In another indication of how environmental, social and governance criteria, or ESG, is making its way into venture capital, take a look at Cathay Capital and its venture arm Cathay Innovation.
In late 2020, Matthieu van der Elst joined Cathay Capital as chief impact officer.
The move was notable in that the position was a newly created role by the firm as part of its commitment to ESG and impact strategy. Also of note was that van der Elst was for the previous dozen-plus years the chief executive of Michelin Ventures, an LP of the venture investor Cathay Innovation.
This week, his work since he joined is coming to light as the international, multi-stage investor Cathay Innovation is announcing its ESG framework to help evaluate future investments and to work with its current portfolio to achieve ESG-related goals.
“This process began about two years ago when we started to see our most successful start-ups scale and have an impact on society as well,” Denis Barrier, chief executive and co-founder of Cathay Innovation, told Venture Capital Journal. “We saw how ESG was an important consideration in the value proposition of the companies and how their impact was also linked to economic performance.”
Barrier noted that since the venture arm was launched in 2015, the firm has seen a growing need to help companies better understand the environmental and social impact of their tech solutions. He said it’s clear now that sustainable business practices are not only critical for the planet, but essential to the success of a business and for creating more resilient and valuable companies in the public markets.
Among the examples he cited from the current Cathay Innovation portfolio of companies focused on providing services that have a positive impact on society are Chime and Pinduoduo.
San Francisco-based Chime provides banking tech solutions to help its members avoid bank fees and save money. The company is currently valued at $25 billion, according to the unicorn tracker of CB Insights.
The publicly traded Shanghai-based Pinduoduo operates an e-commerce platform that connects farmers and distributors with consumers.
Barrier and van der Elst said that the firm has developed an ESG framework to evaluate potential investments during the firm’s due diligence process. Barrier said the firm wouldn’t invest if founders weren’t interested in building a sustainable company.
“Does the founder not only want to go on a journey and scale the business and achieve economic reward while also providing a sustainable business,” he said. “If they don’t care about building a company that creates a positive benefit for society, then we won’t invest.”
As part of its new strategy, the firm said it is compiling data on its portfolio and is reporting quarterly to its LPs about the progress of every company regarding such factors as climate-risk exposure, among other metrics.
The roll-out of an investment framework by Cathay Capital is another example of how ESG criteria is making its way into venture capital. In the last couple of years, more GPs and LPs have discussed ESG implications, especially in the wake of a pandemic, growing concerns over climate change and the social protests of 2020, which have all spurred change throughout society.
Just last month, Norwest Venture Partners, which raised $3 billion for its latest and largest fund to date, introduced its ESG policy to help define its approach to due diligence, investment and portfolio management processes.
Last summer, VCJ reported that energy and industry investor Piva Capital was also launching a program to evaluate start-ups.
Meanwhile, LPs are scrutinizing the ESG credentials of their fund managers like never before, according to VCJ‘s annual LP Perspectives Study. In the study, 74 percent of LPs said that a strong ESG policy will lead to better long-term returns in their private markets portfolios. As a result, the LPs anticipate more fund managers will develop ESG-related policies as the ESG revolution continues to build momentum.
Van der Elst told VCJ that he joined Cathay to combine impact with scale. “We are trying to be a better ESG impact player, to be useful to our portfolio in terms of impact and ESG. How can we help at every stage, from scouting the best companies at investment to exiting them and satisfying the customers, the employees, the partners. That’s really what we are trying to do.”