Ip Group (LSE:IPO) — ESG Forward - our approach to impact

0:01 Good morning, and welcome to the IP GROUP PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question or receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CFO, David Baines. Good morning to you. Hello. Good morning, and welcome to the second of our deep dives. These are slightly different from the normal kind of annual reporting cycle where we're just talking about important accounts. This is an opportunity for us to look at some aspects of our business, perhaps a little bit more detail than one could normally talk about. So about six months ago, we talked about our valuation policy, which at the time, we didn't think it'd be a particularly popular subject, but, like, about 200 people turned up to and was very warmly received. So we thought this would be a very good opportunity to look at another very important aspect of our business, which is, ESG and impact.

1:10 And we'll be covering questions like why is ESG important to IP GROUP, but also why is impact important, and what actually is impact? How is that different from ESG? We as a company always felt we were very naturally highly impactful. But interestingly, as the importance of ESG and impact arose and went up, we found it is very hard to communicate that fact. So that's one of problems we'll be talking about today. Now joining me today are our our CEO, Greg Smith, a a brand, our head of ESG will will also be joining us. But we'll actually be hosted today by Alex Edmonds. Now he has quite an extensive CV, and I certainly won't embarrass him by going through all of it. Just to say he is a professor, of finance at London Business School. He's done a a number of appearances at TED Talks.

1:57 In fact, he's had more than 2,800,000, watches on those TED talks. Hopefully, we'll be able to get that number out a little bit more today. He's written a number of books, including GROUP PY, which I think was a financial times book of the year. And last and as impressive as all the rest of it, Henge has been professor of the year in his time. So without further ado, I will hand over to him. He will be able to give a bit of background to ESG in the current market, and then we'll have a a discussion. Just to mention at the end, about quarter two, '10, we'll have time for questions. So using normal format, please ask questions, and I'll be able then ask that to to the full panel at that time. So without further ado, I'll hand you over to Hans. Great. Thanks very much, David. It's it's really great to be here to talk about the importance of ESG for long term financial value. So I'm actually not really an ESG person. So I'm somebody who cares about long term value, but why I'm so focused on ESG is this is something that does lead to long term value.

2:55 So why do I look at it begin with? So my first job was at Morgan Stanley in investment banking. And then what really struck me was even though financial incentives were so high, you could work hard to get promoted and to get a large bonus, Really, per person impact that very much mattered to an employee's motivation. So if you're a junior employee, you didn't go to the meeting, but your boss did. If he or she called you on the way back and said, this meeting went great. You know, the analysis that you did all weekend, this came up in the meeting, and this was something the client was really impressed by how much we understood the issue. So small things like that had a large effect on employee motivation even though rationally and economically it shouldn't have done because financial incentives were so large.

3:40 So then when I went to MIT to do my PhD, everybody else, because it was MIT, they were looking at tangible things such as cash flows and balance sheets, but I wanted to look at the human side of enterprise. Is it the case that employee satisfaction, whether people feel aligned with the organization, whether they they feel a purpose and a mission, is that linked to the long term performance of the company? And so I wrote a paper showing that companies which are in the 100 best companies to work for in America, those are companies that go above and beyond in how they treat their workers. They beat their peers by 2.3 to 3.8% per year over a twenty eight year period. So that's 89 to a 184% compounded. And then they do further tests to suggest that it's causation, not correlation.

4:29 It's employee satisfaction that leads to long term performance rather than the opposite. Once the company's already doing well, then it can start investing in its employees. Now that paper is viewed as a seminal ESG paper, but I don't mention the word ESG a single time in it. ESG wasn't really that big when I was writing it. I talked about long term intangible value. And then since that paper, my work has broadened to what we now call ESG, but I've always approached this with the idea that this creates long term value. And the thesis of my recent book, GROUP PY, was that if a company has a positive impact on wider society, then that impact will flow back and benefit the company in the long term. So impact is great for society. We can address some of the world's biggest challenges, but ultimately, we are companies or we're investors, and we do need a financial return.

5:26 And this question particularly that you see in The US, is this a distraction from financial returns? My research and practitioners also find that this is something which can be very synergistic

5:37 and symbiotic. Now if you were a bit of a skeptic and skepticism is obviously useful for issues such as this, you might think, do we really need a focus on ESG and impact? Shouldn't we just focus on profit as long as our focus is on long term profit? For example, if you were running a car company, would you invest in electric cars? Well, the answer is yes. Even if you did not care about climate change and a positive environmental impact, you might still invest in an electric car factory. Why? You would build a spreadsheet. You do what finance professors tell you, and you will forecast for the future cash flows. And as long as that spreadsheet is sophisticated and deep enough and long term enough, you will show that, yes, in the short term, there will be some losses, but in the long term, there will be some profits, and those profits will exceed the losses. A traditional financial calculation will say shift from petrol cars to electric cars, so you don't need ESG or purpose or impact for that decision.

6:45 But the core thesis of my work, which has been informed by lots of practitioner discussions, is that there are many decisions that cannot be reduced to a financial calculation. So no matter how good your spreadsheet is, there are certain investments that a company might not take without a view towards impact. For example, just to take a simple decision, would a company choose to provide more parental leave to their employees? Maybe you have some sense that if you do so, employees will be more motivated and more productive and more likely to stay. But to put this into cell c 23 of an Excel spreadsheet, how much more productive will the employee be? That's something which will be very, very difficult. And so if we live in a world in which all our competitors are trained by finance people and are used to spreadsheets, I'm making decisions with financial calculations.

7:38 The goal and the power of impact is that frees us from making every decision exclusively based on the financial calculation. Certainly, finance is really still useful, but are there additional dimensions to a business decision?

