Category: Research

In the time of Covid-19, not all startups were created equal. We have seen some startup founders going through some of their worst nightmares, while some others are having the time of their lives. In this article, based on our experience, we want to examine the impact of Covid-19 to the startup community and paint pictures of how these startups are reacting to the situation.

One way to assess the impact of COVID-19 to startups is through examining the pandemic’s effect on short term liquidity of startups, and the long term profitability (which correlates with the market size of that particular startup’s playing field). This model is adapted from Roland Berger’s Covid Impact Matrix. We then try to map the technology industry by sector into four startup groups: Shining star, Trapped Tiger, Slow Sore, and Panicking Patient, with a definition of long-term as five years.

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Shining Star: This group is marked by its strong growth potential in both the short term and long term. Startups in this space are characterized by the ability to create and capture value completely online and ease and/or urgency of adoption. Covid-19 has driven real demand for solutions in this space, accelerated adoption, and trained consumers to be accustomed to using these virtual solutions. The startups that are included in this group are Healthtech, eCommerce, Online Enterprise Productivity Tools (such as ERP and Software-as-a-Service, or SaaS which can cover anything from accounting, CRM, to property management) Online Media & Entertainment, Insurtech, and e-Payment. Unlike other groups, they have the luxury to focus on perfecting, not fixing, their businesses, and riding the wave during the time of Covid-19.

Boost marketing spend to acquire new users: Responding to the growing demand pie in these industries, many startups were seen to have increased marketing spending to obtain new users. We have witnessed different eCommerce giving out very attractive first-time user incentives. This move is endorsed by many researchers suggesting that increasing marketing spend – instead of decreasing, is a dominant strategy in times of economic uncertainty, if the company can afford it.

Invest to develop new offerings: As lockdown forces the mass from Gen Alpha to Baby Boomers to migrate to online platforms (many wouldn’t have migrated otherwise), several Shining Stars have spotted new business opportunities or new potential use cases for their products that they can capitalize or build loyalty upon. For these startups, they have the privilege to innovate on new offerings without having to worry so much about cash flow. Houseparty, a much loved social networking app that enables group video chatting, for instance, launched a new feature that allows friends to ‘co-watch live events with their friends’ (from sport events to comedy shows).

Integrate new payment mediums to support digital payment of the non-cardholder:  Online payments have traditionally been done through credit card, and a good portion of the now digitally adapted population has no access to them. According to the Thailand payment research by JP Morgan in 2019, Thailand’s credit card per capita is as low as 0.29, and debit card per capita is 0.77. As the Thai population migrated online, startups who have the time and resources are now exploring ways to integrate new online payment methods to facilitate payment from non-credit cardholders (usually students and non-urban population). The alternative payment channel includes payment through mobile operators (credited to monthly billing), cash cards, integration with mobile banking apps, and e-wallets.

Although the Shining Stars are thriving in this new market condition, many have reported difficulties in fundraising. This is because Covid-19 has made networking with investors difficult and many investors are very preoccupied with supporting their own portfolio companies.

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Trapped Tiger: This group is poised to ride the wave of the longer-term market growth but currently trapped by short-term illiquidity and/or temporary sales slump. This is because the startups in this space offer complementary value products or services whose values are created offline (such as mobility or B2B logistics), or the demand for their products or services is highly elastic (such as wealthtech). Their main agenda is to outlive the Covid pandemic and prepare themselves for the upcoming bullish market.

Freeze or reduce expenses: As revenue halts, their net burn rate accelerates. Founders are faced with a tough trade-off between how far they want to cut costs (or resources) to keep burn rate under control, and how much resources to preserve so that they can get back on track once the market recovers. We usually witness headcount freeze, pay cut measures (many founders take steeper cuts than their team to keep morale high), reduction of employee benefits, and decrease in marketing spending. Many have moved from aggressive marketing spending (to acquire customers – which is what the Shining Stars are focusing) to defensive marketing spending (to just make their offering stay relevant in the customer’s head).

Finetune existing offerings and prepare for the next big launch: If their cash position allows it, some Trapped Tigers reported that they are optimizing their platforms, developing new features, or redesigning the user experience to be more on point. Many also have plans to formally launch an upgraded version of their offerings to create a strong rebound momentum for their business once the crisis is over.

Explore creative use cases for excess supply/capability: Many startups are also working creatively to capitalize on their excess supply resulting from diminished demand. Zoomcar, a self-driving car rental platform, for instance, has been working to shift the excess car in their system for B2B, medical emergency, and last-mile logistic use.

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Slow Sore: The Slow Sores are usually B2B enterprise solutions that have locked down short to medium-term SaaS contracts with large corporates. This is why these companies will likely be able to sustain cash flow in the near future. The solution generally comes in the form of back-end efficiency enabler, data infrastructure, and management tools (such as Enterprise IT and Construction-tech). Nevertheless, to onboard these solutions, the corporates would normally have to go through lengthy configuration and system migration, where the startups would then charge ample implementation fees. We can expect that the Slow Sorer will have a hard time making new sales as corporations will try to preserve cash, diminishing sales potential and profitability in the longer run.

Retain and assist existing clients: Startups are devoting time to retain its original customers through feedback-based product improvements. Startups with longer runways also have considered deferring payment schedules to give breathing room for their clients to sort things out first. Amazon Web Service (AWS) has been running a program to give cloud credits or fee deferrals to small companies who are affected by Covid, helping them to continue operation and delay potential job slash.

