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At a recently concluded webinar, speakers from East Ventures, Aruna, and the UNDP SDG made a case for ESG moving from the ‘nice to have’ space to a vital element of business strategy and growth
“As an investor, we have to be at the forefront of changing consumer trends and behaviour. Consumers are increasingly concerned about ethical business practices. There’s a shift in preference towards environmentally friendly and socially responsible products and services,” said Avina Sugiarto, venture partner at East Ventures.
She was speaking at a DealStreetAsia webinar ‘How venture capital is creating an inclusive and sustainable future for Southeast Asia’. The event was part of the launch of East Ventures – Sustainability Report 2022 — available for download in both English as well as Bahasa Indonesia, the first in a series of annual reports that track the spread of environmental, social and governance (ESG) themes in investment thesis across Southeast Asia, particularly Indonesia. It was clear from the outset that the dial had moved on ESG in the region. From being a halfhearted attempt at building a perception of ‘doing good’, there were many strong reasons on both the purpose and profit sides of the scale. Avina said, “Workers are choosing companies that are impactful. The pandemic and the climate crisis have added to the urgency.”
She was borne out by Utari Octavianty, co-founder and chief sustainability officer at Indonesia-based fishery startup Aruna. With the aim of digitalising and empowering the largely unorganised fishery industry in Indonesia, Aruna was among the pioneers of transformation. Utari said, “For us, sustainability is about people, the planet, and profit. How can we ensure that this business will be profitable?” It led to a formal division within Aruna focused on sustainability, and Utari being appointed chief sustainability officer in addition to her role as co-founder.
Weaving the themes of profit and sustainability together was a challenge for startups and investors alike. However, the way forward was a collaborative approach between governments, private capital, and startups. Devahuti Choudhury, SDG impact specialist, UNDP said, “The Indonesia Impact Fund is a wonderful example of being structured around development challenges. UNDP comes into the picture as an advisor on impact and measurement. We determine metrics that ought to be added for us to calculate impact, and to report and disclose what the fund achieved along with commercial viability.”
Click here to see the a video recording of the session or read on for a transcript of the webinar, edited for clarity and brevity. Click here to download English and Bahasa Indonesia versions of East Ventures’ Sustainability Report 2022 .
While several other asset classes have embraced ESG over the last few years, VC has been lagging behind. What are the main drivers for the push towards ESG and why now?
Avina Sugiarto (AS): As an investor, we have to be at the forefront of changing consumer trends and behaviour. Consumers are increasingly concerned about ethical business practices. There’s a shift in preference towards environmentally friendly and socially responsible products and services. Workers too are choosing companies that are impactful. Firms with stronger ESG narratives can attract and retain quality talent, and increase overall productivity.
The pandemic and the climate crisis have added to the urgency. Given higher transparency and the prevalence of social media, a company’s reputation will be better protected with good governance and proper risk management. We would like to support, embrace, and be at the forefront of this sustainability journey in Southeast Asia.
Can you take our audience through the highlights of the Sustainability Report 2022?
AS: At East Ventures, our investments not only generate very strong financial returns, but also impact the ecosystem and society. We have recorded over $86 billion of annualised GMV in our portfolios.
Our companies have drawn in over $6.7 billion of follow-on funding — primarily in Indonesia. We have mapped our portfolio to contribute to 16 Sustainable Development Goals (SDG) by the United Nations. On Diversity, Equity and Inclusion, 52% of our workforce are female, as are one in three of our investing partners. Women founders and co-founders account for 25% of our active portfolio.
There is still significant progress to be made. Hence, we started an initiative called ‘Women with Impact’ to empower more women to continue in the workplace, reach senior leadership roles, and become strong female founders.
We also have East Ventures Digital Competitiveness Index (EV-DCI), where attention is paid not only to the first-tier cities, but those in the second, third and fourth tiers, to build a more inclusive country.
