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ESG facing heat, direct indexing, and camel surprise
The future of innovation is global. We discuss it here.
ESG facing the heat
I believe companies have a responsibility beyond only shareholder profit, including multiple stakeholders like their employees, their community and the environment.
This perspective has certainly become more mainstream, notably with the pronouncements from the Business Roundtable.
But perhaps nowhere else has this attitude been demonstrated then in the rise of ESG investing. ESG has become big business. Total assets under management in the category is expected to exceed $50t (trillion) this year.
Yet, ESG has come under fire, including a front cover feature in the Economist this month: “The environmental, social and governance (ESG) approach to investment is broken. It needs to be streamlined and stripped of sanctimoniousness.”
The challenge is not that measuring ESG is a problem, but rather in its application. Take Tesla, which was removed from the ESG index, not because of deficiencies in E, but rather around governance and treatment to employees. Elon’s response:
While I don’t agree with his conclusion, the system is indeed imperfect.
ESG measures a mix of criteria (and arguably an incomplete set) about the negative externalities a business has to the environment, society and government. As a result, it is hard to measure objectively or compare across different companies (e.g. Exxon scores well because of governance, while Tesla which has done incredible work promoting the electrification of cars was booted for their lack thereof. Unlike an impact fund, ESG does not focus on the proactive positive impact of the business (e.g. the value of an education technology business driving greater access to the mass market).
The market is massive and growing. And the methods are not universally applied. Because of how much is at stake, we will also see an increase in regulation - as is already happening.
Improving ESG (or whatever acronym it evolves to) will create opportunity for innovators: in 1) measurement (and standardization therefore) of impact, particularly around “E”, 2) accountability (e.g. auditing) 3) investing (with a range of players already scaling businesses in this space, including direct indexing, per below) 4) integrating into the payment flow (e.g. buying offsets as you consume). Fintech will see specific applications. In a future deep dive, I will dig into ESG innovation in more detail.
But my short take: it is not time to throw the baby out with the bathwater, but there is much room to improve and standardize methodologies.
Camels
It has continued to be a tough month for venture. Deal count and valuations are down.
Employee reductions have also continued. It is the “end of a second straight month of nearly daily layoffs shows how every startup sector, from mobility to fintech, is impacted by the downturn. Strategy ranges; some companies are laying off specific teams, others are distributing cuts across all departments, and many aren’t responding to comments when asked for further information. There are also the founders who — within the same breath of their layoff announcement — will make it clear that they are still hiring for strategic roles.” Fintech has been particularly hard hit.
But will it last? US Venture Capitalists have never had this much spare cash. ”The question… is why — why are venture investments slowing when so much capital has been raised by VCs to invest?” While pace has slowed, I believe it won’t stop, and will resume as the environment stabilizes to the new normal.
One pressure: new capital allocation, measured by new fund formation continues. New venture capital funds, particularly with differentiated strategies are still seeing funding.
The slowdown in tech may play out differently in different regions because of the types of businesses getting built. For example, some argue it will be short-lived in Africa - not because of the macro, but because of the micro of what is getting built. “the rapid acceleration in the amount of funding into Africa’s tech scene is cause for celebration. That’s also why the signs of a pullback in the global market should be a real cause for concern for all…[But what will the recession be like?] It won’t be that bad, and it won’t be that long…by this time next year, we will be back on a solid accelerated growth we have now become accustomed to…Because we are solving such fundamental problems, most of what is being built are survival tools for digitally connected Africans and African businesses. A global recession will undoubtedly affect jobs and purchasing power across the continent and in the diaspora, but it is unlikely to suppress the need for African consumers and businesses to connect with each other, exchange goods and services with others, and access the global digital economy.”
In other words, these types of entrepreneurs are Creators, building with sustainability in mind, for real problems that everyone needs in any economic climate.
What should founders do?
My answer stays the same: be a Camel.
You did not ask for it (nor did you know you wanted it), but here is the camel video of the month (perhaps the only month where a camel of the month video is featured):
Interesting discussions
The power of new platforms to remake old distribution is real. I was surprised to read about the rise of TikTok in book sales. “Early last year, the publishing industry began to notice that the books readers were gushing about on TikTok — the social media platform that traffics in short videos — were showing up on best-seller lists. Publishers were surprised, authors were surprised, even the readers making those TikTok videos were surprised…Now one of the commanding forces in adult fiction, BookTok has helped authors sell 20 million printed books in 2021, according to BookScan. So far this year, those sales are up another 50 percent.” Too bad for Out-Innovate it is primarily in fiction.
But the shifts in how people find out about products, develop conviction around them and buy them continues to shift. This will likely be even more pronounced in emerging markets as the onramp into ecommerce accelerates.
Where is insuretech headed? Three trends include new risk types (e.g. self-driving cars), new infrastructure and embedded fintech, where my work is featured.
Where does capitalism go next? Enjoyed this conversation on creative destruction and creating a more equitable future. On creative destruction: “Part of what’s interesting about this is that you have a contradiction at the heart of the growth process. On the one hand, you need innovation to motivate innovation. But on the other hand, there is this temptation by yesterday’s innovators to prevent subsequent innovators because they don’t want themselves to be subject to creative destruction.” To manage the innovation process from a regulatory process requires finesse. “In terms of regulating capitalism, governments have to choose their tools. For example, if they overtax the capital income of firms, they will discourage innovators. Innovation allows people to get to the top income brackets. But because of creative destruction, it’s also a force of social mobility.”
The startup acquisition wave is coming. “In startup boardrooms around the world, acquisitions are becoming a key topic of discussion. Those with capital and thriving businesses are looking for ways to grow, expand product lines or build footholds in new markets. Conversely, those facing challenges may seek the security of an acquisition to weather the storm. In fintech particularly, as predicted for the year, we will likely see a rise of strategic acquisitions (i.e. by other companies rather than financial investments). There are five rationales for startup acquisitions. I cover these in this month’s deep dive.
Book of the month
This month I read something different: Sovereign Self: Claim Your Inner Joy and Freedom by Acharya Shunya.
As reviewed here: “There are sentences in this book that should make just about anyone sit up and pay attention. As the subtitle says, the book promises to open up the major scriptures of what’s traditionally rendered ‘Hinduism,' but in Acharya Shunya’s teaching is more properly understood as Advaita: nondualistic thinking. Advaitic teachings have transformed the West since being introduced to North America in the 1800s.”
