Ep 10 - Bo Ilsoe and Monica Johnson - Sustainability and Returns

Introduction: 

Hello, and welcome to ESG in VC, a podcast where I continue to interview top players in the ESG space and where we will dive into ESG-related topics exploring how investors, regulators, and founders try to build a more sustainable and inclusive society. I'm your host Oksana Stowe and today we have Bo Ilsoe and Monica Johnson joining us.

Bo is a Managing Partner at NGP Capital. He has developed NGP Capital from initial commitments of $25 million to more than $1.6 billion, and now investing across three continents. A technologist at heart, he believes in the positive, transformative effects technology has on society. 

Monica is the Operating Partner and Chief Financial Officer at NGP Capital. Prior to joining NGP, Monica was the CFO of CafePress where she led the company’s growth from $30 million to $250 million in revenues, as well as through its IPO. 

Let's dive right in. 

Oksana: 

Hi, Bo and Monica, Really good to have you with us, especially given that you are on two different continents, which is really exciting. 

So NGP recently published a very interesting report and you can find a link to the report in the episode description and on our website, but the report focuses on funding trends of more than 2000 startups to understand the impact of the growing ESG focus as well as sustainable development goals. 

And before we sort of dive a little bit deeper into the actual findings of the report, I thought it would be good to hear from you to get a little bit of background. What prompted you to do this study and why you felt it was important?

Bo: 

Yeah, Bo here I can go first. We have spent a lot of time in the last three years thinking about investing related to ESG or SDG targets. It's sort of really being crystallised now for us as an investor. We wanted to understand what's the current state of affairs in the market. We wanted to see how are different countries comparing to each other, which are maybe more ahead than others. And also what's the general level of investments that go in, in venture capital to ESG or SDG, if you will, targeted-companies? 

Monica: 

Yeah, and I would say we have this great internal system that we use for sourcing and we have access to hundreds of thousands of companies, and we use it to decide what kind of companies we want to look at.

So we really wanted to cross reference that with how do we think about not only our sourcing as it relates to sort of the typical metrics, but then put the lens of the SDG and the ESG, so that we could intersect that data with what's evolving in our own practice in terms of how we think about ESG.

So there's another way to use a sourcing tool that we use internally to look at what's going on in the environment and how we think about ESG. 

Oksana: 

Great. And when you collected the data and started to make sense out of the data, what has surprised you the most and why? 

Bo: 

Yeah, I think our main conclusion is that ESG is really going mainstream. And if you look across the markets in Europe, for instance, you see anywhere between 10% and 20% of investments are going into companies that have SDG targets as part of their strategy. That was one big surprise.

And then the other thing was obviously that, what are sort of the leading markets versus maybe what are the trailing markets. But overall, we were very pleased to see that.

And also in a way, ESG or SDG-focused companies, they come out of this a little bit of a niche, if you will, and also maybe with a sort of sticker on it, that it is not a financially sound investment, it is more if you will, towards a charity or money that maybe you expect to see, not so much return on. And we believe that's absolutely not the case. 

Monica: 

And I was also really pleased to see that climate action came out as the leading SDG. And I think it's the leading goal and it's such an area of urgency that we see today. So I thought it was great to see that came out as really the leading goal in the data set we used. 

Oksana: 

And given the market volatility, quite a few people have proclaimed that ESG is dead, actually, and many people say that it was much easier to care about ESG and SDGs in a bull market. But when things are not as rosy, it will be much harder because, on the ESG side, companies will have to make decisions internally about layoffs and many other things while maybe on the impact investing side, the distribution of capital will be different. So what are your thoughts on this? 

Bo: 

Yeah, Oksana, that's very much the perception among some people. When you look behind the data, it is just not true. And one of the reasons it's not true is that digitalization is hitting now so many sectors in the industry.

And if you think for instance about the micro-mobility companies that have sprung up, and initially you could say there was a lot of waste of bicycles and scooters shared, and it has now gone mainstream. It's just an example of a private funding of systems and solutions that make public transit a lot more convenient, a lot easier, and also connect both first mile and last mile in public transit and in that way, relates to lowering CO2 emissions and also making public transit much more efficient. And it's a purely financial investment that has worked for a number of investors already. 

Monica: 

I also think if you look at the macro environment, it's just not the financial environment, but if you think about the climate issues, as well as political turmoil and, and what's going on in the macro environment today, I think all of those are impacting the way people think about ESG and increasing the trends to adopt ESG as well.

