Heightened interest in Environmental, Social, and Governance (ESG) issues has taken root in recent times. Activists are demanding concrete action from policymakers and investors, in turn, are sitting up to take notice.
Amasia, a Singapore- and Silicon Valley-based venture capital firm founded by Ramanan Raghavendran and John Kim, shared that ESG conversations have progressed significantly since the VC first began forming its sustainability thesis in 2019.
Profit and impact are no longer seen as direct trade-offs. In fact, they’re increasingly seen as having a symbiotic relationship, and one might even argue — an enhancing effect when it comes to generating returns.
“With more and more research today, it’s increasingly obvious that there isn’t just an existing sub-segment of the investment universe that can make an impact, but you’ll increasingly need to be focused on doing good things for society and the environment in order to make superior returns,” said John Kim, managing partner at Amasia.
But venture capitalists, like many global asset and fund managers, have found themselves swimming in reams of ESG definitions, data, and frameworks, each adopting different approaches to similar missions. Further adding to this complexity is the VC’s focus on early-stage projects, which are already challenging to measure and execute as investors.
All these point to a long road ahead for ESG investing, even for sustainability-focused investors like Amasia. But even so, Kim argues that impact has to be far more than skin deep.
The VC firm is in the midst of building a framework that helps private equity firms on sustainability and impact. According to Kim, it will be one of the first in the industry to do so, covering impact measurements and guidelines, which other VCs may refer to in the coming months.
“We have plans to roll out a version of it more widely in the coming months, so other VC firms can use this framework as well,” shared Kim.
Amasia’s investment framework is rooted in the 4 Rs of behaviour change — Reduce and Regenerate, Reuse and Recycle, Replace Bricks with Bytes, and Rationalise Resources.
It oversees “several hundreds of millions of dollars” of assets under management (AUM) across two funds and special purpose vehicles (SPVs). Some of its Southeast Asian portfolio investments include Tokopedia, Super, Xendit, TreeDots, Divigas, and Maicoin.
Edited excerpts of an interview with John Kim, managing partner of Amasia:
Amasia has been building a sustainability thesis for a number of years now. How did it all come about?
We published our sustainability thesis in 2019, but we had been formulating it internally for a year or two before that.
We’ve always been about two things: One, we are thesis-driven. Two, we’re cross border or global. In the beginning, crossborder meant having an office in Silicon Valley, and one in Singapore. That manifested by investing in US companies, helping them expand into Asia, and investing in Asian companies, and helping them bring in best practices from Silicon Valley.
As for being thesis-driven, we develop frameworks about industries or technological trends and use those to surface opportunities in sourcing. For example, we developed a thesis around e-commerce in Southeast Asia that led to an investment in Tokopedia.
When we first started thinking about climate, it was just another thesis. But since then it’s really swallowed up the whole firm. I think it’s because it’s such a big problem. Right now, we’re very much a sustainability-focused VC.
How did you communicate this to your LPs? Was it difficult to explain some of these evolutions to them?
When we first published the thesis, we were communicating topline ideas on what we were looking at. Sustainability was just one of the many theses at that time, so it was very easy to communicate that to our LPs.
Around 5-10 years ago, people would have had questions about whether you can make money and create an impact on the environment at the same time. But with more and more research today, it’s increasingly obvious that there isn’t just an existing sub-segment of the investment universe that can make an impact, but you’ll increasingly need to be focused on doing good things for society and the environment in order to make superior returns.
As an example, when it comes to Gen Z and millennial consumers these days, if you do not communicate a brand narrative that’s focused on giving back to society and the planet, nobody’s going to buy your product!
By the time we internally figured out that this is what we wanted to do, none of our LPs had any questions. Many of them are people we’ve known for quite some time, and they trust us a lot.
Can you run us through your investment thesis around sustainability?
My partner Ramanan, as part of his non-profit activity, joined the board of the Natural Capital Project, which is one of the premier research institutes on climate at Stanford University. Through his activity there, he realised that global emissions have grown by about 700x over the last 200 years. The overwhelming majority of that increase has to do with the fact that each of us, per capita, is generating much more emissions than ever before. Why is that?
One thing to note is that over this same period of time, breakthrough technology has driven a lot of efficiency in output. The manufacture of say a spoon per unit today requires less carbon emissions than ever before. But when we get more efficient at making something, the price goes down, so we end up buying more of those things. This phenomenon of overall emissions rising despite per unit emissions decreasing is known as the Jevons paradox.
So ultimately, the problem is our behaviour. We ultimately need to change our behavior and our decisions to fix this. That became the central point of our thesis.
We call our framework the four Rs of behaviour change. The first R is Reduce and Regenerate, which is basically the closest to traditional climate tech. Most of what we’ve been doing in that space has to do with measurement, because what gets measured gets managed.
The second R is Reuse and Recycle, and it has to do with the circular economy. This could be software that helps a recycling company. It can also be used-goods marketplace like eBay or Carousell which helps us decrease our carbon footprint. We’re an investor in Tokopedia and they have some used goods there as well.
Our third R is Replacing Bricks with Bytes, or basically remote. Last year, Zoom did so much for us and for the environment in the midst of the pandemic, because we basically virtualised travel. Remote work and online learning companies help decrease our carbon footprint. A lot of the fintech that we do, we call remote banking too.
Our fourth R is Rationalise Resources, which has to do with supply chains. These may be companies tackling food waste, or social commerce firms that make one delivery and let consumers cover the last mile. Companies like TreeDots in Singapore and Super in Indonesia would fall in this bucket.
