Ep 12 - Anna Pellicer – Investing with Impact

Introduction: 

Hello, and welcome to ESG in VC, a podcast where I continue with my quest on raising awareness around the ESG VC ecosystem and interview top players in the ESG space and where we dive into ESG-related topics, exploring how investors, regulators, and founders try to build the most sustainable and inclusive society.

I'm your host Oksana Stowe, and today we have Anna Pellicer joining us. Anna is an early-stage VC investor at Abac Capital, a Barcelona based private equity and VC fund investing to improve the sustainability performance of its portfolio companies. She also holds the SASB FSA credential, which studies the link between sustainability and financial performance.

So let's jump straight in.

Oksana: 

Hi, Anna. Thank you for joining us today. Abac’s funds define themselves as investors with impact. Could you tell us a little bit more, what investing with impact is? 

Anna:

Hi, Oksana. So first of all, thank you so much for having me on the podcast. I'm excited to be here, and I think it's an important moment for the venture capital industry. So very thankful for initiatives like this that are getting the conversation going. 

So, as you were mentioning, so at Abac we define ourselves as investors with impact, and that has a lot to do with the way we work with our portfolio companies, both in our private equity practice for mid-market companies and in our early-stage VC practice, which is currently the two verticals that we operate. 

Investing with impact has to do with the role that investors have and the way they engage with their portfolio companies, so when it comes to managing the impact of these companies. It's about changing the performance of these companies to intentionally drive sustainability outcomes. So in short, what we want to do with our capital is to actually make a difference in the way that companies are actually operating so that we help them remove the negative externalities and then focus on scaling the positive ones.

But before I get into more detail, I would like to take a step back because I think there's a lot of confusion in the investing space. I would say, especially in venture capital, between what ESG is, what impact is. And this is actually a topic that I heard was addressed by the Venture ESG team on a podcast, on one of your podcasts so I also encourage everyone to listen to that. 

But ESG in short is just very much focused on processes and practices and in the way that companies embed environmental, social and governance factors in the way that they're making decisions. Now impact is about intention and intention in driving sustainability outcomes that will actually contribute to broader social or environmental challenges.

So I think that the first idea when we talk about impact, the idea that is really fundamental, is the notion that all companies have an impact. This can be a negative impact. This can be a positive impact, but all companies have an impact. And what we want is for organisations to manage their impact in a way that they will not be harming the environment or society, but rather helping them progress.

So when we get into the impact space, we see that really there are two dimensions to impact. So on the one hand you have the impact that a company has, and you can find, I think like two models here. So you can find there are companies with traditional business models and what you want to do with these companies is help them remove the negative externalities and then see how their business model can actually scale positive ones.

So if you think about, for instance, a large company that relies on human capital because it operates a lot of warehouses.  Maybe you can think about, okay, how can I employ rural communities or communities that are at risk in certain areas through my recruitment policies for instance? This would be an example of a company with a traditional business model that is trying to use its company to actually solve a social issue, maybe in a certain area where there's a group of people that are a part of society that has issues entering the labour market. 

Then you have companies that are born to solve problems, and this is the kind of company that uses their business model to contribute to the solution where the solution is really the objective or the purpose of this company.

And these are usually companies that are backed by investors for impact. I'm sorry, because there's a lot of wording involved in the impact space, but investors for impact. So investors that are looking to back these new solutions. 

The second axis of impact is the impact of an investor. And so I think that this can come in three different ways. The first one is how you engage with your portfolio companies. This is what we try to do. So we invest in traditional business models. But what we want is to work with the management, to improve these externalities and actually scale impact as companies grow. 

Then you can have investors that are backing companies in underfunded sectors, or you can have investors that are providing flexible capital. So that might mean accepting less return or maybe holding the asset for a longer period of time so maybe you have a lower IRR. 

So I think at the bottom line in the impact space is that impact should be intentional. It should be something that you can measure. It should be something that is focused on an outcome and that is based on evidence. So that is contributing to a problem that exists.

But what we see is that this can happen in different types of companies and in different scales. So you can back a CleanTech company that is looking to remove carbon from the environment, or you can back an established and large company and help them reduce their emissions. You know, both things have an impact and these are complementary approaches.

So when we define ourselves and to finish this first question, but when we define ourselves as investors with impact, what we mean is that our capital aims to change the trajectory of the companies that we invest in so that they can have a positive impact through their business models and the way they operate.

Oksana:

Yeah, and I actually think one cannot exist without the other, you need to tackle both. And I think it's great that you take that approach and differentiate as well. 