7:54 And can it be that a focus and impact will allow us to take some decisions that a business might not take otherwise? So this is why I, as a professor of finance, not philosophy or business ethics, and also as an ex investment banker at Morgan Stanley can be so passionate about purpose and impact. It's not only that it's good for society, but it's also good for the long term success of a business. Well, with all that said, you might think, well, why is there such a backlash against ESG at least in some quarters? Isn't everything that I said fully logical? Shouldn't this make sense? But there is a backlash. And before arguing that that backlash is politically motivated, we should first ask, is there actually truth behind the backlash?

8:40 And there are three possible reasons why there is some weight to why people might be concerned. So one concern is there are some people who claim that ESG always improves financial returns. We always have win wins. Doing good for society is always good for profit. And that makes a great message. It means we don't need to deal with trade offs. But even though my research and practitioner experience suggest there is lots of overlap, that overlap is not perfect. There might be certain ESG dimensions and impact dimensions which benefit society, but don't benefit the company even in the long term because we have externalities. So that's point number one. A second concern is that some ESG advocates put ESG on a pedestal above everything else. So when they evaluate a potential investment, they will look at its ESG credentials.

9:34 And sometimes that that will be given more weight than standard business principles, such as good management, good innovation, great capital allocation, those were important issues. They may be as important or sometimes more important than ESG. It shouldn't be that ESG dominates everything. And the third and final concern is there are some investors and some companies who claim ESG will have a huge amount of societal impact. So if you are a mutual fund, you might claim that if I'm to disinvest from fossil fuels, I will starve these companies of capital. But, actually, if you're selling in secondary markets,

10:13 you can't sell unless somebody else buys, and so your overall impact on that company's cost of capital may be more limited. So this is why it's great to speak to IP GROUP about this because as a primary investor, this is an example where impact really is something that you can achieve and you can justify a reclaim. But to discuss all of these issues in in much more depth, it's great to be able to speak to to Greg, the CEO and Graham, the head of ESG, about the the thorny complicated challenges of putting ESG into practice. So I'll first start with Greg. So so why is ESG such an important issue for you and IP? Well, I think you make some really excellent points. And if I I will say if you haven't listened to, some of Alex's podcasts and you're interested in this or his TED talks, you should very much do so because the framing of why growing the pie or or creating impact in wider society, is very good for financial return is a very common philosophy that we have here at IP GROUP. I mean, specifically on ESG and there's in their sustainability and there's impact specifically on ESG. I think there's there's sort of three main reasons that we focus on it as a business.

11:26 I know as brands spoke recently and let let a discussion at a conference around an article that was written in the Feet, which was talking about the fact that sort of ESG is done, and you've alluded to some of the reasons why. We we disagree with that. But one of the points that the author made was you should keep ESG concepts as amorphous as possible. It's in everyone's interest. Just keep them amorphous as possible. And our view is very much the opposite. We think that we should be specific about why we do ESG and how we go about doing it. Brian later is gonna come to talk much more about the the how we do it. I'm gonna talk more about the why we do it. I think the sort of first and foremost, we think that Sandy SG principles contribute to long term value in our in the portfolio companies in which we invest, which will in turn lead to greater returns, but will also lead to lower cost of capital for those businesses. So I think that's that's very important, and we are increasingly seeing ESG or impact or sustainability being involved in due diligence processes both by ourselves, which we've been, hopefully leading the market in, but also by co investors and investors into IP GROUP as a whole. So it's so it's it's very, very important. If you don't have a good ESG profile, then you can struggle to attract capital or best opportunities or to deliver the best returns.

12:47 Second area is around, the sort of a holistic view on risks, the risks of the business faces. We adopted the principles of the TCFD relatively early. I mean, The UK markets as a whole have adopted them early on an international stage, but we adopted those principles early to look at not just the risks around climate change, but also the significant opportunities around that. So we use it as a as a risk framework. And then I think finally, we there there's a whole load of other things you can talk about. Employee motivation, attracting and retaining talent,

13:18 these are all vitally important. But as a quoted company, we are increasingly under obligations to report against things like carbon emissions, diversity and inclusion, pay gaps, etcetera. And so that's it's important to for us to to have a proper due process on all of those matters and to report against them. Why is that important? Well, a, partly because we're told to, but also it does affect the rating that you get from rating agencies and an increasing amount of capital that is investing into liquid and equity stocks in The UK and abroad is through index trackers. And one of the best ways that you can influence whether you're in in the in the you qualify for or you're in the top end of sustainability funds, ESG funds, impact funds is to make sure that you've got good credentials and you rate highly.

14:10 So Brian and his team put a lot of work into making sure that we are, rated appropriately highly, above our peers, and that means that we're more attractive to, to to those tracker funds. So all those three points make good business sense, but they make such good business sense that some skeptics about ESG will argue, well, you don't need ESG to think about those things. Just good business will mean that you want to manage your risk and treat employees well. So so how does a particular ESG impact lens lead to you taking a different decision from just what would be good business? Well, I think that that's I I I thought about this question quite a lot, and the the slight trick tricky thing here is we we don't see them as as different. So I'm I'm never really trying to when when it comes to an investment decision, we're never really trying to rate impact above the financial return.

15:06 So we we our our purpose as a business is to accelerate power of science for a better future, and that's better better planet, better people. But we are a listed company. We're investment business. And in order to, have a right to operate, to have the capital to operate, we have to be able to deliver compelling financial returns. So the thing that links together our portfolio companies and the the the opportunities that we look to address are, one, that they address a significant unmet need in the world. Two, that there is a significant commercial opportunity. And three, that there is a deep technology solution to addressing those two risks or opportunities. And that means that in most cases, we're not looking to pick something which purely has an impact a positive impact on the world. We're looking for the the overlap that you talked about, sort of the, you know, the Venn diagrams, the overlapping Venn diagrams.