What kind of KPI or reporting mechanisms have you set in place for your LPs and portfolio companies?
We’re in the midst of building a framework with a consultant that helps PE firms on sustainability and impact. It’ll likely be one of the first frameworks in the industry for early-stage venture capital. This will include impact measurements, and we have plans to roll out a version of it more widely in the coming months, so other VC firms can use this framework as well.
There’s a reason why measuring impact is really hard in a venture. If a company has been around for 20 years and there’s a lot of data, it’s easier to measure its financial and operational state. But when the company’s been around for one or two years, how do you value the company?
At an early-stage company, teams are generally much more stretched and so each hour spent on reporting literally takes an hour away from growing the business. In an entrepreneur’s mind, they’re thinking — if I have to do all these metrics and all this reporting, how am I going to keep my business afloat and grow at least 3x so I can raise my next round of financing?
So getting founder mindsets to a place where this isn’t seen as something that takes away resources, but something that’s going to help their business is still relatively new. We have a handful of companies preparing for IPO in the next year or so, and it’s very clear that when you become a public company, you need to have a strong ESG story.
“It’s clear that when you become a public company, you must have a strong ESG story.”
I believe it’s now filtering back to the earlier stages where it becomes more and more relevant. So I think it’s becoming easier to sell to the CEOs that it’s worthwhile to start measuring this a little bit earlier because it’s going to help you to raise funds and give a broader set of investors. If you do it early enough, you’ll be in a better position to say that you’ve been doing this for a long time when you eventually go public, while all your competitors have only been doing it for just so long. It demonstrates commitment.
We haven’t imposed reporting on our Fund I portfolio companies yet because we made those investments a long time ago. We drew a line in the sand and made it overt with Fund II portfolio companies that we had this thesis and this was important to us. So there is some expectation management to say that yes, we’re going to invest in you, but we’re going to have slightly higher standards of suggestions on how you might want to think about tracking and reporting.
We’re not going to make it overly onerous, but we’ll work with you on that. The companies we have done that with haven’t pushed back at all and I believe they generally find it useful and fully buy into the process.
Most ESG/impact funds tend to refer to “tonnes of carbon saved” as a metric for measuring impact. But financial metrics tend to calculate how much has been produced. How much impact are we generating if we are in a society where consumption is constantly growing?
That’s why the framework is important but difficult. Tonnes of carbon is the closest thing to a universal kind of currency that one can use to measure impact. But as you rightly stated, first of all, there’s a verifiability issue. If you say this much was saved, is it true that if they didn’t use your solution, they would have gone with another solution that is better or more efficient?
We see this with a lot of the carbon credit projects that are being sold. We looked at one company that was selling carbon credits for farmers who are using sustainable practices in the United States. If the farmers had been using regular practices, then this is the amount of carbon that’s sequestered in the ground, so that’s where the “impact” is.
That’s great, but the thing is, the farmers were already doing these practices. So selling carbon credits on something that they were already doing doesn’t actually change any behaviour. It’s not actually helping the universe at all. So this point on “additionality” is what I think you’re alluding to here, and it’s hard to drive into. There’s also another point on permanence, which is – how long does this endure? A lot of times, you’ll sell some credits for a forest. Soon after, the forest burns down, but you’ve already sold the credit. So what are you going to do there? So there are all these issues.
Tonnes of carbon is the closest thing to a universal metric, but in general what happens with frameworks is that we try and figure out what are some metrics that will apply to a particular company. Especially if you have a portfolio of companies that have similar aspects in their operating model, once you start to compare and contrast and then amalgamate them, that’s really where you get some leverage.
This is complicated, but it’s something that needs to be done. Just because it’s complicated, it doesn’t mean that you shouldn’t try. I think that’s where we are in terms of making our efforts and hopefully eventually helping the industry when we release this framework in some months.
There are also groups that are talking about putting a price on carbon the same way we put a price on crude oil, gold, and other commodities. Does Amasia support that view?
In general, the idea of a cap and trade was very successful in decreasing pollution from the 1990s. I think market-based solutions to incentivise behaviour, in general, are helpful and can work.
There are many problems here with having a price on carbon. There are actually many carbon exchanges around the world where there’s already a price of carbon, but prices vary widely. There are also types of markets that are voluntary and involuntary.
So for instance, the government says you have to buy credits for this particular activity, and so people go there. But even the prices between voluntary and involuntary markets are totally different, and voluntary versus voluntary, and involuntary versus involuntary in different places are different. The types of projects that people put onto these exchanges are also very different. On top of that, they all run into the same problems of verifiability, additionality and permanence that I just mentioned.
So I think in principle, getting people to change their behaviour by getting them to understand that there’s a price of carbon for their activity is a good idea. There’s just a lot of challenges that lie ahead for that.
We have a US portfolio company called Joro from our R1 bucket. When you download the app, it connects to all your credit card data through Plaid and from there, it will tell you roughly what your carbon footprint is and give you some social challenges and some nudges to help you decrease your footprint over time. There’s a feature called the net-zero subscription where you press a button, and it will actually do all offsets for you with very verifiable credit projects.
So I subscribe to the idea that we should have people understanding the cost. As they see the price of carbon shifting, they’ll understand that cost is going up. But one other point I’d make is that there just aren’t enough projects in the world.
If you look at the amount of emissions that we need to cut as the distance across one soccer field, the total number of carbon projects that are on the market right now wouldn’t even get you one step towards the other side!
There’s just so much more that we need to do. Even if you buy all the offsets in the world, it’s not going to get us anywhere close to where we need to go, which is why it’s not just about buying credits in an exchange, we need to change our behaviour.