But why do you think it is important for traditional investors to invest with an impact mindset? And what have you seen where that mindset is being introduced and really makes people pause because unfortunately it's maybe not spoken openly, but there are still a few traditional investors who take the whole impact quite cynically, and they recognize it's important, but they still think it's quite tangential. 

Anna:

I think there are so many reasons why this is important. The first one is that investors are in a really privileged position to push change because they're managers, we're channelling impact. And so we have a multiplier effect and actually investing with impact, it's an agile and scalable way of transforming companies and actually working towards development goals that we share with the societies where we actually operate. 

My second point would be, I think that the impact space is evolving from measurement towards accounting and actually influencing valuations. Sustainability, so before we discuss impact, I think sustainability issues already have financial impacts in companies. So if you think a company that doesn't manage governance well it probably has a higher risk profile. So it probably has a higher cost of capital, for example. 

If you improve your energy efficiency, you're usually improving your cost structure, you're improving your EBITDA margin. If you launch a sustainable product line, this can be a growth driver, it can drive higher retention, create brand value. It can position your company better as a supplier. 

So this already happens and it already exists. But when we look at impact, we see that we're advancing towards a paradigm where impact will be integrated into accounting. So what's happening is we already see how frameworks and standards such as at IRIS+, the B impact assessment. So frameworks are becoming I think more mature in terms of how externalities are measured and then how impact should be managed. 

And I think that the next step, and there's a very interesting initiative at Harvard Business School called the impact weighted accounts, the next step is taking these externalities and actually turning them into accounting adjustments made to the P and L or to the financial statement of companies. And this is where we're going. 

And so if we want to help our portfolio companies perform well in the long-term, this is something that we should be looking at.

My last point would be if we look at asset classes. So for instance, in private equity mid-market, I think the role of investors is helping market companies change and transition to sustainability because these companies can actually profit from the expertise and the resources that an investor can offer.

In venture capital, I think this is essential because we are really finding industries and we're not very certain how these industries will be impacting people or how many, what externalities they will have. And this is something I think we have to think from the moment companies are born, new industries are born, before they start scaling and so externalities start scaling.

Oksana:

Understood, and Abac actually has a private equity and VC arm to it, which is somewhat unusual. There are not that many funds that are set up that way. I think it would be interesting to go a little bit deeper into that, and if you could comment, how does investing with impact change from private equity to VC? What have you seen from your experience and noticed in the market?

Anna:

That's a really good question, and also something that we're actively working on at the moment. So I think we have been leading ESG and impact management, especially in our mid-market private equity practice. So we buy out companies that range between 30 and 300 million revenue and average 300 employees per company.

And in VC, we back pre-seed and seed early-stage companies. So we're kind of working on how to replicate what we've been doing in PE in the venture capital space. I think that as an investor with impact, at least from our perspective, there are two fundamental questions that you should be asking. 

The first one is what challenges can you actually contribute to addressing through the asset class that you're investing in? This is different from private equity to venture capital. And then what type of engagement can you have with your portfolio? This is, again, super different when you take a majority position and you actually buy the company and you own the company compared to when you share the cap table with other investors in our minority position.

So if we look at our journey with private equity, so I think it's maybe helpful to give a bit of context. So I think for many years we focused on having very strong ESG processes. 

And so that meant strong sustainability governance, having sustainability leads at every company, having sustainability committees at every company, tackling diversity at the Board of Directors. Are we discussing sustainability with our portfolio companies? Setting up strong data collection, having quality data, which is very hard, even when you buy the majority of companies and you own them. Identifying materiality, embedding sustainability factors into corporate strategy. 

And we even certified ourselves as a B Corp, so Abac as an asset manager. And then we rolled out the impact assessment and the B Corp certification to our portfolio companies. And so a couple of years ago, we were in this position where we had a strong performance on that front, and we had companies that were purpose led with sound processes working towards certification. 

We had our first company that is nearly certified. So, I mean, we were advancing on that front, but we started thinking about the intentionality. So in a way, how can we measure this positive impact or this changing performance that we're having on portfolio companies?

So the first thing that we were trying to understand is okay in the market where we operate, what is the dimension of the problem that we can actually tackle? So what are problems, social, environmental problems that mid-market companies can actually change? 

And so what we saw is that while mid-market companies, which are the companies that we buy, drive over 50% of the GDP in Europe, they hold around a hundred million job positions, these companies are struggling with integrating sustainability and that detriments their position in the long term, but it also perpetuates externalities.  

And to give one example, so out of all occupational injuries that occur in the EU, 82% happen at small and medium companies. This is a huge problem. So when we had that in mind and understood the problem, we then thought, okay, what can our role be here? So we thought, okay, we take majority positions, we're in a position to share the knowledge, share the resources, to actually help our companies remove these externalities and then focus on areas where they can actually have a positive impact.