Reprioritize company’s efforts: Companies are also re-prioritizing their potential clients based on which clients will thrive under the new normal, and shift sales and innovation effort to better suit those growing clients. Many construction-techs are turning their attention to the B2G construction segment, which was once overlooked due to its bureaucratic and traditional approach to business. The reason is that, with the private sector’s growth outlook remaining stagnant, government spending on infrastructure will likely be the only prominent source of industry growth.

Focus on streamlining the onboarding process: Noticing that troublesome and expensive onboarding process is among the key barriers to adoption, many startups are now trying to pursue growth by making the onboard easier and cheaper for their clients. This could mean offering a more standardized solution, a self-guided onboarding wizard, and elimination of implementation fees to target small and medium enterprises.

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Panicking Patient: The Panicking Patient group is affected by Covid-19 in every worst way. These startups are behind the industries that are heavily involved with offline activities (such as Traveltech and Eventtech). The light at the end of the tunnel (that comes in the form of Covid-19 vaccines, treatment, or virus mutation to a much weaker strain) for this group still seems far away at the time of writing this article (many expects that the pandemic wouldn’t get resolved for at least another 2 – 3 quarters). These companies are in a big battle for their survival and need to pivot or at least diversify fast.

Extend the company’s cash runway: Like the Trapped Tigers, we have witnessed several expense reduction efforts by the Panicking Patient. Companies are returning office space and adopting the 100% WFH model. Steep pay cuts accompanied by reduced workdays and staff reduction are becoming prevalent. Indonesia-based Traveloka laid off 10% of its employee in April, while Bangkok-based Agoda slashed up to 25% of its workforce in May. Many are also borrowing cash from future revenue by offering prepaid vouchers or unlimited future passes. This example is also evident in the traditional travel industry, in which airlines and spas are selling heavily discounted vouchers to get cash for the survival of their businesses.

Pivot to other businesses: Because it is unclear when the situation will be back to normal, some startups choose to pivot to related business(es). Eventpop or Airbnb, for instance, chose to pivot to the online experience space, offering exclusive online events to its customers from dough making lessons to online meditation events. Some startups went to a more extreme route and completely shifted their businesses. Flying Elephant Production, an Irish startup focusing on exhibition and event setups, pivoting to selling desks made from the excess plywood they have in inventory.

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Closing thoughts:

In this difficult time, we hope this piece will spark some food for thought for you and your organization, no matter what roles you play in the ecosystem – founders, investors, corporate partners, or a mere observer. The pandemic forces us into the lifestyle and working mode that we thought would never be possible. Similar to us seeing new joys in the new normal, businesses and startups will see new rooms to thrive. Like what the US President John F. Kennedy once put, “when written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.”

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Author: Woraphot Kingkawkantong (Ping)
Editors: Wanwares Boonkong, Vitavin Ittipanuvat
Covid Impact Framework: Roland Berger

Other interesting reads:

• https://blog.creandum.com/can-i-fundraise-in-covid-times-the-new-fundraising-matrix-5fefaee59f5e
• https://medium.com/@innovationbay/covid-19-startup-impact-report-dd7c2067cf5e
• https://medium.com/janeventurecapital/founder-survey-reveals-impact-of-covid-19-on-early-stage-startups-c3dbae129040

Fear is a powerful factor that creates a fundamental shift in human behavior as the human brain is hard-wired to avoid loss. Scientists and behavioral economists call this “loss aversion.”

We are seeing this trend play out in real-time as the COVID-19 contagion accelerates globally; people are adopting technology at a pace they have never done before. Schools are being conducted through teleconferences. Senior citizens are adopting QR payments and digital banks for the first time. Online activities and transactions are no longer a convenience factor but a necessity. As people adapt to a digital lifestyle, so too will they expect the same convenience and seamless experience from other areas of life, including financial services.

Thailand has made great strides in digital payments thanks to the Promptpay initiative, but it was only during the COVID-19 outbreak in March that we witnessed a noticeable jump in the adoption of digital payments. PromptPay transactions rose 93% or an average of 11M per day in March, up from 5.7M per day in the same period last year. Digital channels are becoming the primary point of access for payments for the mass population in both online and offline purchases.

One of the challenges is not all financial transactions can be done digitally. Think about the last time you wanted to open a bank account, open an internet banking account, take out a loan, or make cross-border transfers, what did you do? Even in today’s world, some types of transactions still require us to visit bank branches.

With the change in customer behavior and expectations, coupled with the pain points of existing products, how will financial services evolve going forward? How might we use technology to improve the way financial products are served?

Credit: Long gone the days of paper-based loan application

Yesterday: As the world enters recession, the bank loan approval rate tends to decline as banks become more cautious over the health of their loan portfolio. This leaves the cash-strapped SMEs with little option for financing. The typical process requires borrowers to submit paper-based loan applications, together with heaps of financial statements and other documents, at bank branches while credit decision-making is done manually and takes weeks.

Today: Google search shows a surge in search activities for words, such as “loan” and “loan from fintech app”, as SMEs and furloughed workers seek alternatives as they scramble for liquidity. In fact, the number of Thai companies that have declared bankruptcy due to financial problems rose 46% in the first two months of the year vs same period last year. Aspire, the neobank for SMEs and our portfolio company, helps digital merchants get working capital loans near instantly utilizing alternative data from e-commerce, account software and point-of-sale systems. The number of active borrowers for Aspire has accelerated in February 2020 vs the year before.

