GO GREEN AND PROS­PER

For a small but de­ter­mined band of Hong Kong ven­ture cap­i­tal­ists, so­cially re­spon­si­ble in­vest­ing makes good sense – fi­nan­cially, for the planet, and for the soul.

The Peak (Hong Kong) - - Contents - STORY NISSA MAR­ION

For a small but de­ter­mined band of Hong Kong ven­ture cap­i­tal­ists, so­cially re­spon­si­ble in­vest­ing makes good sense

David Ye­ung chooses his investments based on their po­ten­tial for fi­nan­cial re­turn, like most. But a cru­cial as­pect of his fil­ter­ing process strays from the con­ven­tional; he also con­sid­ers whether a founder’s val­ues align with his own, what kind of non-mon­e­tary sup­port he can of­fer them, and – per­haps most im­por­tantly – what kind of mea­sur­able pos­i­tive im­pact the com­pany will have.

Ye­ung is part of a new wave of early-stage in­vestors who be­lieve that “do­ing good and do­ing well can hap­pen si­mul­ta­ne­ously”. But­tressed by mil­len­ni­als and their con­sumer ideals, these in­vestors want a stake in some­thing more than straight-up profit, and are plac­ing the planet’s well­be­ing at the fore­front in their port­fo­lio choices.

The con­cept isn’t new. Known in­ter­change­ably as green, sus­tain­able, triple-bot­tom-line, or so­cially re­spon­si­ble in­vest­ing (SRI), the strat­egy typ­i­cally in­volves ex­am­in­ing en­vi­ron­men­tal, so­cial and cor­po­rate gov­er­nance (ESG) cri­te­ria.

There are his­tor­i­cal ex­am­ples of so­cially driven investments aimed at spe­cific out­comes. Most no­tably, in the 1970s, fi­nan­cial pres­sure from strate­gic di­vest­ment ul­ti­mately led South African busi­nesses to call for an end to apartheid. These days, SRI has be­come a well-recog­nised tool to pro­mote en­vi­ron­men­tally and so­cially sus­tain­able de­vel­op­ment, and a glob­ally ac­cepted in­vest­ment strat­egy. Ac­cord­ing to the Global Sus­tain­able In­vest­ment Al­liance (GSIA), in 2016 more than one out of ev­ery five dol­lars un­der pro­fes­sional man­age­ment in the United States – over US$8.72 tril­lion – was in­vested ac­cord­ing to SRI prin­ci­ples.

Im­pact in­vest­ing, a term coined around ten years ago, takes the no­tion a step fur­ther, con­sid­er­ing so­cial and en­vi­ron­men­tal im­pact as crit­i­cal mea­sures of a com­pany’s suc­cess. Im­pact in­vest­ing still rep­re­sents a very small part of the global mar­ket: a sur­vey of 158 im­pact in­vestors around the world by Global Im­pact In­vest­ing Net­work (GIIN) found re­spon­dents had com­mit­ted US$15.2 bil­lion through 7,551 deals in 2015. By com­par­i­son, the global eq­uity mar­ket is worth US$61 tril­lion. Mean­while, the world of ven­ture cap­i­tal has largely been play­ing catch-up, or not play­ing at all; a GIIN and JP Morgan sur­vey the same year es­ti­mated that over 90 per cent of im­pact-driven cap­i­tal was in­vested in com­pa­nies in the post-ven­ture stage.

That said, there are nu­mer­ous ven­ture cap­i­tal in­vestors in Europe and the US whose aim is to find win­ners in clean­tech, clean en­ergy and smart so­lu­tions that re­duce en­ergy con­sump­tion, and there­fore emis­sions. Ven­ture fund­ing al­lo­cated to green star­tups can also have an out­sized im­pact, with game-chang­ing investments in re­new­able en­ergy and other ar­eas. Com­pa­nies like Tesla, So­larcity, and En­phase En­ergy, all of which have since held IPOS, had their ini­tial growth sup­ported by ven­ture firms.