And some of these areas are shared among mid-market companies. Some of these areas are specific to every industry. This kind of led us to be able to set thoughtful, researched improvement targets, where we have evidence that if we improve these targets and we go above these targets with our portfolio companies, we're actually contributing to solving a problem through the asset class that we are investing in.

And basically these targets are in five categories, four of them are shared across our fund. So for all portfolio companies, these are targets around climate, around employment, around diversity and around governance. And then we have a fifth bucket that we use to think about the impact of every industry that we invest in, because this of course is different.

So this is a private equity journey. And then when you think of all that and try to apply it to venture capital, you see that first of all, the influence you can have is different. In venture capital, you're sharing your cap table with different investors. These investors change very quickly. So your influence, even if you're a lead, you know, at one stage you will not have the same influence on the board on the next stage.

And I think you need to coordinate with other investors and be transparent about these discussions, because the last thing you want is investors kind of steering companies in different directions. 

A second challenge that I see or something that is different is the resources. So there are limited resources in venture capital when it comes to capital, but also when it comes to time. These are competitive environments. Everything moves very quickly. And I think that impact on ESG has a challenge of being more dynamic and adapting to where the company is at every stage. 

And I think a third maybe challenge is that the topics to address are different. So in private equity or in established industries, we have frameworks that we can use to understand what externalities are important in what industries. This is something that doesn't exist that much in venture capital because of course, these industries are new. 

So I think that one challenge is actually cooperating more with other investors and just trying to get this data and all this knowledge and frameworks going just to help everybody get on board the impact space.

I think my last one would be on the bright side, and one thing that we do see in venture, which is really positive, at least we see it like is that new founders are more receptive. New companies are just built with this purpose in comparison to maybe the kind of management companies that we find in more established companies that maybe they're historically rooted in a different management mindset or a different idea of what the role of the private sector is.

So that is a challenge that private equity has in terms of training knowledge that maybe it's easier in venture capital. 

Oksana:

Yeah, agree. And there is definitely a big push from VC, and I'm more familiar with VC than PE myself, but there is definitely a big push to portfolio companies to adopt ESG practices. And they also themselves add an impact lens when they are making investment decisions.

But how can a VC investor integrate ESG practices and impact management so it adds value to entrepreneurs, so that it's feasible for early stage companies? And maybe you can give an example from your portfolio, if you have done something like this yourselves. 

Anna:

Yeah, absolutely. We like to think of ESG and impact management in venture capital, as I was mentioning, as something more dynamic. 

Two ideas that we're committed to that we're working on is first impact management, I think should be addressed in a way that adds value to the company, to the business model, to the growth drivers at every stage. Our experience is that it helps entrepreneurs see it as something strategic and therefore make it a priority. And this is important because there are so many things on the table at the very early stage and resources are so limited. 

A second point that we're committed to and we're working on is we really think that early-stage investors have a huge role to play embedding ESG practices in portfolio companies.

This is where it must be dynamic. But our rationale here is, first of all, ESG and impact are different things, but probably a company that has good ESG practices is better prepared to manage its impact as they scale. 

Second is ESG is advancing quickly and on the regulatory front, so many different ways. Companies that have 250 employees already have a lot of requirements to fulfil, and this can happen quickly at a startup that is growing fast. Or we see that our role is to actually help our portfolio companies prepare to scale these processes. 

It's probably not writing all the policies down at the early stage, but I think it is working with them to have them understand what the framework is when they will have to be implementing what processes and what policies.

And this is also important to raise capital, to build a strong equity story. And I think later stage investors. Just as they like to see other aspects of the business that are prepared to scale, they will like to see companies that are prepared to scale ESG practices and that are prepared to manage their impact, at least this is our experience with our portfolio. 

So how we are thinking of working for instance, in due diligence is I think in early stage, what's most important is checking alignment with the management. There's not a lot of data to look at. These are companies that are usually co-working spaces.

I mean, it's hard to get data and sometimes there's not even a product. So yeah, it's basically hard to get data and do due diligence. But I think that an element that is super important is understanding how the management thinks about impact. 

And so for instance, giving an example, if I ask an EdTech or a HealthTech founder about accessibility, and they think that it doesn't have anything to do with the business, then I might be worried about how they will manage the impact at scale. What's going to happen with accessibility, which is a huge impact topic. If you're building in education or in healthcare, within that, our experience in private equity is kind of helping us embed these kinds of questions into the conversations that we have with founders from the investment team when we're thinking of investing in a company. 