Tomorrow: Looking ahead, a lot more can be done using technology. Some of the things that we’re excited to see are

• A platform that automates and digitizes loan application and decision-making processes, both for long-term high value (e.g., mortgage) and unsecured loans (e.g., credit card). Blend, for example, uses software to assess information that the bank has about you — income and assets held at the bank — to almost immediately calculate how big a loan you can afford, and reduces the risk of fraud and errors by replacing document uploads with connections to financial data sources and by automating data verification.
• A private credit scoring data aggregator that links different private data sources and fintech players and collects data that can be used for assessing borrowers’ credit scores, including national credit bureau (NCB) data, mobile data from telecommunication companies, utility payments. By democratizing credit scoring data, data owners can monetize the data, and reduce the risk of fraud and default for the whole ecosystem.

B2B Payments: Digital process creates the visibility required for supply-chain financing

Yesterday: A process to make payments is still analog with 90% of businesses receiving their invoices the old fashioned way (on paper). Payments might have to go through a purchase order process, invoicing, accounts payable, various data entry points and disbursement. It costs an organization nearly $8 to process a single account payable to suppliers^[1].

Today: Since 55% of B2B sales in APAC is made on credit with 32 days terms on average^[2], companies need a way to manage, initiate, approve and make payments in a fully digital way with full visibility on financial resources and commitments (e.g. AP, AR, and payroll).  FlowAccount, one of our portfolio companies, offers software that digitizes the process of issuing invoices and recording receivables.

Tomorrow: By linking disconnected players in supply chain payments – from buyers, suppliers, to banks, businesses will not only better manage their liquidity, but also a better opportunity to access working capital.

• A platform that connects buyers and suppliers can provide full visibility on where things get stuck and helps businesses optimize workflows. Tradeshift helps businesses connect with all their suppliers digitally, remove paper and manual processes across procure-to-pay, and seize early payment discounts to save money. AvidXchange automates AP processes for medium-sized companies.
• Access to real-time payments (RTP) could enable companies to access payment delivery statuses and settlement information and, thus, better manage their liquidity. Highradius helps companies get paid faster on their receivables via AI and machine learning. Finlync connects businesses’ enterprise resource planning (ERP) systems with banks’ payment portals, allowing its customers to have full visibility over cash flows.

These are some instances where fintech can help improve the way financial products are served. COVID-19 is just a catalyst that helps push customers along the technology adoption curve. Once onboarded, users tend to stick with the new habit because it’s more convenient. This shift towards digital products and services, accelerated by the virus, will have a long-lasting effect on the years to come. The winner will be those who can serve a digital-native product and adapt to customers’ digital behavior with speed and ease of access being table stakes.

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Author: Nattariya (Nat) Wittayatanaseth

Editors: Wanwares Boonkong, Vitavin Ittipanuvat

Photo by Clay Banks on Unsplash

Visa recently surprised the banking world with its $5.3B acquisition of Plaid, a fintech startup that allows applications to connect with customers’ bank accounts easily and instantly. This is by far the second biggest acquisition Visa has ever made after it paid $14B for Visa Europe in 2015. It also marks an important shift in Visa’s strategy towards becoming an “Open Platform.”

Visa seems to be shifting its strategy significantly from partnering with banks to expand its card networks to partnering with startups to facilitate money movement through both card and also non-card payments (digital channels). The shift comes at an important juncture. While Visa’s payment value had been growing at a steady rate in the last decade, the rate has dropped below 10% in the past two years. Card penetration in emerging economies remains sluggish with penetration in a majority of Southeast Asian countries remaining well below 10%. Consumers are leapfrogging cards to other methods of payments, such as mobile wallets, altogether. Where mobile wallets are nascent, governments have pushed initiatives to facilitate low-cost interbank transfer (such as Thailand’s Promptpay), limiting the role of cards even more. Finding a new growth driver is mission-critical for card networks.

With Plaid on-board, Visa can pursue its Open Platform strategy at full speed. Currently, Plaid allows 2,600+ app developers to connect to users’ bank accounts easily. But, together with Visa, Plaid can utilize Visa’s network and infrastructure to offer new capabilities, such as cross-border money movements or fund distributions and collections, to those developers from the get-go. Fintech partners can connect to, interact with, and create and exchange value with each other through Visa’s network. In return, Visa stands to get large transaction flows from the 200+ million customer accounts that are powered by Plaid.

The popularity of Plaid highlights startups’ growing demand to add financial services to their product offerings. Software-as-a-service (SaaS) companies can monetize by offering financial services, serving as a new revenue stream with zero customer acquisition cost and creating a moat around the business. Fintech is no longer a primary business model, but also a secondary business model for startups (think of it as an ingredient to the main dish). Japan’s largest e-commerce site Rakuten, for example, has 40% of its revenue from financial services. Another example is Shopify, a website that helps small businesses set up e-commerce stores, which has more than half of its revenue from payment processing.

This is an emerging opportunity not only for startups but also for banks who can leverage those startups as a new distribution channel, apart from bank branches and digital banking apps. There are three strategies that banks can pursue to capitalize and capture a piece of this pie:

1) A Closed Ecosystem: Banks directly integrate with startups to offer financial products on third-party platforms. An example of this is Grab Thailand which offers Grab Wallet powered by KBank. In this model, banks would have to dedicate its resources to do the heavy lifting work of allowing its legacy system to communicate with third-parties’ systems. Since most banks still employ complex centralized technical infrastructure, changing such systems to allow external access is not easy and may result in unintended consequences. Due to the significant requirements of both time and resources, banks are generally selective of the partners, prioritizing by the scale of the partners, thus, early-stage companies often get relatively low priorities.

