As a concept, ESG is nothing new. The idea of explicitly looking at environmental, social and governance issues as a holy trinity of principles predates a large part of the VC landscape as well as most of the global fintech unicorns in which they invest.
Separated into its core components and broken down to its simplest level, the reasoning behind each ESG pillar is hard to refute – don’t harm the environment, treat your employees well and champion corporate transparency.
Sound business fundamentals have seamlessly morphed into an acronymous buzzword that is difficult to quantify and even harder to dismiss. No company wants to be the one that affirmatively says it doesn’t care about its employees.
Good businesses – and good VCs – are increasingly aware of both the monetary benefits and the intangible optics of paying attention to ESG. It’s no longer just ‘greenwashing’ – as more money and attention has flooded into the space, common vocabulary, definitions and regulations have emerged to combat what ratings firm MSCI’s 2022 ESG Trends to Watch report called “social-responsibility spin.”
ESG through a VC lens
A breakout company in the QED Investors portfolio that has environmentalism at its core – Solfácil, a Brazilian fintech that is building a solar energy ecosystem – exemplifies the investment rationale for focusing on ESG.
Solfácil started by highlighting two profound realities: Brazilian homeowners wanted solar power; but they could not afford the upfront investment of solar panels. By financing the costs of the panels and getting paid back through monthly savings the panels provided, Solfácil quickly found a product-market fit while tackling climate change by reducing customers’ reliance on fossil fuels.
Credit financing for rooftop solar expanded opportunistically to helping more than 8,000 installation partners plan projects, find equipment and manage a combined – and rapidly growing – customer base of more than 40,000 people.
For installers, the next iteration is about turning one-off customers into lifetime customers – maybe by adding additional solar cells or installing electric-vehicle chargers. For homeowners and SMBs, it may be about getting visibility into their electricity efficiency or buying insurance and warranties to clean or maintain their equipment.
As the ecosystem gets more efficient, solar becomes more accessible, and as solar becomes more accessible, the ecosystem gets more efficient. The flywheel effects quickly become apparent.
The lure for investors is strong, too, especially considering that solar is a massively underpenetrated sector that is growing 170% per year. Just 1.48% of Brazilians have rooftop solar power today, compared with one-in-three Australian homes and 18% of Californians, according to an internal report from Sunrun. Because of the approach taken by the Brazilian government and the broad demand for more energy, the country is on a path to becoming the largest decentralized solar energy market in the world, behind only China.
Another portfolio company that has a strong ESG policy is Tangelo, a LatAm fintech specializing in alternative credit solutions.
In its annual sustainability report, Tangelo tracked a number of metrics including the resources allocated to training its staff (more than 4,000 hours of courses); the number of pages it printed in its Mexico office (280,000, down from 430,000 12 months ago); the number of separate food donations to Guadalupano Calacoaya Boarding School, an institution that supports underprivileged girls between the ages of 2 and 17 (four); and monetary donations made to UNICEF Mexico to help financing education programs ($12,000).
Tangelo, which was named a Socially Responsible Company for the third consecutive year, also shared updates to its code of ethics, IT security policy and anti-corruption policies, plus frameworks for developing and monitoring stakeholder relationships with customers, investors and collaborators.
ESG investing is “moving toward a place that reflects innovation and corporate leadership more transparently” according to a 2021 report by Refinitiv, ‘Stability and Sustainability in the Investment Community.’ “Transparency is a key ingredient in sustaining organizational values and as a management method to build a resilient culture.”
At QED, we believe innovation, corporate leadership and culture are among the most important factors in a company’s success. Here is how several of our portfolio companies are considering ESG challenges.
Between January and June 2022, Colombian B2B marketplace Melonn used more than 45,000 compostable bags made from corn to replace plastic ones.
In addition, more than half of the storage solutions in its new warehouse in Bogotá are plastic-free since the introduction of carton and metal solutions, and the company is testing electric vehicles and reducing delivery miles to reduce emissions. Each month, Melonn quantifies the CO2 emissions from their operations and purchases carbon credits to offset the impact. To date, it has compensated more than 80 tons of carbon.
Another innovative fintech-focused on the ‘E’ in ESG is Kin, a company with a direct-to-consumer home insurance model for property owners in areas most impacted by climate change. From climate risk forecasting and weather modeling to emergency preparedness, Kin uses data so homeowners in places such as California, Florida and Louisiana pay less for essential coverage.
Chilean portfolio company Betterfly contributes a portion of its revenues to social impact projects and enables its clients to do more social impact giving as well.
Betterfly has donated more than three million meals to children in need, planted more than 300,000 trees and provided millions of liters of clean water to communities across Latin America. In 2021 the company became the first startup to work with Teleton, an annual charity event held in Chile since 1978 to help children with developmental disabilities, raising – together with its clients – more than $600,000 for the nonprofit.
FreeWill, a majority-female-owned company with a staff that is 60% female and 45% people of color, has helped people make more than $5 billion in commitments to more than 600 nonprofits and charitable causes through free estate-planning tools.
QED portfolio companies Resolve and Summer are both B Corp-certified with social missions to help consumers swamped with debt. The latter recently partnered with the Student Debt Crisis Center to launch a national survey of over 7,000 student loan borrowers, finding that the student loan crisis is disproportionately impacting women, BIPOC and LGBTQ+ identifying borrowers – a key priority on its 2022 roadmap.
Elsewhere, Hello Alice provides access to financing and tools for SMB owners, many of whom are minorities; RestLess is fighting ageism in the U.K.; FinancePeer is enabling funding for quality education for children from middle-income families in India; Coru is addressing financial stress in Mexico and the developing world through actionable coaching and personalized wellness plans; and AtomicVest is enabling wealth-building at scale globally from its Los Angeles headquarters.
QED often serves in a strong advisory role since the vast majority of our almost 200 global investments are at the seed or Series A stage.
Broadly speaking, we help bring the first layer of corporate governance to many of these companies. We’re trying to build it holistically through embracing diversity on their leadership team, reinforcing the need for business ethics and compliance, creating board independence, promoting corporate transparency and being accountable to shareholders.
Mike Packer is a partner at QED Investors.