For the investment period, we're thinking that our role should be first to help founders understand the impact of their business model and kind of embed impact management into the product roadmap into the business model and also training. So as I was mentioning before, helping them understand the ESG ecosystem, which can be complicated, helping them understand when they should be doing what and basically prepare. 

And finally, but I think it's important, the equity story. We encourage our founders to share how they see impact or how they want to approach impact management through their business when they are trying to raise further capital to us, this is proving to be actually valuable.

And yes, I'm happy to provide an example if you want, from one of our portfolio companies in our early-stage VC practice. So Qoala is an example that I really like, and it's an end-to-end shopping solution. 

So how it works is they're a browser extension that guides the user during the entire shopping experience. So from automatically applying discounts to redeeming cash back to the checkout process. And in turn, it helps retailers improve the experience that they deliver to users and reduce the friction throughout the whole process, especially at checkout. 

So when we were discussing impact with their CEO Rafael, he was telling us how they realised that because they're built on enabling eCommerce there are carbon emissions embedded in the transactions that their technology is actually facilitating. So this product will be shipped and maybe it will not be shipped in bulk as it is shaped in retail. There are so many implications when it comes to environmental management and emissions in any eCommerce in general.

So their team was really keen on finding a way to actually use their technology to help users shop more consciously. They started engaging with users and retailers, so their two sides of the value chain, and see, you know, if this would be something that they would value in the product. And the feedback was actually very positive.

And so the first thing that they did was to embed the option to offset emissions when users redeemed cash back and that worked very well. And so what they're now working on is actually continuing to embed this kind of impact or this externality into the product and into the way the product develops.

And they're thinking of building well, they're actually doing it, building a sustainability panel to help users make conscious decisions and understand what the impact of the purchases that they're making on the internet is. 

So what are the emissions of the products that I'm buying? Where am I shopping from? What retailers are better positioned in sustainability? And this is super powerful. See, this is a product that you use throughout your whole shopping experience across the internet. So this is like cross-retailer. And so we think that this is super valuable in terms of what it delivers and what it means when we think about the impact of this company, right? 

I think these are the questions that are valuable for founders to make. So now we have a company that is performing well, and on top of that, they have embedded impact into their product roadmap. And we think this is super powerful to deliver value to users, to retailers, to society at large. 

And proof of that is that we’re the first portfolio company or VC practice that is actually certified as a B Corp. We're just very happy to see that our VC portfolio is also advancing in this direction and in this way. 

I think we think of ourselves or who we want to be in our VC practice as kind of the partner for our funders to have these kinds of conversations and just to encourage them from day one to face externalities and think how they will be managing them through the product. 

Oksana: 

Yeah, understood. And a very good example.

And in terms of interesting themes that you see that are emerging within impact investing, which ones are you excited about yourself in particular? 

Anna:

I think especially in Europe, but anything that has to do with the environment and climate, I think is a very hot topic in Europe. It's backed by regulation. It's backed by policy and the plans that the European Union has for the region. And it has been accelerated by supply chain disruptions, the Ukraine crisis. 

So anything that has to do with strategic sectors in terms of technology with energy security, with food security, and with circular economy, because the EU has a lot of regulation actually looking at waste, anything that has to do in this space will certainly be growing in the near future. 

One space or one sector that we are very excited about is all the technology and the companies that are working around the aging population. And that will be a huge issue in Europe. So that means from companies that are trying to make healthcare more efficient, so they can actually assist more people, which is probably what's going to happen in the next year. Pressure will increase so we need technology to have doctors, nurses, and hospitals run smoothly. 

And also technology that will help people stay healthy and home for a longer period of time so that we can also avoid putting pressure into the healthcare system. So I think that this is a space that we are very excited about.

Oksana:

And do you think that current macroeconomic conditions will have an impact on impact investing? It's too many impacts in one sentence. But what are your thoughts around that? 

Anna:

There's a lot of uncertainty in this space, but what I can say is that both impact investing and impact management are not trends.

We continue to see LPs allocating capital and a huge demand to find asset managers that are actually taking impact seriously, that are investing in companies that are solving problems, that are investing in asset managers that are helping companies operate better. 

I think that impact investing focuses on problems that exist, so as long as a problem exists, there's a market. And so probably there's an opportunity to look for solutions and ways to address this issue. And sadly, the macroeconomic environment will probably create new problems for new sectors or existing sectors of society. And so we believe that there will continue to be an opportunity to back founders that are looking into this space. 

Oksana:

Yeah, I think it's encouraging to see that one of the top priorities and capital is still there for this. So it's really encouraging. 

Anna:

Absolutely. 

Oksana: 

Well, thank you so much for joining us, Anna and speak soon. 

Anna:

Speak soon. Thank you so much for having me.

Oksana:

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