2) An Open Ecosystem: On the other end of the spectrum, banks can turn itself into an Open Platform, changing its centralized system into microservices that can interact with one another through application programming interfaces (APIs). Third-parties can then build and test their software on top of the banks’ infrastructure easily without the risk of messing up the banks’ centralized systems. Adopting this Open Platform strategy is not a difficult decision, but one that requires a strong commitment from the bank’s management and a complete overhaul of the banks’ monolithic legacy system (e.g., mainframe); this ‘transformation’ process can take years.

3) A Semi-Open Ecosystem: There exists a middle ground, a model that banks can adopt as they slowly progress towards an Open Platform. Banks can work with startups that act as middlemen between banks and other startups. These middlemen – so-called ‘core wrappers’ –  are doing the heavy lifting work of connecting with banks through APIs, wrap the integrations within its platform, and open its platform to other third parties to build or offer financial services to end customers.

This is where Plaid comes in. We can think of Plaid as Amazon for e-commerce. Before Amazon, merchants had to do everything from inventory storage, packaging, distribution, to return handling and customer support. With Amazon, those issues are taken care of, and merchants can focus on their core activities and what they’re good at. In the same way, Plaid acts as a middleman between banks and startups, providing a one-stop-platform for bank account access to third-party apps.

Many other startups are considered Core Wrappers for a variety of financial use cases. Stripe allows developers to process online payments and money transfers from a customer’s bank account into a merchant’s bank. Nium (previously Instarem) allows corporations and SMEs to send money cross-border, spend money through Nium-issued prepaid cards, and collect money from counterparty abroad. Synapse offers end-to-end banking services to app developers, eliminating the need for startups to identify bank partners and initiate one-to-one integration with the bank. Startups can easily offer financial services on its app by just plugging into Synapse.

Software is rapidly changing how financial services are offered. We are transitioning into the Banking 3.0 era where financial services are no longer sold in a physical bank branch (Banking 1.0) or mobile banking app (Banking 2.0) but are offered and sold through third-party platforms. Financial service is no longer a standalone service, but it’s being abstracted away and served to the customers in a digital-native way, wherever they are, and in a way that they are used to, instant and seamless.

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Author: Nattariya (Nat) Wittayatanaseth

Editors: Woraphot Kingkawkantong, Vitavin Ittipanuvat

Image from Plaid.com

One of the hottest and fastest-growing sectors for startup investing is Property Technology (or PropTech). According to the Wall Street Journal, halfway through 2019 more than $12.9 billion of investment has poured into this sector globally, more than the total investment of $12.7 billion in 2017.

 

But, what exactly is PropTech?

PropTech uses technologies to optimize and modernize tedious processes of searching, transacting, and managing properties for tenants, landlords, brokers, buyers, and sellers in the real estate industry.

The University of Oxford categorizes Proptech into three verticals of PropTech:

1. Smart Real Estate Platform supports the monitoring, operations, and management of real estate assets;
2. The Sharing Real Estate Platform facilitates the renting or sharing of real estate assets, such as offices and apartments;
3. Real Estate FinTech Application simplifies the buying and selling process of real estate assets.

PropTech has been developing and evolving since 2000. The evolution of PropTech is demonstrated in Figure 1.

PropTech in Southeast Asia

The size of the Proptech market in Southeast Asia is still relatively small compared to China and India. According to JLL, there are approximately 800 Southeast Asian PropTech startups, with a total investment of $738 million over 36 deals in 2018. These figures are expected to increase due to several reasons:

• Rising middle-class population and salaries;
• Growing urbanization and younger population;
• Exponential growth of smartphone penetration.

Among the countries in Southeast Asia, Singapore emerges as the regional leader in PropTech investment as the government has a Smart Nation Initiatives to streamline transaction processes in the real estate industry under transformation roadmap, which is further supported by a mature startup ecosystem.

Nevertheless, there are several hurdles for PropTech industry, including:

• Restricted access to credit and financing and high financial costs;
• Outdated regulations;
• Trust and information asymmetry;
• Low purchasing power of the millennials.

Despite the hurdles, the outlook for PropTech in Southeast Asia remains positive. Government initiatives and investments from VCs are key to fueling PropTech development in Southeast Asia.

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Author: Wanwares Boonkong

Editors: Nattariya Wittayatanaseth, Krongkamol Deleon

Cover photo by Jakob Owens on Unsplash

Introduction: What is ESG investing?

 

ESG is a term that is gaining popularity and momentum as investors take advantage of economic shifts such as the rise of electric cars and plant-based foods. But what exactly is ESG? ESG stands for Environment, Social, and Governance. ESG criteria are a set of common standards for companies to integrate in their operations, and in the long-run can help improve companies’ internal operations as well as provide benefits to stakeholders such as customers and the society.

In Thailand, there are two common terms mentioned when discussing about long term sustainability. One is ESG model as mentioned earlier, and other side is Bio-Circular-Green Economic or BCG model which is economy model to develop Thailand economy by adopting three dimensions including

 

• Bio economy aiming to make the most from bio resources
• Circular economy aiming to ensure resources recycling ability and reduce waste
• Green economy aiming to reduce pollution for overall global long-term sustainability

Key differences between the two are BCG model is the absolute economy goal for Thailand while, ESG model is the universal standard and methodology that allows companies to achieve better operational practices and long-term sustainability. For this article, we aim to explore more in the field of ESG model and especially deep dive further in ESG investing.

 

Taking ESG factors into consideration when evaluating investment opportunities is becoming more common and relevant at this present day as ESG investing does not only provide benefits toward the planet earth, but also to investors in the form of greater and more sustainable profit. According to CBInsights, the mentions of climate change, global warming, and ESG on earning calls surged significantly from Q2 2020 to 2021. This finding demonstrates that the consideration of ESG has a positive effect on the investment performance and is currently at the very top of institutional investors’ minds when they are making their investment decisions.