16:05 We start from the premise that's got to have a significant commercial opportunity and it's got to have a big impact on the world. And and what we think we add as investors, the thing where we are edges is understanding the markets in which we operate, trying to understand the dynamics of the markets in which we operate, being able to source novel deal flow, and that's the reason we work a lot with universities and seats of innovation, not just universities, seats of innovation, which gives us a differentiated access. But thirdly, we think our edge comes in understanding pricing and taking technology risk, and we aim to do that better than others. So that's maybe it's a way of sort of I I don't think we're avoiding the question, but I think it's we see the two things as as not mutually exclusive, but we certainly don't see impact as above financial returns.

16:56 Yeah. I saw that really resonates with me. It seems your your goal is to be a great company rather than just a company that's great at ESG. Just like I see myself as mine. My research and teaching is on long term value, not just ESG. There's many other drivers of of long term value. And then just more on your approach, Greg. So lots of companies nowadays, they claim to to care about ESG and purpose and impact. I'm sure many of these companies are are really genuine and take it seriously. What do you see in it is particularly distinctive about your particular approach to to ESG and impact? Yeah. So let me I'll I'll try and give you a few examples of how we think about that sort of that playoff between the financial and financial opportunity. So so an area that we focus a lot on with our future capital at the moment in IP GROUP, where we've got a very strong track record is in our energy transition, our fleet tech investing part, and that's a separate brand that we have, and we call it Keiko Ventures. And it's investing our balance sheet, our shareholders' balance sheet capital into energy transition, climate related technologies, and businesses that are looking to address that.

17:59 And the one of the reasons that we invest in that space is because there is a very, very significant cost and value opportunity that is gonna come about or is coming about because of the energy transition. That's the various factors is to do with growing and scaling innovation in order to get more clean energy versus traditional energy sources. It's to do with the cost of existing energy going up while

18:29 that transition is occurring. It's to do with the infrastructure that's gonna be required to deal with rising sea levels, for example. And it's also to do with, the cost of, as as crop yields are affected by climate change and the cost of food. You see that and we've seen that those, situations occur. So there's a huge cost or financial opportunity involved here, and the numbers are are very, very significant. So estimates are sort of 5 to 10,000,000,000,000 per annum in, in the energy transition and for the foreseeable. Let's put that in context. The world GDP is about 100,000,000,000,000. So you're talking to five to 10% of world GDP is is going to be related to investment in or dealing with the energy transition. So it's clearly a very, very significant area.

19:19 That being said, that's not the same as generating venture returns in specific investment opportunities. And I've said yeah, I said at the half year results, and I've I've said it more recently, we haven't actually done a single new investment through our Cleantech platform this year. And the reason that we haven't done that is not through lack of opportunity. We've got seventy, eighty things on the pipe Actually, at the moment in the economic cycle, we haven't found things that are sufficiently and appropriately priced in our view. That means we want to allocate our shareholders' capital into those opportunities. And there's some there's some fantastic examples. There's carbon capture technology based in The Middle East, which we looked at, and it's got some fantastic investors who have come into it.

20:05 And we've helped that business with things like IP strategy and along the journey, but, actually, we didn't feel that the the technology would scale commercially sufficient to drive a financial return. So it isn't we we although there is a huge opportunity there to generate impact and although there's a massive commercial opportunity, what we're actually looking for is the the the the conflicts or the overlap of that very big opportunity, the big societal need. They're both met in this case, but it has to be, able to deliver a venture return for us. And I think that's where our discipline and the fact that we have a permanent capital vehicle means that we can, take a you know, to take an appropriate view with our shareholders' capital. And I think that pricing valuation is just really important, so to put my public equity lens on, which is what I I know better.

20:52 There are many investors who say, well, let me just disinvest from a particular sector or invest in some other sector, and this might be based on ESG ratings. But if that is fully priced in or more than priced in, then you might be improving your ESG footprint, but you're not generating financial returns by

21:07 doing so. So ESG is just like any other financial issue. It's one that creates returns, but only if it's not appropriately priced. So you care about it, but you also care about it in terms of the the return potential as well. It's great. And so then when you think about just how this drives decisions, so when you speak about cleantech, those are great business decisions, and and one might even argue that a traditional investor will notice opportunities in cleantech. But have there been cases where you were maybe on the margin or undecided about an investment and then your focus on impact just led to the swinging one way when it could have gone the other way? I mean, again, on this one, I I I can think of many more examples where the impact has been very significant, and the financial return hasn't been sufficient. Or at least in our view, the financial return hasn't been sufficient. So there are there are many more in that category than the other way around.

22:00 I mean, it maybe affects our and this is partly due to our structure and and and the the long term nature of the balance sheet capital rather than being fixed life fund. But there are definitely, technologies that we backed that perhaps a traditional investor might say that is way too far in the future for us to be able to make a a financial case now. A couple of examples would be things like, quantum computing, so we were relatively early investing in the quantum computing space five, six, seven, eight years ago. A lot of what we talk about within our, our sort of tech enabled future, parts of our strategy is IP group being ahead of the curve, and that's partly because we interface with these these seeds of innovation. But and I'm so I suppose you could argue in that case, the potential impact of quantum computing on the world will be very big when it comes to, huge amounts of change in the way that we interface with machines and the way that AI is working. But equally, it's quite a long way off.

22:58 Probably a more extreme example, and we don't I'm not saying we did this for impact, but but but, again, sort of aligns with the thinking is we backed a nuclear fusion business, and we backed a nuclear fusion business from Oxford, at the point of which it was merely

23:13 some PhD work that was modeling the wavefront of, shock waves. And there was no empirical evidence, and we we backed that company very early with a very small amount of capital. And it took about ten years for them to empirically prove that you could actually create the fusion and the conditions required for fusion that was validated by the UKAEA. But I but, again, we did that because, actually, the financial opportunity is very, very big there, and it's a very novel approach to fusion, one that we think is is one of the few in the world that could be commercially relevant over the course of, you know, the next few decades, shall we say. So I I I struggle really to think of examples where we've actually said that the impact here is so big Mhmm. But the financial return is because, you know, we're we are a an an investment investment organization, and and there are others that will fill that purpose. Yes. If we have those situations often, we will then try to pair them up with either philanthropic or using sort of transitional money or or other sources of finance.

