With our #ESGinVC initiative, we want to foster a discussion around ESG and help each other develop and improve our frameworks. As part of this initiative, we spoke to leading managers and LPs about their ESG frameworks. The long-form interviews will be published in a reader on our website, while we will regularly post interview extracts on our social media channels (Linkedin — Twitter — Medium).
The extract below is from the interview with Ha Duong (Ocean Investment).
Already published: Bettina Denis (Gaia Capital Partners), Kinga Stanislawska (Experior VC, European Women in VC), Miki Yokoyama (Tech Founders), Farooq Abbasi (Preface Ventures, Diversity VC), Fabian Heilemann (Earlybird, Leaders For Climate Action), Kanyi Maqubela (Kindred Ventures), David Teten (Versatile VC), Liz Broderick & Chrys Chrysanthou (Kindred Capital).
Coming soon: Andreas Surya & Richie Wirjan (Kejora Ventures) and Catherine Dupéré (Isomer Capital).
What role does ESG play when investing in private technology markets?
You can look at the ESG three initials separately, so environment, social and governance. Governance, especially when investing in private technology markets at earlier stages, is extremely important. You always invest in the team, the leadership and the culture, so it is all about the type of organization that you want to help to grow up. Governance is very critical, because if the team and the leadership are not well run, then the organization will behave accordingly.
You will not be able to build something successful if the foundation is not right, which is why every early-stage investor should care about governance, even those that don’t think much about ESG or impact investing. Going forward, with more focus on mental health and on diversity within teams, I think that the governance aspect will become even more important over time.
“You will not be able to build something successful if the foundation is not right…”
The role of “environmental” and “social” depends more on the business. There are studies out there saying that brands and companies with a positive image attract and retain talent better and that customers tend to favor business partners with a positive environmental and social impact. These statistics are not always very robust, but I do believe that more and more companies are thinking about ESG today. Consumers are becoming more demanding and expect their favorite brands to have awareness about this topic. When investing in private technology markets, companies and brands that are well positioned in ESG will hopefully do better over time.
How can limited partners support VC managers to implement ESG policies within their firms and at portfolio level?
It really depends on the type of LP. It is very different if you speak to a small family office or high-net-worth individual with small negotiation leverage, versus talking to large institutional investors with specific demands. There are some governmental programs and larger institutional investors that demand an ESG or impact policy whenever they step in to invest and commit to a fund. Here, LPs can definitely have an impact on the managers at firm level and also at portfolio level.
“What LPs can do, no matter who or what size they are, is to raise awareness”
What LPs can do no matter who or what size they are, is to raise awareness, be transparent and ask about ESG when they do their due diligence. By bringing up these questions and topics more and more often, GPs will realize that they are important to LPs. I’m not sure how much small LPs will be able to affect things on a legal level, but showing that you care about these topics will set a signal. And as the relationship with the manager goes on not just for the first fund, but the second and third, the managers will know how much you care about ESG goals for your future relationship with them.
Do you think family offices dedicate enough attention to ESG responsibility or impact investing within their capital allocation plans?
I struggle a bit with the word enough here. It is not easy deciding what enough means and how much effort is enough to put into ESG responsibility. Every capital allocator, whether it is an institutional investor or even CEOs of companies, should have in mind that what they do has an impact in terms of ESG.
Smaller parties will not always be able to pay enough attention to these topics because of limited resources and the need to prioritize other things. They need to stay alive, have enough runway, become profitable etc. But as you become larger, you will have more resources to think about your corporate responsibility. I would expect a larger family office to pay more attention and to do more, but as it is their capital, I have no right in saying how they should deploy it.
Either way, ESG should not be just an afterthought where you communicate against bad PR if you have done something negative. You should use it as positive action to build your brand.
Given your experience in the crypto space, what ethical challenges do you see arising from the development and adoption of blockchain?
In the blockchain and crypto space, something that comes up all the time is the idea of “Code is Law”, where you try to implement desired governance structures and coordination mechanisms with code and smart contracts. What could be challenging when it comes to Code is Law is that the human component and social relationships get left out when building these networks. There is a risk that we think everything that we do can be hard coded, but forget the emotional side of things.
“We need to think about how to avoid ethical challenges that come up as these crypto networks grow to scale”
Depending on who makes the design decisions, I can foresee a future where disregarded minorities who are not involved in creating this new crypto network could be misunderstood or misrepresented. Perhaps milieus with unequal opportunities will not get to vote their voice when it comes to hard-coded governance mechanisms.
If you assume that every human relationship is entirely rational and we are living in a benevolent world, I think these crypto networks by hard governance will probably be the best system that ever existed. But due to the fact that human behavior cannot be predicted at massive scale, these networks will need to have an awareness of human error. We need to think about how to avoid ethical challenges that come up as these crypto networks grow to scale.
We are already seeing this happen in the “DeFi” world (decentralized finance) where new protocols are being developed to represent financial narratives. Here you can see certain predatory behaviors of the insiders that know the ins and outs of the ecosystem and are trying to make money off the new entrances into the ecosystem. That is not a good governance mechanism to have and we need to find ways to avoid that.
About Ha Duong
Ha Duong is a capital allocator by profession, industrial engineer by education and nerd at heart. He is a Venture capital professional with operational experience and a technical background and has deep experiences with direct and indirect private market investments across VC, quant (hedge funds) and crypto.
Next to his role as Investment Principal at Ocean Investment, Ha is an Advisor to Cambrial Capital, a contributor at Forbes and a mentor at Techstars.
About Ocean Investment
Ocean Investment is a single-Family Office based in Berlin. The family principal is a serial entrepreneur and successful investor across asset classes. Besides a stellar track record in private markets, he also cofounded an asset management firm with the best performing public fund in Europe in 2020.
About Marco Cesare Solinas
Marco is an Analyst at Blue Future Partners, where he is responsible for sourcing and analysing new investment opportunities. He is passionate about Technology and Venture Capital and making an impact with investments. He focuses on both direct and indirect investments.
Previously, he has built an international and multicultural background across Italy, US, Germany, Turkey and Malaysia. Marco holds a CEMS Master’s in International Management and a Bachelor´s in Economics and Finance from Bocconi University.
Linkedin — Twitter — Medium
About Blue Future Partners
Blue Future Partners is a Fund of Funds with decades worth of experience in investing in Venture Capital. We specialize in backing Emerging Managers focused on early-stage technology investments. We are people-centric and relationship-driven. We have a global mandate and existing relationships with Emerging Managers in the US, Europe, Israel, China and South East Asia.
Website — Linkedin — Twitter — Medium