 

 

Source: CBInsights

 

In this article, we will discuss the brief evolution of ESG investing, how investors view ESG investing, and the implications to the venture capital industry and financial institutions.

The Brief Evolution of ESG Investing: From Compulsory to Mandatory

 

In the past, the concept of social responsibility was simply a rule of faith separated entirely from investment activities. It was not recognized in business and investment operations until the 18th century, with the rising influence of Methodists and Quakers who believed that money gained should not come at the expense of life.

 

Integrating social responsibility in investment activities was not popular and not straightforward due the lack of technology to support ESG data assessment. This limited the ability of investors to access the ESG information of each company. Consequently, investors could not acquire sufficient information to make socially

responsible or ethical investment decisions.

 

In the 1980s, the idea of integrating social responsibility in investment activities emerged as global warming became more threatening and disastrous incidents such as Bhopal^[1] and Exxon Valdez^[2] pushed people to recognize how much damage businesses could inflict on society, the environment, and the business’s profitability if they did not act responsibly. As a result of these two incidents, Union Carbide Corporation was charged 470 million dollars in damages by the Indian Supreme Court for the toxic gas leak at Bhopal, and Exxon had to spend more than 3.8 billion dollars on cleanup costs, fines, and compensation. These disasters served as wake-up calls and catalysts for investors to take greater interest in companies’ social impact. The demand for socially-responsible investments has increased, resulting in the establishment of the United States

 

Sustainable Investment Forum (SIF)^[3] in 1984. The forum has assets under management of 5 trillion dollars for sustainable and responsible investment. It aims to develop sustainable and impact investing expertise by providing resources such as ESG investing knowledge sharing sessions and networking events for institutional members, including investment and advisory firms, mutual fund companies, and data firms.

 

Since then, the concept of ESG investing has gradually evolved and been incorporated into investment decision-making processes. It is expected to become more deeply integrated in the future due to technological advancement and increasing business stakeholders’ expectations.

 

Stakeholders	Expectation with ESG
Investors	Many large institutional investors have explicitly agreed to apply ESG principles to guide their investment decisions and monitor key points in investing companies such as progress, disclosure & reporting on ESG issues, and ESG integration in business operations.
Customers	Customers are now focusing more on how much businesses care about ESG when they are making purchasing decisions and are willing to pay a premium for ESG-focused offerings.
Supply Chain Partners	Supply chain partners are expected to pay more attention to ESG matters as they are now regarded as parts of a company’s footprint and respective impact.
Employees	Millennial and Gen Z employees prefer to work at a company that has the vision to serve a higher purpose than profit generation.
Communities & Society	Communities and society expect companies to be responsible and take care of issues that impact the community in a more sustainable manner, not only for CSR purposes.

 

What  ESG  Investing is in the Eyes of Investors: No Longer a Choice between Planet or Prosperity

 

Investors used to believe that they had to compromise performance to invest more responsibly. But today, they can also do well while doing good. Research from well-known organizations such as McKinsey & Company, CBInsights, and CFA Institute support that ESG investing is gaining attention and can produce more profit to investors than non-ESG investing.

 

According to MSCI, more than 80% of ESG and ethical fund indexes, which are designed to reflect the performance of investment strategies that seek to gain exposure in companies which demonstrate both a robust ESG profile and positive trend in improving that profile, have outperformed and proven to be as resilient as traditional funds over the last three years.

 

 

Source: MSCI

 

The rationale behind this superior performance is that ESG can enhance overall company performance in key areas:

1. Revenue boost;
2. Cost reduction;
3. Overall risk minimization; and
4. Employee productivity enhancement.

 

1) Revenue Boost

 

With a solid ESG proposition, companies can increase revenue from both existing and new markets.

 

For existing markets, ESG consideration allows companies to gain more revenue as consumer preferences have shifted and customers are now willing to pay a premium for ESG-focused products or services. According to PwC research, nearly 80% of Thai consumers said that they have become more eco-friendly when purchasing products and services. This trend is more applicable with younger populations as they are generally more well-educated and are the generations that will have to bear the costs of ESG-related misconduct.

 

For new markets, integrating ESG consideration in business operations will allow companies to expand to the new market more easily due to regulatory support. Businesses with strong sustainable consideration are likely to get support and access from the government relations and communities as the positive impact that the businesses will create is in line with the government’s long-term policies.

 

2) Cost Reduction

 

Considering ESG can also help reduce cost of production and expenses for companies in both short and long term.

In the short term, applying ESG ideas in business operations will allow companies to reduce costs such as raw materials, energy, water, waste/hazard, or carbon footprint by adopting production methods that generate less waste to the environment and lower the threat of getting fined as a result of participating in risky activities. According to a study by McKinsey & Company, as financial performance and resource efficiency are significantly correlated, 60% of operational expenses can be offset by implementing ESG in a proper way. 3M is an excellent case study for ESG cost reduction. In 1975, the company saved 2.2 billion dollars as a result of the Pollution Prevention Pays (3Ps) initiative, focusing on preventing pollution by reformulating products, optimizing manufacturing processes, redesigning equipment, recycling, and reusing industrial waste. Another great example is FedEx. The company plans to convert its whole 35,000-vehicle fleet to electric or hybrid engines. With 20 percent of the fleet converted so far, FedEx has saved more than 50 million gallons of fuel consumption.