24:17 And so we're gonna move shortly from from the why to to the how, but still stacking at a high level. How is it that you incorporate impact considerations into an investment decision? So is it that you calculate a traditional net present value first, and then you have a separate impact assessment, and then those things enter separately, or will you try to have the impact integrated into the overall NPV so you just have one number at the end, or does it just depend on the investment opportunity?

24:41 Can can I sort of cheat and answer both? Yeah. We do we do the, we always do the traditional financial return. There are various scenarios that you look at. You're thinking about how you might you know, what what capital requirements is this business gonna have?

24:55 What's the exit likely to look like, or what would we like it to look like. And then we also look at various screens. So, again, sort of within the clean tech business, we look at sort of five do no harm type categories to make sure that we're trying to have a not a negative impact while thinking about the positive impact. And as you said, there were always playoffs. This is not a it's not a sort of a black and white answer in in each case, and and sometimes we refer things up to our ethics committee. We have an ethics committee which which brand leads and is shared by professor Gordon Clark who's a, you know, real sort of leading light globally on these matters. So we do we do contemplate those things. To to come back to that sort of the the thing that differentiates our what we're trying to invest in is big societal need and big commercial opportunity, and and and so we're looking for the the interface of those.

25:47 And so that's where things become intertwined. Yeah. It could take, Esteso as an example. So our our most, valuable therapeutic company, is a phase two, compound. So it's sort of a good way through the clinical validation process, and the the it's furthest through in a very, very big disease area called rheumatoid arthritis.

26:13 Rheumatoid arthritis is a really horrible debilitating disease for sufferers, and it affects about one percent of the world population. So a hundred and sixty five million people suffer with this disease, and there are various ways that you can treat the symptoms. Our compound, we believe, treats not just the symptoms, but also the underlying cause of disease and and reverses that. So it's gonna have a if it works, which is obviously why we're doing the clinical trials and why we've got risk capital, if it works, it's going to address a really significant need in the world. It is also going to have a huge financial impact. The the the value of that that those treatments of those cures is going to be very significant. And so when we're assessing things like therapeutic, you're obviously looking at market opportunity.

27:00 Market opportunity is is the same as this is the number of people who are suffering from this terrible condition who are going to benefit from these treatments. You do then get into things about pricing and availability, and that obviously is a consideration when we're partnering compounds. So that's that's very important. Then I can you know, another example would be in the case of Oxford Nanopore, one of our sort of best known investments. They are working with the World Health Organization, on TB and trying to, determine strains of TB that are antibacterial resistant or antimicrobially resistant. It's a it's a treatable disease, but more than a million people die each year around the world from TB. And that is something which we're very proud that the company that we seed invested in back in 2005 and that we invested in all the way along. We've we've taken all of our cost off the table, so we've done what good venture investors do. We've we've disinvested the cost from that. So we remain the largest shareholder in the business, but it is having a real world impact.

28:04 And in that case, it's the speed of the turnaround being able to get to an answer from a sample within a few hours because in Sub Saharan Africa, somebody's had to travel a long distance to get to a medical,

28:17 tent in some cases. And if they're not given an answer and given an appropriate treatment, they might not be seen again or they might not be seen for days. So it is it's it's really important. So that so that it does play into it, but I see them as as as very intertwined in those areas. All things are as as you said, you know, they're not always black and white as that, but in many cases, the commercial opportunity and the impact are are intertwined in in what we're doing. So I'd like to bring in Bran now, the head of ESG, just speak more specifically about the implementation and integration. So so, Bran, your approach at IP GROUP is called ESG forward. So why is it called that? What do you mean by that? And what are the main pillars of the ESG forward approach? Great. Thanks, Alex. So I I think actually ESG for many, unfortunately, can be a box ticking exercise.

29:03 So what I what I'm trying to do is to do ESG internally that adds value to us, to our portfolio companies, and ultimately to our shareholders. So I I come from an engineering and math background, and, you know, I spent quite a lot of time with investment banking like yourself. I also carry off. So I try and go back to first principles. And, you know, so whatever you're doing with respect to Asia, I always ask, you know, why are we doing this? And, you know, what what's what's it actually into The value that it's going to add to us, you know, and and to our broader stakeholders. And, you know, maybe actually if I can just go back to the origins of ESG, and it'll be interesting to understand where, you know, where we aligned and, you know, what your thoughts are on this also.

29:51 So I think, you know, from my understanding, the premise of ESG is that an asset doesn't exist in isolation. It exists as part of a broader system, and, you know, you have to understand how that assets sort of interfaces interacts and impacts that system and, you know, the how that system then impacts that asset, you know, becomes such a double neutrality if you like. To get a sense in terms of the longer term viability and the sustainability of that asset. Right? So so, you know, when they go into the thousand and four people, who cares when it's I think the premise and and historically, ESG

30:27 has always been used as a risk framework more more more so than, you know, the the looking at the value add aspects of that. And so, you know, which is why I think your work is, you know, really incredibly important because you are looking to sort of demonstrate and evidence the upside, you know, and evidence in the causality of sort of these ESG signals, you know, with respect to performance.