Oksana: 

So you don't think that ESG is dead, which is very, very good to hear because I also disagree with this statement. 

Bo:

And Oksana, maybe if I can jump in on that still also, there's a whole new generation of digital native investors coming into the market as well. And they have all grown up with learning about the environment, learning about global warming and that cohort, a generation of investors will also come in with a very different mindset about being mission and purpose driven. And that in our view will just strengthen the ESG and SDG focus also on the investor side.

Oksana: 

And circling back to the report, and 2,000+ companies is quite a good sample size and coming back to other criticisms of ESG disclosure and also focus on SDGs as your sort of investment case, I think a lot of people say that it's quite difficult to link it back to cash flows or in increases in firm value and finally, financial returns. 

Do you think that it’s the right approach, once again, to link everything simply to dollar signs, or should we actually look at it a little bit broader and try to highlight the maybe other aspects of benefit and assign value to it in some shape or form? It's a very open-ended question.  

Bo:

Yeah Oksana, it's a good question. Maybe if I take attack from the European point of view and Monica also can comment from the US point of view. So you have now seen in Europe, a regulation that has come into force called SFDR and that means that all large institutional investors in Europe will demand reporting on the ESG targets. Meaning that that demand will flow into VC funds and VC funds will have to report that from their portfolio companies. 

And that just creates a massive force for good in terms of bringing the ESG targets forward in all conversations, also both among LPs and their GPS, and then among GPS and their potential portfolio companies.

And it is a relatively new regulation we have to say, right? It started in 2020, and has sort of been starting to roll out in 2021. They are more aspects of that being rolled out, but that has really driven also a much bigger awareness in Europe among these, really putting money behind these targets as well without necessarily sacrificing financial returns. 

And I think that's sort of the myth that we have to debunk that you cannot make investments that are good for ESG targets and not make money at the same time. Right? It's not true. You can make very sound financial investments and you can also do good for the ESG targets. Monica can comment on the US side.

Monica: 

Yeah, and I agree, and I think the first thing in the struggle right now is there's the need for a standardised approach for reporting. And I think whether it's the US or Europe, there are just different standards that are evolving. And I think that's where everyone's struggling. Was it SASB, is it the SEC has proposed some regulations, we've got SFDR in Europe as Bo has mentioned. So it's really hard to measure when you can't compare across different companies. And so I think the real focus right now is what is a standard set of measurements across companies, across different regions, that we can use to measure companies’ performance across ESG.

And then once we get a bit more consistency, then we can start to compare companies and do a look back to performance. But I think right now the focus has to be on what are some common measurements across companies. And that I think will improve that topic significantly and we’ll get away from companies greenwashing, or are they really adhering, are they really sustainability and ESG focused? 

But the common measurement, I think has really got to be the focus right now. 

Oksana:

Yeah, and it's interesting because of the confusing landscape and some people call it an alphabet soup around ESG, which I think really highlights the issue. But what do you think are the barriers? Because on the ground, I think everyone recognizes the need for a common language, so to say, but it seems to be quite difficult to get there. Do you think it's a question of time or a question of complexity? How can we tackle it actually? 

Bo:

Yeah, I think if you spend a bit of time in this space, you will sort of understand more of the alphabet soup, right? As you maybe start looking at it, it can get a bit confusing. I think we will, as in now in Europe with the SFDR regulation, there is a common language. There are common guidelines. There is quite a lot of flexibility within those, and that is fine. 

To still go back a little bit to your earlier question also, and fundamentally digitalization tends to drive more efficiency into businesses and ecosystems. And that's why digitalization actually helps drive ESG in many cases. You think about logistics and transportation. We have invested in companies that are making logistics more efficient. You think about telehealth or getting healthcare served fast on your phone in a reliable manner. 

You're thinking about the whole movement of maybe growing meat from protein, et cetera, et cetera, right? So there are most of these areas where digitalization happens and new technology comes in that actually drives efficiency. And in that way it also helps drive or makes services available to underserved communities, for instance, in telehealth or among farmers in developing countries.

So across many of these areas, right there are strong ESG consequences in a positive way, if you will, from that digitalization. It's not everything. And people can argue, well, what does more gaming, for instance, mean for the environment or more cat videos loading service in data centres. 

So of course, it's not everything, but if you look across these, in the case of the UN SDGs, you see that many of the new trends driven by entrepreneurs are actually serving the betterment of these goals overall. 