 

In the long term, having a strong ESG position can prevent companies from costs that might occur in the future such as non-compliance costs. ESG has become a mandatory measure and criteria in many countries, and it is essential for companies with plans to expand their businesses abroad. For example, Nestlé announced they would invest up to 2.1 billion dollars by 2025 with the aim to shift from virgin plastic packaging to food-grade recycled plastics, and to develop other sustainable packaging solutions. Its goal is to reduce carbon emissions as well as to protect itself from non-compliance charges in the several countries where it is operating.

 

3) Overall Risk Minimization

 

Organizations that focus on integrating ESG have lower risk levels because ESG practices allow companies to be less vulnerable to regulatory and legal interventions. The reduced exposure to these interventions can then help reduce overall cost of capital.

The ESG-focused companies will be able to avoid the risk of incurring costs from the government such as fines, penalties, and enforcement actions. According to McKinsey & Company, more than 30% of corporate profits are at risk from state or government intervention and can be even higher depending on the industries.

 

 

Source: McKinsey & Company

 

The correlation between the cost of capital and the company’s risk are well established. Therefore, the ESG-focused firms with lower volatilities and risk levels tend to have lower cost of capital for both debt and equity. With support from MSCI research, organizations with high ESG scores, on average, experienced lower costs of capital compared to those with low ESG scores in both developed and emerging markets during a four-year study period.

 

 

Source: MSCI

 

4) Employee Productivity Enhancement

 

According to research by Mckinsey & Company, favorable social actions of organizations have a positive correlation with increased job satisfaction. The positive impact of their work on society helps motivate employees to act in a more prosocial manner and encourages them to work more productively. This finding is supported by a study from Alex Edmans, professor of Finance at London Business School that companies on the “100 Best Companies to Work For” list which have strong employee governance earned  2.3 – 3.8 percent higher profit than typical players over the 25-year period.

 

ESG investing and Venture Capital Industry: Venture Capital Investment and ESG integration

 

Venture Capital (VC) firms, like other traditional investment entities, are giving more focus towards more responsible and impact-driven practices for greater social and economic return. According to a PRI survey, most VC respondents indicated that they mostly consider ESG factors in their investment processes during the due diligence and decision-making processes.

However, ESG incorporation in the investment processes for VCs has not yet been standardized throughout the industry and is often less comprehensive than public firms. These are how VCs incorporate ESG in their investment activities from screening, due diligence to investment decision making.

 

ESG Incorporation and Investment Policies

 

Currently, there are various practices for ESG incorporation in investment policies. Some VC partners have clear and concrete investment policies on ESG in place that define the scope and nature of their ESG strategies. Some VCs have policies covering only particular ESG aspects such as diversity, equity, inclusion and anti-harassment. Other VCs may have incorporated ESG issues in a less formalized way and do not have any policy to govern their practices.

 

ESG Incorporation and Screening

 

For the screening phase, several VCs have adopted customized screening policies that incorporate ESG factors. For example, Amadeus Capital Partners avoids investing in a variety of industries and business models, including gambling, predatory credit and debt traps and Truffle Capital avoids investing in companies whose scientific procedure led to a way of modifying human beings.

 

ESG Incorporation and Due Diligence

 

There are many distinct ways VCs can apply ESG incorporation to the due diligence process. Some VCs use pre-investment ESG questionnaires to discover and understand the ESG risks and opportunities of potential target companies. VCs might also apply standard measures as a criterion for due diligence, such as Sustainability Accounting Standards Board (SASB) standards. VCs might also apply informal methods to examine ESG, such as assessing the founders’ principles and ethics by observing how they interact with others.

 

ESG Incorporation and Investment Decision Making

 

For the decision-making process, some VCs consider ESG data when deciding whether to pursue an investment. Startups with high ESG risks that severely impact the society and other stakeholders and are difficult to mitigate, such as unethical business operation process or improper waste management, may be rejected.

 

Some VCs might insert additional sustainability clauses requiring startup founders to consider and be aware of ESG in business operations. These terms may include warranting the company’s due diligence results, enforcing the company’s compliance, and monitoring and addressing the company’s non-compliance with ESG requirements. This practice could help ensure the appropriate overall ESG risk during the investment period.

 

Next Step for VCs and ESG investments

 

There are several areas that can be enhanced to enable VCs to effectively move forward with the ESG integration. Examples include:

1. Broadening the understanding of ESG incorporation in the VC industry by forming and joining communities of practitioners such as Venture ESG community who work together 12to improve practices; and
2. Enhancing sharing of best practices of practitioners and investors on experiences, observations, and insights as well as ongoing challenges through channels such as case studies reports, podcasts and roundtables.

 

ESG Investing and Financial Institutions: Current and Potential Initiatives

 

Current Initiatives

 

Financial institutions (FIs), like other businesses, are conscious of the movement toward ESG practices. They are aware of the advantages of incorporating ESG into their business operations, as well as the pressure of increasing customer expectations. According to Forbes, more than 40 percent of banks holding global assets have agreed to join the net-zero banking alliance, which would synchronize lending and investment strategies while utilizing technology and policies to achieve net-zero emissions by 2030. This agreement does not only target the industry’s own carbon emissions, but also allocates lending and investment funds to organizations involved in the reduction of carbon emissions.

In Thailand, there are numerous internal and external initiatives from Thai FIs striving for ESG incorporation and sustainability. For internal operations, FIs aim to improve their core operations by proposing policies to achieve net zero carbon including setting up zero waste policies to reduce greenhouse gas emission activities in the working environment by 2030 and digitizing internal operations processes. For external initiatives, FIs have been developing and providing loan portfolios to accommodate sustainable projects such as green bonds, green project financing, and EV car loans to support customers with ESG vision.

