hundreds of thousands of jobs, did not solve the climate issue and clearly worsened social inequalities. Actually, this sanitary crisis helped governments and citizens to realize that our future economic growth should be adapted to be more sustainable. And now all economic players (government, employees, customers, suppliers) assess if and how a company has a positive or negative contribution to the climate and social issues.
3. At the intersection of the two trends, there is an answer to our environmental, social and societal challenges• We are convinced that the proportion of Impact companies will increase in the coming years for the following reasons:
• Rising awareness of climate issues by the entire population and in particular by business leaders who wish to make their companies players of this shift: according to a poll from IPSOS-EDF realized in Europe in 2019, 70 percent of people are expecting political leaders to act for the planet;
• Integrating ESG issues is also a way for the company to attract the best talents from the new generations and to meet the growing demand from consumers for sustainable products and services: for instance, according to a poll from Regions job, companies values are now one of the top three criteria for candidates, far from salary.
This increase in the Impact Proportion can be observed in a more tangible way through the following examples: growth of Label B Corp: +39 percent CAGR 2017/2020, increased number of European labels (SRI, FNG-Siegel, LuxFlag, Towards Sustainability, Umweiltzeichen, Nordic Swan Ecolable, Greenfin Label), strong activity of the Tech For Good in Europe led by entrepreneurs & VCs with the UN Sustainable Development Goals framework at core, and finally a strong increase of the total AUM in solidarity savings (x3.2 in 2019 vs. 2018).
To accelerate their growth and achieve their impact ambition, these companies require a new kind of investors, with growth tech expertise and impact know-how. In particular, an investor capable of monitoring both financial and impact performance and to align its own objectives with them.
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