Im­pact VC is a small sec­tor, but in­ter­est in the pos­si­bil­i­ties is grow­ing. Break­through En­ergy Ven­tures, a bil­lion-dol­lar fund backed by some of the world’s most suc­cess­ful busi­ness brains and fo­cused ex­clu­sively on al­ter­na­tive en­ergy so­lu­tions, was un­veiled last year and shows that big names are plac­ing big bets on green in­no­va­tion.

While im­pact VC funds are of­ten lumped in with the broader world of im­pact in­vest­ment – which can in­clude in­vestors will­ing to net lower re­turns in favour of pos­i­tive im­pact – they are, in fact, gen­er­ally be­holden to as­set own­ers with ex­pec­ta­tions of high fi­nan­cial re­turns on their investments. Yet, de­spite be­ing ide­ally po­si­tioned to cre­ate sub­stan­tial im­pact while pock­et­ing sub­stan­tial re­turns, un­til re­cently VC in­vestors in Asia have been slow to em­brace the green move­ment.

GOOD BUSI­NESS

David Ye­ung was no new­comer to the idea of ‘busi­ness for good’ when he founded Green Mon­day Ven­tures in Hong Kong. Both his Green Mon­day food move­ment, which en­cour­ages busi­nesses and in­di­vid­u­als to em­brace

plant-based di­etary choices, and Green Com­mon, his mind­ful­liv­ing re­tail con­cept, were built on this very prin­ci­ple. Ye­ung’s be­lief is that eco­nomic force is in­te­gral to driv­ing so­cial change, and ul­ti­mately to cre­at­ing a more sus­tain­able fu­ture. “If you look at China in the last 20 years, it has un­der­gone an in­cred­i­ble revo­lu­tion. Mil­lions of peo­ple have come out of poverty into a more com­fort­able lifestyle. And the ma­jor rea­son for that is not be­cause some donor do­nates bil­lions of dol­lars and feeds them, but rather, it’s be­cause of eco­nomic re­form. That’s the key.”

Ac­cord­ing to Ye­ung, the food in­dus­try is go­ing through a revo­lu­tion, and of­fers huge op­por­tu­nity for im­pact. “Mil­len­ni­als are driv­ing the change. Only one out of five mil­len­ni­als in the US has ever had a Big Mac. One out of five! It’s a very dif­fer­ent con­sumer mar­ket than, say, 20 or 30 years ago. Look at Ama­zon ac­quir­ing Whole Foods. That says a lot, right? Or­ganic food, nat­u­ral food, healthy food is be­com­ing a main­stream thing. It’s no longer a niche. Now, this shift is still mainly hap­pen­ing in the US and in Europe, but with 60 per cent of the world’s pop­u­la­tion liv­ing in Asia, all of them need­ing nour­ish­ing food, how could there not be room for dis­rup­tion? And given our strate­gic lo­ca­tion in Hong Kong, we want to cham­pion that change in this part of the world.”

His sourc­ing strat­egy is sim­ple. “When you’re look­ing for that triple bot­tom line of en­vi­ron­men­tal, so­cial and fi­nan­cial re­turns, of course the bar be­comes higher. But if you can find com­pa­nies that align all three, then you’re look­ing at the best sce­nario pos­si­ble! So as an in­vestor, why would I not aim for that?”

So far, Ye­ung’s in­stincts have led him to the food in­dus­try. One of the main sources of green­house gas emis­sions is an­i­mal farm­ing and an­i­mal-based food pro­duc­tion. As de­mand rises for ev­ery­thing from dairy to steaks, es­pe­cially from emerg­ing mar­kets, the need for meat-free sub­sti­tutes makes long-term sense.