 

Potential Initiatives

 

Looking forward, there are several opportunities for FIs to support ESG incorporation and sustainability, including:

1. Considering carbon credits as a criterion for loan offering
2. Treating carbon credits as loan collateral; and
3. Investing in sustainable fintech startups which provide innovative solutions for long-term sustainable finance development.

 

Conclusion

 

ESG investing is not only a way to support businesses that are doing good for the society, but it is also a new key consideration for better investment returns. However, there are challenges lying ahead in ESG investing in the VC industry which are the lack of knowledge and deep understanding of ESG incorporation in the current investment process. Joining ESG investing communities for VC and encouraging sharing of best practices of ESG incorporation will drive ESG incorporation in VC to another step. For financial institutions, there are many opportunities to explore more in the area of ESG incorporation and sustainability for better operational efficiency and meeting customer expectations. The immediate initiatives for FIs to incorporate ESG investing in their operation is through their core business such as adopting ESG as a loan criteria and considering carbon credit as a collateral. As ESG investing is expected to remain dynamic in years to come, it is also important for investors to pay close attention to the ESG disclosures by the target companies and carefully interpret the actual meaning behind those statements to achieve the appropriate and desirable ESG exposure and make the most optimal investment decision.

 

Author: Chaloemlak Tantiviwatkhul (Gam)

Editor: Wanwares Boonkong (Pin), Krongkamol Deleon (Joy)

 

Source: 

https://www.db.com/files/documents/2022/01-JAN/ESG-Capital-Markets-2022-Outlook.pdf

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value

https://klementoninvesting.substack.com/p/how-to-lower-your-cost-of-capital?s=r

https://blog.worldfavor.com/why-venture-capital-firms-need-to-integrate-esg

https://www.unpri.org/private-equity/starting-up-responsible-investment-in-venture-capital/9162.article

https://www.cfainstitute.org/-/media/documents/survey/future-of-sustainability.ashx

https://www.openinvest.com/articles-insights/debunking-esg-myths-pt-1-the-fear-of-sacrificing-financial-returns

https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000478852/Big_data_shakes_up_ESG_investing.pdf?undefined&realload=goIiIaL0bVwqRD4WPq5x0j63wxwmJyxQtockReAUkRhHI3BkmcaVlSsaeOqxH76E

https://www.uethical.com/blog/the-history-and-future-of-esg-investing

https://slideplayer.com/slide/10914977/

https://www.cbinsights.com/reports/CB-Insights_Tech-Trends-2022.pdf

 

 

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[1] The Bhopal tragedy was a gas leak accident that happened on December 2-3, 1984, at the Union Carbide India Limited pesticide plant in Bhopal, India.

[2] The Exxon Valdez oil spill was a man-made disaster that happened on March 24, 1989, when the Exxon Valdez, an Exxon Shipping Company oil tanker, dumped 11 million gallons of crude oil into Alaska’s Prince William Sound.

[3] Sustainable Investment Forum (SIF) is a Washington, DC-based membership organization that promotes sustainable investment across all asset classes.

One of the major buzzwords this past year has been “metaverse,” triggered in no small part by Facebook’s announcement this past October that it was rebranding to Meta and investing at least $10 billion on metaverse technologies.  While the term “metaverse” originated in the 1992 novel Snow Crash, in which people use the metaverse as an escape from a dystopian world (an idea also later explored in the novel and film Ready Player One), only recently has technology improved to the point where the metaverse could leave the realm of science fiction and become a reality.  This article will explore what the metaverse is now, and what it may become, as well as some of the companies involved in creating it and opportunities for financial institutions, in particular, to get involved and help shape the future of the metaverse.

 

What is the Metaverse?

 

The metaverse has been described in several different ways.  The Oxford dictionary defines the word as “a virtual-reality space in which users can interact with a computer-generated environment and other users.” Meta has referred to the metaverse as “a persistent, synchronous environment where we can be together.”  The video chat platform startup Gather has shared their definition of the metaverse as “the next iteration of the Internet that brings a sense of place and facilitates rich human connection.”

As the world is likely still several years away from seeing a fully-realized metaverse, it is unclear how exactly the metaverse will look in the end.  However, there are a number of facets of the metaverse that most people would agree are core components of the definition of the metaverse.

1. The metaverse will be an ecosystem of shared virtual worlds.

While virtual worlds already exist today (for example, within online video games), most worlds are not linked, and consumers cannot move freely in between different worlds in the same way that one could move from one website to another.  Assets purchased in one game typically cannot be used or sold in a different game.  In the metaverse, it is expected that items such as digital clothing or accessories will be able to be shared across different worlds and experiences.  The boom of technologies such as non-fungible tokens (NFTs) may assist in allowing users to use items across different worlds.  Further, virtual worlds in the metaverse should be persistent, which is to say that the world will remain regardless of whether users are logged on or logged off, unlike Zoom meetings or video calls which end as soon as the participants leave the room.  Changes to these shared worlds could also persist into the future, creating a more realistic and lived-in experience for users.

 

2. The metaverse will fuse the real world with the digital world.

Creators will be able to recreate real-world spaces or objects in a virtual medium, where users can feel like they are present in the space, as opposed to merely seeing the space via a web browser. Virtual objects may also be embedded into the real world via AR technology.  The best current example of this technology is the hit game Pokémon Go.  Corporations such as Nike and Gucci are already investing in technology to bring their products and branding into the digital world in the form of skins and digital clothing. In the same way that consumers purchase branded goods and accessories as a form of self-expression in the real world, these digital collectibles will allow users to display their interests and personality in the virtual world.  As AR and VR technology improves, companies and creators will find new ways to merge the physical and the digital to create experiences that feel more real and more integrated with the daily life of the average consumer.

