While the sustainability theme is not new to most investors, it is only beginning to catch on among venture capital (VC) firms, which tend to operate more actively in the private space, away from the disclosures obliged on public companies.
According to California-based magazine Stanford Social Innovation Review, VCs lagged behind in adopting environmental, social and governance (ESG) practices.
In their scan of the 50 largest VC funds, only five mentioned ESG or a commitment to sustainability on their websites.
The title also adds that out of some 3,000 VCs globally, “only a few dozen firms have made public commitments to ESG”.
Compared to the public markets, ESG practices have evolved differently within the realm of private capital, says Jeffrey Chi, vice-chairman and founding partner at Vickers Venture Partners.
This is despite the influence they wield over investee companies. “For private capital, fund managers can directly influence portfolio companies to include ESG fundamentals as part of their business and growth strategies,” says Chi in an interview with The Edge Singapore.
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Founded in 2005 and headquartered in Singapore, Vickers is a global venture capital firm focused on early-stage investments. Working alongside Chi are founder Finian Tan and co-founders Khalil Binebine, Damian Tan, Linda Li and Raymond Kong.
The partners’ track records include Baidu.com, Inc, Focus Media Holding, Kongzhong Corp, Cambridge Real Estate Investment Trust, Asian Food Channel, TWG Tea, M-Daq and Mainspring.
Sustainable investing may be more popular than ever but Chi claims Vickers has incorporated ESG into its investments since 2008. “When we started our ESG journey back in 2008, it was primarily a negative screening process where we did not invest in ‘bad’ companies. These included the so-called ‘sin stocks’ such as gambling and companies that had poor HR policies, like child labour.”
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That bar has risen over the years. He tells The Edge Singapore: “Today, our starting premise is that our capital should not just avoid ‘bad’ companies but also push humanity forward somewhat.”
Funding a better world
Vickers backs companies with solutions to today’s biggest problems, says founder Tan. “We believe these high-impact companies have the potential to be the biggest winners of the next decade.”
Led by the vision of “Funding a better world” — also the name of its second annual ESG report — Vickers’ rather vague rallying cry belies a broad portfolio that cuts across multiple sectors.
These include RWDC, a US-Singapore producer of a biodegradable plastic packaging substitute; Jing Jin Electric Technologies, or JJE, a Shanghai-listed electric motor systems manufacturer; and Eavor, a geothermal energy company.
As early-stage investors, Vickers sees its investee firms through their “biggest uncertainties”, adds Tan, “periods of most significant change and growth”. “We believe that having an ESG framework in place helps guide our companies through this phase to achieve long-term, sustained growth.”
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But most start-ups lack the resources to produce ESG reports comparable to the standards of a public-listed company, says Chi.
Hence, the Vickers ESG regime starts from the pre-investment stage. The VC uses a scorecard to screen for ESG risks when assessing deals. Some rubrics include job quality, gender diversity, pay disparity, supply chain risks, data privacy and data security, on top of the typical commercial assessments.
This helps companies “shape and ingrain” ESG into their operations and strategy, says Chi. “A lot of the pain is removed from the companies because we do the heavy lifting upfront… [This is] so it does not become an afterthought or snowball into a heavy burden on their part.”
During the deal, Vickers requires companies to adopt its ESG policy and report on their frameworks.
Post-investment, Vickers is developing an ESG reporting software to better track its portfolio companies.
Says Chi: “Compliance costs represent the main hurdle when it comes to adopting and implementing ESG policy and framework. Manpower resources would be another typical cost and concern. We don’t want to make it too onerous for companies such that they incur high overhead costs to comply with ESG requirements.”
In a scoring of more than 100 VC firms with British Venture Capitalist Association membership, Vickers was identified as one of the top 10 performers for its ESG disclosures across its portfolio companies and among VCs.
While Vickers has yet to divest from any company owing to a poor ESG record, its second annual ESG report details the ESG performance of all its 36 portfolio companies, aligned with the 17 United Nations’ Sustainable Development Goals (UN SDG).
A dozen of Vickers’ portfolio companies had “limited gender diversity” or a “lack of gender diversity” mentioned in their summaries of ESG risks, while eight firms were flagged for data privacy and security risks.
The VC pulls no punches in its succinct assessment. One review reads: “Regulatory and commercial risks for vaccines in the current political climate, lack of transparency in hiring and performance analysis, CEO bottleneck in decision-making.”
While brusque, that candid tone is necessary to avoid greenwashing.
Says Chi: “I’m happy to say that our portfolio is developing in line with these efforts. Our ESG report this year is a key element of the firm’s larger ESG due diligence, monitoring and portfolio company engagement process. 75% of our portfolio companies have an SDG tagged to them, and all of them are making progress in fulfilling their ESG targets.”
Photo: Vickers Venture Partners