Ye­ung’s first in­vest­ment was Be­yond Meat, a Los An­ge­les com­pany that pro­duces plant­based meat sub­sti­tutes. Of­fer­ing con­sumers re­al­is­tic, pro­tein-rich ve­gan ‘meat’ prod­ucts, Be­yond Meat was named one of 2014’s most in­no­va­tive busi­nesses by Fast Com­pany mag­a­zine. The prod­uct is now avail­able in over 11,000 stores in the US, and since rolling out in Hong Kong has been sell­ing, ac­cord­ing to Ye­ung, “like crazy”. Be­yond Meat has also en­joyed investments from Kleiner Perkins Caulfield (their first food ven­ture), Morgan Creek Cap­i­tal and Bill Gates.

Green Mon­day Ven­tures next staked a claim in Per­fect Day, a syn­thetic bi­ol­ogy start-up with a fo­cus on an­i­mal-free dairy prod­ucts. “Per­fect Day looked at the in­hu­mane prac­tices and mas­sive en­vi­ron­men­tal im­pacts of in­dus­trial dairy pro­duc­tion, and they saw an op­por­tu­nity. The founders asked: What hap­pens in a cow’s body to make that pro­tein that peo­ple crave so much? Can we re­verse en­gi­neer a glass of milk to pro­duce the same re­sults? And, to ev­ery­one’s en­light­en­ment, it was doable.”

Ye­ung im­me­di­ately recog­nised the scale of dis­rup­tion pos­si­ble. “To me, this is gamechang­ing. If we can cre­ate an­i­mal­free dairy prod­ucts that are just as good, then why wouldn’t we? It costs so much, en­vi­ron­men­tally and eco­nom­i­cally, to raise cows – about 1.5 bil­lion of them on the

“ONLY ONE OUT OF FIVE MIL­LEN­NI­ALS IN THE US HAS EVER HAD A BIG MAC. ONE OUT OF FIVE! IT’S A VERY DIF­FER­ENT CON­SUMER MAR­KET THAN, SAY, 20 OR 30 YEARS AGO”

–David Ye­ung, Green Mon­day

planet right now – just so they can feed us. It’s out­ra­geous.”

Both Be­yond Meat and Per­fect Day, along with Green Mon­day’s other port­fo­lio in­ter­ests, meet the sourc­ing cri­te­ria iden­ti­fied by Ye­ung and shared by many of his peers. “We look at how much im­pact they can cre­ate, and the syn­ergy be­tween the re­sources they need and what we can of­fer. Of course we also look at things like val­u­a­tion, and at who else is in­vest­ing. But above all else, the num­ber one thing is mis­sion align­ment, value align­ment.”

Keenan Kwok, a found­ing part­ner of Aera VC and ac­tive mem­ber of the grow­ing im­pact in­vest­ment com­mu­nity in Asia, is fa­mil­iar with this line of thought. The “Aera Terms” for founders is a sup­ple­ment to the tra­di­tional fi­nan­cial term sheet, un­der which a com­pany’s so­cial or en­vi­ron­men­tal mis­sion and im­pact met­rics must be clearly de­fined along­side its fi­nan­cials in or­der to be con­sid­ered for in­vest­ment.

Aera was es­tab­lished by Derek Han­d­ley, au­thor and found­ing CEO of global non-profit The B Team, as a ve­hi­cle for Han­d­ley and a pool of like-minded co-in­vestors to in­vest in early stage ven­tures that are – ac­cord­ing to the com­pany’s pro­mo­tional ma­te­ri­als – “de­fined by both pur­pose and profit, be­liev­ing that these two ele­ments are not only equally im­por­tant, but pro­pel each other for­ward.”

Kwok’s role is to en­gage in­ter­ested as­set own­ers in Asia. “We are cre­at­ing a vi­tal link. We find the re­sources to ac­cel­er­ate en­trepreneurs that are solv­ing big prob­lems. Mean­while, we’re con­nect­ing an ever-grow­ing net­work of fam­ily of­fices with causes that are rel­e­vant and mean­ing­ful to them.”

There is, he says, plenty of ap­petite.