The Sustainability Report 2022 also contains an overview of our sustainable investment strategy, and how we integrate ESG in our organisations, starting from the leadership, the investment team, legal, value creation, as well as across our investment lifecycle, from deal sourcing to exit. We hope Sustainability Report 2022 will inspire and empower our ecosystem, the broader community, and stakeholders towards a more sustainable future.
Aruna is among the few startups in Southeast Asia, where a co-founder also shares the designation of chief sustainability officer. How did this come about? Was sustainability always a priority for Aruna?
Utari Octavianty (UO): Not too many startups are concerned about sustainability. It is not just something new, but also very complicated. Most people assume that when we talk about sustainability, we care purely about the environment. But for us, it’s about people, the planet, and profit. We have a responsibility to care about the results of our actions.
That’s why we created a division focused on sustainability. As a co-founder, I wanted to take charge of that. According to research from the International Finance Corporation (IFC), among companies that pay attention to ESG, 80% of them are more successful, and become sustainable in the long term.
Aruna raised $65 million in its Series A round not too long ago, to be used for regional and global expansion. As a startup how do you combine expansion and increasing market share with sustainability?
UO: Not all companies can make the shift, even if they want to. We have a great support system at Aruna with East Ventures as an investor and by working with the Bank of Indonesia, and the Worldwide Fund for Nature (WWF).
In terms of implementation, it cannot happen overnight. We need a roadmap. That’s why in Aruna, we have a three to 10 year year program for sustainability.
UNDP recently launched an investor map of Indonesia identifying six priority sectors including F&B, healthcare, education, renewable energy, infrastructure, and finance. What has been your experience with these sectors when it comes to investor interest?
Devahuti Choudhury (DC): The SDG investor maps are crafted to highlight investment opportunities that lie at the intersection of public policy, development needs of a particular country, and private sector interest.
In Indonesia, the 18 opportunities that we have identified appear on the map because they have established business models. There is also market intelligence around investor interest, including fundraising, and in some cases, successful exits.
There is a lot of VC activity particularly in social sectors such as education, health care and climate change. Digitalisation is a strong underpinning factor.
The trick is to see how it can be applied to take these models to last mile populations in low resource settings, where the services and products are needed the most.
What has the investor response been like?
DC: It’s a journey and a process. The SDGs are a very well recognised framework.
However, when it comes down to the brass tacks — which SDG targets are being considered? There are 17 SDGs and 169 targets accompanying them!
There is very little evidence to show for all this effort. We launched SDG impact standards to drive home the point that a good decision-making process needs strong reporting and disclosures. It is not just about spreading awareness but unlearning behaviour.
Having said that, we are very encouraged by several consultations held with private sector players, including East Ventures.
Strategic partners like Temasek Trust in Southeast Asia help anchor these standards in the business-as-usual practices of firms and funds. We feel optimistic about moving from awareness to experimentation, to adoption, to a recurring assurance framework that can help authenticate a company or fund’s contribution to sustainable goals.
Can you give us a few examples of East Ventures’ sustainability principles in action?
AS: In edtech, we were the first investor in Ruangguru, which aims to provide equal access to education through technology, anytime and anywhere. They have over 25 million students, over 70,000 learning videos, and various initiatives to support better education in Indonesia. This includes a teaching fellowship that has benefited over 140,000 teachers across 33 cities.
In healthtech, Homage enables wellness and recovery through personal care. They have over 1,000 curated professional caregivers, doctors and nurses, and provide holistic care to older adults and families through technology.
Nalagenetics is based in Singapore and provides cost effective pharmacogenomics in Southeast Asia. The aim is to reduce adverse drug reactions, and increase prescription efficacy through DNA testing. Nusantics is a biotech company which repurposed its capabilities and designed the first locally produced COVID-19 PCR test kit at the beginning of the pandemic, reducing costs for tests by 70%. They also have an air scan capability which detects airborne infection, and are thus supporting the safe reopening of schools.
We’ve seen progress at the level of individual funds and even some LPs taking baby steps towards ESG. But what is still missing from the whole initiative?