Monica:

And I agree, and I think one comparison I've heard is ESG is kind of where GDPR was years ago, where there are efforts there, but it took a number of years to get a platform like that and approach across the regions.

So I think we're moving there. And as Bo said, the digitization of where we're at, I think can accelerate that. I mean, we look at a lot of companies that are focused on governance and reporting that are going to, I think, accelerate this process. 

Oksana:

Yeah, and to circle back a little bit to the scepticism, I think there have been a few in the venture community that have really embraced it, but a few VCs remain kind of sceptical thinking it is very much a marketing exercise, and not real in many ways. 

Do you feel, given that you co-invest with quite a few established and maybe emerging managers, do you feel that's not the case, and what has NGP done itself to embrace ESG policies on a fund level and portfolio level?

Monica:

Yeah, I'll start with this one. So I think when you think about venture, and we're part of Venture ESG, which is a great organisation that brings the venture firms together, but I think one of the benefits of venture is that we really have sort of three levels of ESG that we can embrace and have influence. 

And so as you said it starts with, what do we do as a firm? How do we operate? How do we treat our employees? How do we hire? What's our own ESG policy? So it starts with that. 

I think the second level is, what do we do in due diligence? And so VCs have a lot of structure and processes around financial due diligence and legal due diligence. And now we've added ESG due diligence. So we've added that to our due diligence checklist. We've got a framework that we put companies through. So we're looking through before we invest on the ESG metrics that we have internally. 

And then the third level is for us and many of the VCs we work for, we have board roles, and we have influence within these companies and we're with these companies for a number of years, they can be in our portfolio for 5 years to up to 10 years. And so what board guidance and what influence do we provide to the companies to influence their ESG? 

So I think that's really important is it's not just internally, but we really have three levels that we touch. So that's where we can really have broader influence. 

Bo:

Yeah, and Oksana to your question, I would also say obviously, there are some investors that have strategies that maybe lend themselves less well to ESG, right? 

I talked about gaming, for instance, you can consider how does better gaming or faster gaming or high-resolution gaming or more gaming consumption, how does it impact the ESG targets? Probably not that much. So it depends a little bit what is the strategy of these investors. Again, if you are in Europe, they will have to start conversations about ESG targets.

And of course there, you can impact, for instance, through gender equality, you can encourage entrepreneurs to think about having more inclusive boards, having more inclusive hiring, et cetera. So although you may be for instance, a gaming company that your end product is not something that serves ESG targets, right, there's a lot you can do from a governance point of view in terms of having an impact. 

But the big trends of the digitalization of major industries, like transportation, logistics, and also energy transformation obviously, has a massive impact on ESG targets. 

Oksana: 

And do you think that we reach a point at some point that if you have a company that scores poorly on ESG due diligence, let's say, but it's financially doing incredibly well, would it be an easy decision for you or for a hypothetical fund to say, look, I actually cannot invest in you? Or do you think we are still far away from having such a harsh line? 

Bo:

Yeah, I think there obviously will be some investors that will try to avoid this for one reason or another.

But as said, I think the impact of ESG is quite wide-ranging. And if you think for instance of having inclusive hiring policies, having inclusive boards, and even to your like, AI. How do your AI algorithms avoid bias in how they operate? 

So I find it hard to sort of really think about industries where you completely can ignore ESG. But of course, there are areas where we don't invest and that has maybe less impact, and you can say what food delivery or e-commerce maybe have other impacts that are less desirable in terms of increasing pollution, maybe increasing packaging waste, and so on that they have to deal with as an industry.

But I think in general, if you embrace it, most businesses can be thoughtful about the impact that they have and lower the overall the impact on or make their ESG impact better than what it is today. 

Oksana: 

Yeah, agreed. Sorry to put you on the spot with a question because it's not an easy decision, but when do you think is the right time for companies to think about it? So if you are not an SDG company and you started operating and all of a sudden you are hit with all this ESG alphabet soup. When is the right time for you to start thinking about it? 

And does it, for example, if a company comes and says, look, we actually thought about it consistently for I don’t know a year or two years before they come to you, how much weight does it have in your eyes? 

Bo:

So again, picking an investment has of course many, many variables to it. And if you put things on a pan balance and you have sort of a hypothetical example that you are weighing two investments against each other, and they are equally good, and one scores higher on ESG impact, then of course, we would take that company. It is rarely that black and white. 