“You look at the older gen­er­a­tion, how they choose to give back, and typ­i­cally it’s through foun­da­tions. But foun­da­tion in­vest­ing is do­na­tion. You do­nate away and it’s gone. So the new model is so­cial im­pact in­vest­ing, and that’s our sweet spot. It’s sourc­ing deals and founders who are try­ing to dis­rupt the mar­ket, and who, if they get it right, can have in­cred­i­ble, mea­sur­able im­pact.”

Kwok notes that peo­ple with wealth in their 50s and 60s are keen to make investments that sup­port founders of green en­ter­prises, with the aim of max­imis­ing im­pact and re­turns. “We help chan­nel the right fam­ily of­fices’ money and re­sources into the right projects, and every­body wins.”

In bridg­ing that gap, Kwok says, Aera helps as­set own­ers who want their re­sources al­lo­cated

“YOU LOOK AT THE OLDER GEN­ER­A­TION, HOW THEY CHOOSE TO GIVE BACK, AND TYP­I­CALLY IT’S THROUGH FOUN­DA­TIONS. BUT FOUN­DA­TION IN­VEST­ING IS DO­NA­TION. YOU DO­NATE AWAY AND IT’S GONE. THE NEW MODEL IS SO­CIAL IM­PACT IN­VEST­ING”

–Keenan Kwok, Aera VC

Chen be­lieves it’s time for the en­tire main­stream in­vest­ment com­mu­nity to be­gin de­mand­ing sig­nif­i­cant en­vi­ron­men­tal and so­cial re­turns. She says that the fi­nan­cial sys­tem is “dis­con­nected from the needs of the en­vi­ron­ment, so­ci­ety and econ­omy.” She con­tin­ues to ad­vo­cate for mak­ing sus­tain­abil­ity a fun­da­men­tal part of in­vest­ment de­ci­sions, some­thing she feels will ul­ti­mately cre­ate a more ro­bust fi­nan­cial sys­tem.

But Chen also ac­knowl­edges that Hong Kong’s sus­tain­able in­vest­ment scene is rel­a­tively small and poorly un­der­stood, de­spite ris­ing in­ter­est. RS Group has tried to ad­dress this with the launch of a new Sus­tain­able Fi­nance Ini­tia­tive (SFI) – a plat­form for dis­cussing and de­vel­op­ing a more ro­bust sus­tain­able fi­nance com­mu­nity in Hong Kong. She is op­ti­mistic about what’s pos­si­ble. “Our own sur­vey shows that 80 per cent of re­spon­dents would like to be par­tic­i­pat­ing in the sus­tain­able fi­nance econ­omy in some way or other,” she points out. “This is very en­cour­ag­ing to us.”

Hong Kong may be be­hind the curve on the idea of green fi­nanc­ing, but there are play­ers in this field, and they are not go­ing away. They see en­vi­ron­men­tal prob­lems that need solv­ing, cap­i­tal-based so­lu­tions, and the will of a younger gen­er­a­tion keen to par­take. They are also buoyed by stud­ies show­ing healthy re­turns from im­pact in­vest­ing of this kind.

For Chen, it is a mat­ter of phi­los­o­phy as well as re­turns. “We are all in­vestors in some way. If we can all be more aware of how our money is spent, change will nat­u­rally take place.”

“THE BE­LIEF THAT IM­PACT- DRIVEN IN­VEST­MENT MEANS GIV­ING UP RE­TURNS IS A GREAT MIS­CON­CEP­TION. SUS­TAIN­ABIL­ITY CAN DRIVE OUT­PER­FOR­MANCE” –An­nie Chen, RS Group

RIGHT An­nie Chen, chair of RS Group, be­lieves there's good rea­son to pool cap­i­tal into sup­port­ing sus­tain­able de­vel­op­ments. BE­LOW Clean en­ergy is one of the in­creas­ingly pop­u­lar sec­tors where in­vestors are look­ing to put money.

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