30:52 So that's really, I think, what underpins our our sort of approach to ESG. So it's actually moving from sort of just using ESG for risk, but also, you know, moving it to value and moving it from sort of box ticking to actually making it proportionate and relevant to to our portfolio companies and also moving it from sort of an ad ad and an after to to actually integrating into into what we do, know, which I think underpins, you know, the sort of thinking behind, you know, the ESG forward approach. I I mean, I I think actually, you know, I when I I I'm a fan of your book and your work, and, you know, in in your one of your TED talks, you say, you know, to have less emphasis on this short term and the quantitative and focus more on the long term and the qualitative, which I agree with. But I don't think you you imply that they're mutually exclusive. Right? So, you know, one of the things that we do as as Craig said is to actually try and produce such an evidential match that we can use to demonstrate the value that this is having, you know, for us. So, yeah, that's in essence, you know, the the pillars that underpin our strategy for the issue. And, again, that resonates a lot with me. So often people think about ESG as as do no harm.

32:15 So let's not be involved in any particular scandal. But then you view SG as only risk management, And so some companies may think, let's do the minimum possible to avoid a scandal, but let's not go above and beyond because that would lead into financial returns. But all the examples that Greg gave were about ESG being actively doing good, having a positive impact in society. And if we believe we have a positive impact in society, then some of that value will come back to us. So this is something which is not purely defensive. It's something that is poor, and it's really important because it's a value creator. And so what's interesting about a company like IP GROUP is that you can implement ESG both through stock selection, so investment selection,

32:53 but also through engagement through supporting the companies on their ESG journey. So can you talk a little a little bit about the the second part? So how do you help and support the portfolio companies? Sure. Yes. So so we make direct investments in in companies. So we have a sort of internal framework for that we call idea, which essentially breaks down into innovate, demonstrate, and elevate and accelerate. And the the principles behind that is actually, you know, we work with the companies to innovate KPIs and measures to co create and to help them to better evidence their their their impact that they have and the value that they had.

33:34 We do data collection, and we demonstrate we help them to sort of start to demonstrate where they are on their journey. We establish a baseline, then we sort of help them to elevate. So we give you know, provide support in terms of getting them to a good standard and establish all the hygiene and best practice around the issue. And, you know, we help them with the, in accelerating the value creation, so we provide them with the tools and support that they that they need to sort of really, you know, accelerate their you know, clear the the impact that they have. But also in terms of actually evidencing that and building the narrative around that. So, you know, we are working with various organizations that like, the value balancing lines to create a a framework to really help our companies to demonstrate the impact in a meaningful, defensible way.

34:39 Because I think that one of the challenges as a VC, because our company is in so early stage, is to provide a a model of impact, you know, that that is defensible, that doesn't include what I I would consider sort of nonsense numbers. I think that, you know, there are lots of approaches and methodologies around impact as you know. And, you know, oftentimes,

35:04 and speak when people speak about impact, they talk about, you know, few key things such as intentionality, conditionality, and, know, the measures, but also the counterfactual in terms of the actual contribution and, you know, what what your sort of input and investment has actually for what you're there. So, you know, we are actually trying to approach this in a methodological, systematic way. So that's And let's let's drill down on data because there's too many people that is the real potential of ESG, but also a big source of controversy for ESG. So on the controversy, so some people will argue that ESG data is not comparable between different companies. And the defense might be, well, that shouldn't be because the key performance indicators for one company will be different from another depending on the business model. But then how does IP GROUP approach this as a portfolio level? Because if you wanted to compare two different investments, if you're having two different sets of KPIs, can you compare their impact? Is comparability important to you, or do you want to have a tailored approach which is relevant for a specific company's business model?

36:11 Well, I I think comparability is important, and that's one of the reasons why I think a lot of impact models use a monetary amount to signify the magnitude of impact, whether that's potentially positive impact or negative impact. I actually think it depends. So the approach that we've adopted or that we're actually trialing out is to start bottom up. So we are creating an impact model. What we're creating, essentially, three different impact models. One for our team take, one for life sciences, one for deep take. And the reason we sort of the reason we are actually doing this is because we want the impact model that actually is meaningful to the company so that, you know, the company can identify with them, you know, you know, so that we get buy in.

37:00 And then, you know, so the the impact APIs that we are sort of co creating are very specific to the company. Mhmm. But the intention is, either as we sort of progress and as this matures,

37:13 then to see, you know, where where the patterns are, where there is actually logical know, where we can logically aggregate some of this information to present, you know, sort of a bigger thematic impact picture of messaging. But I think it's sort of counterproductive to try and take a, you know, top level framework and try and force it down, you know, onto a company when it doesn't necessarily fit because then, you know, you there's a disconnect and you you lose the buying. Right? So Yeah. And actually, before I get

37:44 to my next question, I just want to remark that that the word co creating, which is what you've used several times, that this really resonates with with me as well because sometimes you have investors who do write to companies this form letter saying we are gonna require you to report all of those those measures. And sometimes those investors don't really understand a particular company. Sometimes, at least in public equity, their goal is to say, we engage with x percent of our portfolio companies. So their goal is to write as many letters as possible. But you're saying, well, we do have some expertise, but also the company has has some expertise

38:14 that we don't have. So you see yourselves as as partners of the business rather than policemen trying to tell companies what to do. I I I completely agree. Yeah. I mean, I think it has to be a collaborative effort. I don't think so this goes back to the sort of yes, you forward principles. You know, it's about partnership led and, you know, doing something that's meaningful, and not not just for this purpose of sort of frameworks or box ticking. And then going to another challenge. Just I was gonna add in there. So we, as a group, are in the unusual position that we sort of straddle public equity and and private investment. Not say that not every there are other examples, but it's quite an unusual position.

38:59 And an increasing number of our shareholders at the PLC level are interested in answering exactly that question. What's the kind of aggregated view on metrics that they, in turn, can report up to their stakeholders, be it members in pension funds, be it investors in unit trusts? And we try to have and part of the reason that, we've taken place at Brand sparing this effort is Brand also does a lot of outreach to our major investors where impact is of particular importance. So an example would be Lion Trust. They're a top five shareholder of ours. We have a very regular dialogue with LINE Trust talking about what's their, impact measurement framework and how can we think about what the work that we're doing with these really small companies, 10 people, 50 people, and to try to bridge that gap to IP group scale.

