Family offices and private investment funds have been on the prowl for sustainable businesses, largely in the growth or late stages, to invest in, but there are opportunities to be found among early-stage ventures, according to single-family office Rumah Group.
“We’d love to see more support in the early stages, because private equity (PE) funds are all excited about opportunities within the energy transition, infrastructure and so on. But they’re all sitting there saying ‘give me $100 million, give me a $200 million, give me a half-billion dollar investment’,” said director Thomas Knudsen.
“So I think there is an opportunity there, whether it's family offices, whether funds, to deploy that little bit earlier, which might mean higher risk, but then actually spread the risk on your investments to get that early traction,” he said.
Rumah Group began looking into environmental causes six years ago as part of its philanthropic arm Rumah Foundation, but expanded into venture capital investments across environmental and social causes three years later.
The family office has 20% of its investable assets allocated to venture capital focused on impact investments, but applies an environmental, social and governance (ESG) lens onto the other, more traditional, asset classes it has exposure to as well.
“We apply exclusions first, which is developed with different family members,” director Kathlyn Tan told AsianInvestor. “We consider ‘what don’t we want to invest in?’ So we talked about the humanitarian, social side and the environmental side, we included animal agriculture products, fast fashion and, obviously, fossil fuels on the exclusions list.”
“And we then apply ESG metrics, to say we only want the top quartile, and then we do a sense check again, because we might think ‘some of this looks a bit weird, we’re not sure about that,’ then we go into it again,” she said.
The firm now has nearly 10 VC investments, which include funds as well as direct investments, across areas such as oceans and plastic waste reduction, early childhood development and eco-hotels. It is also partial to businesses that operate in Southeast Asia while being domiciled in Singapore.
One of the funds it invests with is Circulate Capital, which announced its third close for its ocean fund, bringing the fund’s total commitment to $53 million. In many cases, investing in the environment will have positive social impact, Knudsen and Tan noted.
“If you look at some of those issues, education, poverty, and so on, most countries in Southeast Asia live off the ocean. You've got plastic pollution, overfishing, infrastructure, mangroves, etc being destroyed, and many end up in poverty. If you address the earliest stages, you then also address poverty in education, which is often an outcome of not having enough food,” Knudsen said.
“You can give money to a school, or you can give money to climate change, which will let you have a bigger impact long term on many of the social issues.”
While the family office started out in its ESG investing journey with funds, it has moved into making direct investments as it grew in sophistication when evaluating deals. The pair also started to question the presence of tech firms in ESG fund products that were being pitched to them.
“We can't look ourselves in the eye if we invested in something we just don't believe in for higher returns,” Knudsen said.
On why they preferred Singapore-domiciled and Southeast Asia-focused ventures, Tan said that the ease of doing business, high transparency levels and good governance were a draw. “We’re seeing more and more companies moving out here to do that, because of the governance that being in Singapore gives,” she noted.
The proximity helps with meeting up with the founders in neighbouring countries and building those relationships too, they said, although they are not completely opposed to investing in a company looking to invest into the region.
“It’s going to be interesting now making an investment outside Asia for us to say, ‘how does that work?’ Can we keep that intimacy with the founders understand what they're doing? Or to help them in expanding into Asia. So we hope that's kind of our focus with them,” Knudsen said.
On measuring the impact of their ESG investments, Tan said that it is comparable to measuring philanthropic impact. Sustainability means something different to everyone, and not everyone has the same understanding of the taxonomy, she said.
Even if an investor has identified the Sustainable Development Goals (SDGs) that he or she wants to pursue, individualised metrics are often designed for each specific project, Tan said.
The family also worked closely with private banks to discuss the type of investments they were comfortable with. Funds or companies that have high ESG ratings may not be in line with their values, for instance.
“It’s a process of mutual learning,” Knudsen said.
Tan believes that better policing of ESG marketing needs to exist too – “making sure that companies are doing what they’re saying,” she said.
Another area she thinks is missing from the industry is an aggregator of sorts to make it easier to compare deals.
“We spend so much time researching and looking around and talking to people. If there was an aggregator that brought together different deals; if we knew which projects were there, that required catalytic funding, that would be quite interesting, because that would cut all that amount of time that you're doing, asking around and looking for good deals,” she said.