And then it goes also with sort of what is your investment strategy as a firm? You tend to be in areas that have certain characteristics of impact. But again, when you think about inclusion, education, and environmental impact, all of these factors. You can make a difference as an entrepreneur and as a founder team. 

And I think all founders today need to start thinking about it from the get-go. And it can make a difference because of course, these things also become habits. Like if I'm a male founder from a certain school, I tend to found a company with some of my mates from my school. And then we hire some people like ourselves and it just happens like that. 

But if you start to build the awareness and the dialogue already early on, they will say, ah, yeah, actually there is something about that. And for instance, we know diverse teams generally make better decisions.

There is even a business rationale for instance, inclusion and being more inclusive than if you don't think about it. So the awareness is a big piece and I think we are just now in the early innings. 

But in spite of that, you can see the rapid growth since 2015 that we have tracked with the data we have presented in the report and has said in many European markets, it's somewhere between 10% and 20% of all invested money goes into companies that have SDG targets.

And it also links to maybe again, back to that newer generation of entrepreneurs and founders wanting to have a purpose, wanting to have a mission that resonates. And I think it's dangerous to put equal signs between an SDG target company and a purpose-driven company. You can have a purpose-driven company without having SDG targets, but more often than not, they're probably linked.

And that's one of the things we have not sort of explored in our report, but that sort of, I guess we have from the data that we have seen. If you have a purpose and a mission, you very often will have some relation to SDG targets as well. 

Oksana:

And what is the percentage of NGP’s portfolio of startups that have SDG targets? And do you have any interesting ones to highlight or that you have been impressed with or where you thought it was a very innovative solution that they came up with?

Monica: 

I would say, I mean, I guess there are a couple of lenses to apply. If we look at SDGs, we've got companies in health and wellness, we've got companies in education. We’ve probably got a bigger percentage of companies in what you'd call industry, innovation, and infrastructure. That's probably our highest percentage. And then probably equal is the sustainable cities and communities.

I'd say, well over, if you aggregate all those, over 60% of the companies fall into those top categories. We've also applied the ESG lens and we come up with over half of our companies falling within those parameters as well.

So really a lot aligned with different goals and different metrics there. I would say a couple of the more interesting companies, and I'll, I'll highlight a couple of the US ones and Bo can highlight a couple on the European front. In the US, and I'll talk about two companies in a mobility space: 

So number one is Lime. And so I think most of you are familiar with Lime, and I know it has got a pretty big European footprint and is really the world's largest electric vehicle company now. And their mission is all about shared transportation and affordable and carbon-free transportation. So that really aligns well with ESG. Their focus is how do we replace all car trips under five miles. 

And so that's a significant decrease in carbon usage and they have really put this at the forefront of their focus. I think in Europe this year, they'll be fully electric and they'll be fully electric by next year worldwide. And they've put out, I think, an aggressive target to be carbon neutral by 2030.

So that's a company that really puts ESG at the core front of their purpose and their mission. And so we are really excited about that company. 

Another company is called Zum and it's a student ride-sharing platform and they provide transportation for students across major cities like San Francisco and Oakland and Los Angeles. They're carbon neutral today and they have committed to being 100% electric buses by 2025. 

So those are two really good examples in the US. And those both fit in the smart mobility space. You've got a number of European companies, especially in the governance space. 

Bo:

Yeah, maybe a couple of other companies. So I talked about logistics before, so we invested in Shippeo out of France and that's a solution that provides visibility to shippers so they know where their goods are, and in that way, they can much better manage the flow of goods. They can manage arrival times, departure times, loading times, et cetera. So that makes logistics more efficient.

Another one is in the digital health space, Clue for women, or individuals with periods, to manage their cycles. And let's say the latest court rulings in the US, of course, put a big sort of exclamation mark around women's right to control their own body and Clue can do so in a non-intrusive way. They just launched an FTC-approved product and you only need a smartphone.

And it has a very, very high degree of safety as well, comparable to other methods of pregnancy prevention. And that again is about the availability of service, empowering people around the world to manage their health better. So, those are just a couple of examples from Europe. 

Oksana:

Yeah, I'm actually a Clue user myself and have been for a long time.

Bo:

Glad to hear. 

Oksana:

But very impressive statistics. And thank you so much for sharing all your views and thoughts, and really good to have you. 

Bo:

Oksana, thank you very much for having us. 

Monica: 

Yeah, thank you very much. 

Oksana:

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