39:50 Lying Trust has got exactly the same issue Yeah. At the tens of billions of scale. And so we try to act as an interface between those two views of the world. And so I think I think partly that's around having credible, quantifiable, but meaningful and useful metrics. And we've started with metrics at the portfolio company level, which are hopefully leading indicators of commercial success because they're not at the point in tracking things just for the sake of tracking impact, but they are generally leading indicators of commercial success. I'm hoping that that will be a way of thinking about impact, which is very complementary with financial return. But having that sort of role where we sort of sat between the youngest businesses and some of the biggest impact investors, certainly in The UK and and if not sort of internationally, is is is important. It's also valuable for us in our in our sort of partnership approach and cocreating these approaches.

40:47 Absolutely. And this this goes to the general principle that ESG is, in many cases, good business. And so we just want to implement fundamentally sound good business principles. So about thirty one years ago in 1992, there was the famous article in Harvard Business Review on the balanced scorecard. And the subtitle of that article was measures that drive performance. So why do we report this? It's not necessarily because external constituencies are forcing us to. It's because we truly believe these are measures that drive performance. Now they might be different from one company to to the other, but why we we're tracking them is these are fundamentally important for value creation for wider society, but also for us as as an investor. So going back to the the data question, Brian, another challenge that we have with with data is that data captures the quantitative. And to quote my own TEDx talk back to you, what about the qualitative aspects? So Greg mentioned early earlier diversity, equity, inclusion.

41:42 And so you can have demographic diversity statistics, but does that capture cognitive diversity, socioeconomic diversity, and also inclusion so you could have a broad mix of people, but how to ensure that they can bring their best selves to work and there's a culture which tolerates or actually encourages dissent. So how can you get a a handle on those more tricky issues? Because that might be where the real value added lies is in the qualitative, not just the the the quantitative. I I I agree. And I think, you know, we're trying to sort of build out the right sort of signals as a so my approach is to try and reduce, you know, the sort of questions that we you know, the they will that we, you know, how we assess our portfolio companies.

42:31 We there there are some firms that, you know, have maybe a 100 questions that ask very pointed specific questions that are sort of qualitative sorry, quantitative in nature. Whereas, what we are trying to do, know, is to try and reduce that to use a a sort of combination of both quantitative and qualitative. And the you know, with the emphasis on the qualitative questions to give us a sort of signal in terms of where, you know, where things are sort of trending in the right sort of direction. Just trying to think. I mean, you know, for example, attrition rate. Right? So that's, you know, quite a quantitative sorry. Yeah. A quantitative signal, but then, you know, we we also have an internal service around employee well-being and and how and net net promotion scores.

43:32 And there was actually give a more broader sort of signal in terms of, you know, whether people are you know, feel comfortable and engaged and, you know, which wraps up a few other sort of indicators sub indicators. So sub catch based within that. But, yeah, I I what I'm trying to say is actually, I think both are equally important. So so you already have a a robust approach, which is already integrated throughout IP GROUP. But, again, with the theme of ESG forward, how will you you will you evolve this approach going forward? Is is this are there new things that you'd like to add to it? I think it's creating greater sort of consensus across the community. So we we do a lot of work with other organizations like the operating principles for impact management.

44:21 So we call convened a working group for what see with them. And the purpose of that is to discuss a lot of these issues and see how we can progress the thinking and practicalities, you know, for specifically for our sector and the types of companies that we invest in. So I think those sorts of initiatives are really critical in terms of not just us, you know, going and doing this, but as as a collective, as a community, you know, furthering the thinking and approach, you know, to take take this to the next step. Well, there's tons more questions I'd love to ask both of you, but I'm sure the audience also has lots of questions. So let me just hand over to David to to field some of those. Thank you, Alex. What perfect timing, I would say. Quarter two, I was just thinking that was the moment to do. I yeah. I've got some good questions.

45:14 Some of them slightly spiky, so that should be quite entertaining. I'll I'll direct them at people. But, of course, if somebody else wants to answer, please feel free for informal format. So I'm gonna point to you, Greg. Isn't this is from Eugene B. Thank you very much for your question, Eugene B. Isn't ESG mostly important just for PR communication purposes? If you don't communicate it, you get bad press, which could harm your financial results. That's the question, or is it more than that? I've gotta get again, it's a bit of a both hand, isn't it? You've gotta be able to communicate these things well, and you've gotta take the brand. And I think Alex were both talking earlier about the protecting the downside, protecting reputation, having minimum standards on governance and things, which is a which is a downside protection, and then also thinking about it from an upside opportunity point of view. So I think you do obviously, you need to better communicate these things.

46:09 But I I think it's more fundamental. It's good business practice. It's having a consistent way to consider, your financial returns. But alongside that, we've been the fact that, you know, ultimately, the purpose of the business that we're operating is to accelerate power of science for a better future. And so if you if you don't have some quantitative and qualitative ways of considering that in your processes internally, you're probably not gonna as as the old sort of note, a road can take you to any destination. But if you don't sort of have a rough idea of the destination you wanna get to, the road might take you to anywhere. So I think you need to better communicate so you gotta have some idea of in that sort of direction you're headed. Alex, I think you probably had a view on that as well. Yeah. I I think it's a great question. I really appreciate the challenge. So so one question I encourage the companies and investors I work with to ask themselves is if we couldn't tell anybody we were doing it, would we still do it? And I think that's really useful because there are many companies which might only do it for the external reporting.