AS: The standardisation of measurement and metrics. Today, there are various voluntary ESG standards. There is the Carbon Disclosure Project or CDP; Global Reporting Initiative or GRI; the UNDP SDG impact. With clear standardisation and measurement, the industry can progress much faster, and have comparable metrics.
When it comes to Aruna, did you have different sustainability goals at each stage of your growth?
UO: We did not implement the full metrics at the very first stage. But our mission statement acknowledged sustainability.
Most customers have changed their behaviour over time and now want seafood that has been caught using sustainable fishing practices. As long as you have a great ecosystem and customers, it forms a balance between profit, planet, and people. There are also customers who don’t care for sustainability and that is a challenge.
While the pandemic has accelerated digitalisation, it has also exposed the divide between the digital haves and have nots. As a VC, how do you view this opportunity?
AS: The unbanked and underbanked population in Southeast Asia is still over 70%, with a majority in Indonesia. In the financial inclusion index, Indonesia has reached 76%, but still ranks lower than some of our neighbours: Singapore at 98%, Malaysia at 85%, and Thailand at 82%.
The financial literacy index in Indonesia is even lower at 38%. We have room for growth and work to do on both the startup and investor side.
There are a number of fintech investments addressing these problems. Koinworks empowers MSMEs underserved by traditional financial institutions. It recently launched a new bank platform and aims to provide frictionless solutions for MSMEs, integrating client cash flows and bookkeeping solutions for better underwriting.
Stockbit, an investment platform aims to democratise access to capital market investments with a robo-advisory to help first time investors. It has served over five million retail investors across 500 cities in Indonesia. Through the pandemic, the Indonesia Securities Depository recorded a 93% increase in capital market investors. Similarly mutual fund investors have increased by about 110% in 2021 alone.
GoTo appointed a head of sustainability in 2020 and soon came out publicly with the ESG framework. Both Grab and GoTo have pledged a commitment for zero carbon emissions. How important is communicating goals and targets to your audience?
DC: Communicating how sustainability is part of your business-as-usual scenario is critical. We must also not forget this is a call to action to invite stakeholders like consumers to participate. It’s not just about questions from big bosses, but from consumers as well.
If you are unable to communicate, you will lose loyalty. Communicating helps foster collaboration — inviting different partners, including more funding opportunities for your business, ensuring accountability, and moving from shareholder to stakeholder value.
Governments across the region have been setting aside funding towards green and sustainable investments. What more can they do?
DC: Governments have understood that they alone cannot push for these development goals. There’s a concerted effort required to bring in the private sector.
But the roadmap should be clear. We are dedicated to identifying white spaces: areas with huge potential, but which need certain policy or regulatory considerations for the private sector to have a better role.
A few audience questions: what do you look at first when doing due diligence: financial performance or ESG framework?
AS: We invest from the seed to growth stage. At the seed stage, companies don’t have financials and it’s all about the idea. At the growth stage, there’s a historic track record to consider. We need to generate strong financial returns for investors. We are sector agnostic but believe that ESG is important and ought to be taken into consideration during due diligence. Obviously, we will focus on a strong growth trajectory and high potential companies.
Are LPs pushing VCs to have an ESG agenda? Does it help you in raising capital?
AS: It’s a mix. Most asset managers today being signatories to PRI, have commitments to sustainability. That being said, not all of them are really pushing or taking an active role.
As an impact partner of the newly launched Indo Impact Fund, how does UNDP work?
DC: The Indonesia Impact Fund is a wonderful example of being structured around development challenges. UNDP comes into the picture as an advisor on impact and measurement. We determine metrics that ought to be added for us to calculate impact, and to report and disclose what the fund achieved along with commercial viability. We hope this can be replicated elsewhere.
The VC industry remains very much male dominated. What do you think needs to change?
UO: Giving women more opportunities is closely linked to sustainability. Most people I’ve met in the space who think about sustainability are women. Sometimes women are afraid to make decisions and put themselves in leadership positions. But they have the potential. We need to encourage them to be leaders.