47:09 But if you want to do something distinctive, we're doing it even if we can't report it externally. For example, do I want to ensure that my workplace is inclusive, that in a meeting that people are willing to share their different viewpoints? Maybe this won't improve my diversity statistic, but this is still the right thing to do. So, certainly, there are certain things that you want to do because they're reported, and one might say that that's more table stakes. But where if we are truly committed to this rather than seeing it as a compliance exercise, that is where I think the real power of ESG is to improve the fundamentals of a business, not just to report in those dimensions. Excellent. Yeah. Thank you, Alex. The the next one, I think, is probably is one for you, Greg. You probably might have to truncate this because this one could go on for quite a long time, I suspect.

47:54 But anybody could anybody in the organization could, I hope, which is could you please provide tangible examples of how your products make an impact? And then there's a second bit, which I think we probably answered quite well. Do you try to quantify the impact of your products? I know we've talked about that. Some name of brand, of course, but, you know, I guess the question is what what of our companies and products are impactful? Yeah. So I I think I've given a couple of examples during the course of the conversation and how how far into the the webinar the question was was posed. There are the individual company level impacts. We're trying to do that through a framework which Brad has done, and we've we've worked with about 20 companies so far. So we've still got quite a long way to go. Another example that sort of maybe thinking about impact in a slightly different way is a business that we have, a a fantastic business, which is very, very purposeful in the way that it's led by the CEO, Martina, but but also in the way that it delivers value. So we have a company called Featurespace. We own about 20% of this business, and they are doing machine learning applied to detecting and preventing fraud.

49:03 And they are very because it's a, you know, it's a fintech type company, they are very good with data and have lots of nice data. So, for example, half a billion consumers are protected from risk using feature based technology. They process 50,000,000,000 events per year. They have a 75% reduction in false positives, so that's the very annoying situation when you go to make a credit card payment and it's refused and you have to come up with some other solution, you're very embarrassed, or you have to go and try and find money from somewhere else. And 75% of fraud attacks are stopped as they occur with a one to five, false positive ratio, which is very, very good. And so this the impact of that is in those numbers. The bigger impact is where does the where does fraudulent money go? It goes into financial crime typically, and that is used to then, finance various nefarious activities, be it related to drugs, to war, to trafficking, etcetera. And so we are that company is in its way helping to solve not just the direct impacts of fraud, but also the wider impacts of financial crime. So there's some really great impact stories there. Of course, it won't surprise you to learn because this is IP GROUP. We're an investor. There is a huge market opportunity here, so McKinsey estimated at about 150,000,000,000 in 2021, growing double digit, etcetera, etcetera. Of that, about 20,000,000,000 is in sort of AI for fintech.

50:33 Given the feature spaces revenues are in the kind of tens of millions at the moment, there is a huge market opportunity to go for with that company, which will which will contribute to financial returns. So we think but as Brian said, they're quite company specific and trying to generalize and say our companies as a whole have have reduced carbon emissions by 47,000,000,000,000 tons of oil, you know, way out of here. You know, I sort of think of it. That's a different thing, and we'll work towards aggregation. But in the meantime, we can give those sort of concrete examples. Great. Thank you. I'll I'll stop you with that because I'm there are a monthly thirty, forty, 50 companies we can talk to, but we won't we won't be here all day. I'm afraid. I'm sorry. It's probably another one for you, Greg. So I'll try and share these out more evenly. We were at the time I think we're talking about the fact that we, you know, we tend to go to whiskey companies, companies that wasn't there at the very, very beginning, but we also have this, clear bent on ESG and impact.

51:25 And so Eugene B has questioned, isn't that risk seeking approach with good intentions in mind the reason why the shares get hit harder when the market turns in a rough risk phase like we're at the moment? Is So it did it contribute effectively to our I I think it does. Yeah. I think I definitely think it does. And and there is a market opportunity there for those people who are allocating capital into, listed equities. We have a, a set of return objectives that we're trying to achieve and at different points in the cycle. And the in prices of of our companies go up and down so that the the environment for investing is is better or worse at times. But, similarly, the exit, prospects for our businesses, you know, hold on to these things forever, also change with the tide.

52:13 So I think at the moment, the fact that we invest in private businesses, the fact that many of them are growth businesses and are addressing very, very big future markets, does weigh on, on the sort of the the perceived short term value. And so, obviously, we think about so, one of the other lenses we think about sustainability is around sustainability of our capital and how we use our capital. And since 2021, we've tried to combine investment for the long term in our portfolio with some shorter term returns of capital to shareholders. And indeed, since we introduced that, we've delivered about 70 odd million of cash to shareholders through dividends and buybacks. When, the financial markets are as they are at the moment, you obviously think, about the ratio of your capital that you use to or the ratio of your realizations that you use to invest in the long term and that you use for sort of shorter term return. So we're always thinking about that. So it's another lens around sustainability, but it it does partly explain, I think, why not just us, but others who are in private equity or or VC are currently trading at at very significant discount.

53:19 Yeah. Fair enough. Fair answer. We what we're trying to do is read out every question, you know, we don't try and cherry pick them. So this one, I think, is probably for you, Alex. Feels a little bit spiky. I think it's it it's really referring to your opening comments a bit, I feel. Sure. It's more of a statement than a question, but still I'll I'll pass it your way. This is from Edward s. Thank you very much. There's much blind faith that ESG positive decisions will lead to profitable outcomes. For instance, the assertion with a car manufacturer shouldn't worry about losses incurred from building an EV factory because in the future, there will be losses outweighed by profits. That it states as fact and therefore it's justification. But in reality, it's a statement of hope and faith, isn't it? The factory may be a spectacular loss maker, for example.

54:06 The last comment in essence, does ESG fail when it's perceived as a group of wealthy men in suits trying to make themselves feel good? But perhaps is it beneficial if it is pursued with humility? More of a statement, but I thought you might wanna comment on that. No. I think it's it's it's a really good set of points. So first, actually, the electric car example I was giving was actually not an example of ESG. That was an example of an investment that could be made on purely financial grounds. And so if you're doing a financial analysis of that, what you would do is you'd forecast out the initial losses and then the future profits. And just to make sure it's not blind toke, you would do sensitivity analysis and look at the upside case and the downside case. But you can make that analysis purely based on traditional financial net present value criteria.

54:53 You don't need ESG for that specific decision. Then when you look at decisions where you do have ESG criteria, then you can be guided by evidence. And so that's why the goal of my research is to look at hundreds of companies over dozens of industries to see whether something seemingly fluffy like employee satisfaction, does that lead to long term shareholder returns? And if it does, is there something which is correlation or causation? So what that means is that if you're a CEO or a head of ESG, you don't have just blind faith to go on or just the one hand picked example from a Harvard Business School case study or even a TED talk or a book, but you have evidence behind you so that you can make these decisions with some more conviction. But I think the humility point is also important because even though I have evidence, evidence is not proof. Evidence might not work in every situation.

55:44 If the evidence I gathered was from 1984 to 2011, maybe the world is now different. And this is why businesses are run by CEOs, not by professors. My professors have the evidence, not the the evidence is something which is not tailored to a specific company or a specific time time saves time horizon. So this is something where we need to have both the evidence, but also the practitioner knowledge of what makes sense for the business. I think what is really distinctive and powerful about IP GROUP's approach is, yes, we do want to take impact in ESG seriously, but we also understand business fundamentals are really serious. And why there is the pushback against ESG is because I think some ESG advocates have not had the humility that the question highlights. They believe ESG should be put on the pedestal above all of the other factors, which is not the approach that creates value either for shareholders or for wider society. Thank you.

56:36 Great answer. Thank you very much. We're we're gonna try and close hard on 10:00. So I'll try and get a couple of questions relatively quickly. This I could probably pass to either, Brand, or or Greg. And this is, has your ethics committee made recommendations which have led you not to invest in a company? Well, I mean, we are I think we're relatively likely because we don't invest in hard to abate sectors or, you know, high high high mid single sectors or any sort of really contentious sort of areas or themes, you know, because we, you know, we have three three themes that are all, you know, also impactful. So, you know, our ethics committee, you know, at least in all the meetings that I've been in, have provided sort of thoughtful, considered, you know, approaches that people should consider, you know, with respect to the implications of AI or technology or, you know, other other sorts of issues, but I I don't recall any instance where we've had to well, any sort of recommendation not to proceed with an investment.

57:45 No. I I think we have that for me to debate, actually. Think we have some debate and also this brand has been with us for a year or two that but predating that. So first off, fifteen years ago, we started investing with the EIF and EIB. So there's quite a lot of exclusion areas that we've all we've had that sort of built into our investing psyche. There was an example about five, six years ago, which is where a particular technology could be applicable to guidance systems, including potentially missile guidance systems. In that instance, that became a very big market opportunity for that company. I mean, it's we did discuss that with the ethics committee and decided not to invest in that instance. And we did very carefully take into account the fiduciary duty, including the fiduciary duty of the directors on the board of that company, but we concluded that we wouldn't invest further in business and indeed would actively seek to divest.

58:36 Do remember that. Remember yeah. Much discussion. I'm so right. Thank you. And presumably that the power of the ethics committee is not just whether you turn things down, but people know that there is an ethics committee. So they might not propose something unless they think it's gonna go through. Like, if I never fail any students, it's not because I'm a softball professor. But if people work really hard for the exam to ensure that I don't fail them, then that is something which has has impact. I'll try and get one more question. Evident, I'm not ignoring your question, but your question was around the fact we've talked about a number of companies that have impact and aren't there anymore. And I I feel we probably answered that one. We can always answer more online if if you need. We'll try to give some more examples in the annual. We we try to give a lot of examples in the annual report, so we can maybe we can highlight those I agree. In the in the show notes. And also in our long year end presentations as well. We often try and highlight top 10, don't we? I agree. Last one. David, thank you very much. In his introduction, Alex referenced his research, but those businesses which were scored higher by their staff tended to perform better.

59:32 So the question to us is, do we have any evidence? Maybe you add expenses. Do we have any evidence or plans to develop any for those businesses which aim and deliver greater positive social? So ESG impact, grow more and do better. Is there any research on that yet, or I I've been planning on doing more? So that research was specifically on just societal impact, not just employee satisfaction. Yeah. So that there there is. And so what my book looks at, it's called grow the pie. So the idea is that if companies grow the pie and create value for wider society, ultimately, this translates into financial value. Now disentangling this, this is quite tricky because you might think, is this correlation or is this causation? Maybe a great CEO both thinks about creating value for society, and he or she delivers financial returns anyway.

1:00:18 So what academic research can do is they can look at external shocks, which might change a company's societal orientation. And so there is one nice study. It's not my own, so I'm plugging somebody else's research. This is by Caroline Flammer, a professor at Columbia, which looks at what happens when shareholders come in, investors come in, and they exogenously change the orientation of a company. And even if that orientation is to create value for wider society, ultimately, she finds this also creates financial value. So this is something which is randomly shocking the societal orientation, but ultimately leading to financial returns, again suggesting that there's the symbiosis which both Greg and Brad have highlighted also in their comments. Yeah. Brilliant. Thank you. And the last one, actually, isn't a question, but I'll say it because it's a very good way to end, I think. Eugene B, thank you very much. For me, in IP GROUP is not entirely about maximizing returns. It makes me feel feel good to invest in technology that will make an impact and sci fi.

1:01:17 So thank you very much indeed. That, I think, is the end of our session now. Just over 10:00. Thank you very much for enjoying today. Alex, particularly thanks to you for for sharing and running it so well. Thank you. I'm sure we'll be back again in the near future with another deep dive. David, Greg, Alex, Brand, thank you very much indeed for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of IP GROUP PLC, we'd like to thank you for attending today's presentation, and good morning to you all.