 

3. The metaverse will provide new ways for people to connect and interact with each other in a virtual space.

While the origins of the metaverse may be found in gaming (key examples include Fortnite and Roblox), many in the industry see the opportunity for the metaverse to redefine how and where people connect to each other.  The pandemic has shown the vital importance of finding ways for people to meet and engage with others via a virtual medium. In the future, the metaverse may provide channels for people to meet, talk, and enjoy activities and events together, even if they are far apart in the real world.  Though the pandemic will hopefully come to an end soon, it is clear that many companies already see a future in remote work that allows the company to save money, while at the same time offering employees a way to avoid the hassle of a regular commute.  Families separated across countries or continents will continue to see the metaverse as a way to stay connected in person, even as travel opens back up.  By eliminating the physical barriers and limitations of the real world, virtual spaces can democratize access to events, education, and even work opportunities.

Though the metaverse is still in its infancy, many companies have already begun creating and hosting virtual experiences that exemplify how people may interact with the metaverse in the future.  Examples include Marshmello’s 2019 concert inside Fortnite (attended virtually by 10.7 million people), or the SXSW Online XR experience in 2021 (which recreated downtown Austin, TX, the traditional host of the SXSW film festival). Companies like BMW and Audi have created virtual showrooms for consumers to shop for and virtually test drive cars, and platforms such as Decentraland and Gather allow users (retail and corporate alike) to create their own spaces for anything from art shows to weekly team game nights.

 

How Will the Metaverse be Created?

At its most fundamental level, the technology does not yet exist to support the metaverse as previously defined.  Like the internet, there will be multiple underlying technologies supporting the advent of the metaverse, including networks and infrastructure to deliver content to metaverse users, hardware to immerse users in the metaverse and render complex 3D environments, and programming standards and protocols to both allow various stakeholders to create new content and experiences in the metaverse and to allow different worlds and creations to interact with each other.  There is no finite answer of when all of these technologies will have developed enough to support the imagined metaverse – people speculate that it will gradually emerge over time.

As will be discussed below, companies are working to overcome current network limitations, improve hardware capabilities, and develop common standards and protocols in order to bring the metaverse to life on a large scale.

 

1. Network Limitations:

To operate, the metaverse will require persistent connections that update in real-time with a high degree of accuracy and a fast data delivery time. The metaverse must also support a collection of applications and experiences across all devices and cater to a large pool of users concurrently.  This is an enormous computational challenge and one that fights against the underlying design or intent of the Internet. Bandwidth, latency, and reliability are the three main metrics used to measure network quality.

Bandwidth is commonly thought of as “speed,” although it actually refers to the amount of data transmitted over a given amount of time. The metaverse has far more rigorous standards than most internet apps and games.  Many players already face bandwidth and network congestion for online games; these requirements will be amplified by the metaverse, highlighting the need for technological improvements to increase bandwidth.

Latency refers to the time it takes for data to be transmitted from one point to another and back. For example, latency is the time it takes for a game player to receive information (such as whether a grenade has been thrown) and transmit that information to other players. In other words, latency can determine whether a player wins or loses, kills or dies in a game.  Many gaming companies have devised partial fixes that lower latency or mitigate the impact of high latency.  However, none of these current solutions scale particularly well.

Reliability measures the reliability of network service quality. This includes not only the overall uptime but also the consistency of other factors such as bandwidth and latency.

To deliver an immersive metaverse to the masses, all three of these network limitations will need to be solved.

 

2. Hardware

Most industry insiders believe that hardware limitations will be the major stumbling block in realizing the metaverse.  In order to enjoy a fully immersive user experience, users will need to access the metaverse via AR/VR hardware.  However, current headsets are expensive, heavy, and lack the graphics quality and processing power to render realistic virtual worlds or objects.  This creates a massive barrier to entry for consumers interested in interacting with the metaverse.  Continuing to reduce the cost and size of AR/VR hardware will require continued improvements in the underlying hardware components, including processing chips, graphics chips, and light engines.  While AR/VR hardware development has taken massive leaps in recent years, including the launch of the widely popular Oculus Quest 2 and the increased adoption in the enterprise VR space of Microsoft’s HoloLens, analysts believe it may be five to ten years before the hardware can support the full metaverse at a price accessible to the mass consumer segment.

 

3. Adoption of interoperable standards

Today’s internet operates under a set of common standards and protocols that allow anyone to create websites, share files, or otherwise interact with said internet. Standards and protocols will need to be considerably wider and robust in the metaverse. Furthermore, because interoperability and real-time synchronous experiences are so important, a common set of standards will need to be adopted.

In today’s world, big tech players may employ similar technology, but they are not designed to function together. Most companies are also adamant about not cross integrating their systems or sharing their data, which makes it more difficult, if not impossible, for users to jump to different companies or to integrate their digital lives across multiple companies.  Interoperability is one reason blockchain proponents believe that the future metaverse will be powered by blockchain technology and that decentralization will make it easier for developers of different platforms to connect and collaborate to offer a seamless experience to users.  However, examples of cross-platform gaming engines like Unity and Unreal Engine in the game development industry point to an alternative possibility, where independent third-party companies may arise to create metaverse engines to help developers create interoperable products.

 

Metaverse Ecosystem Players

 

 

Infrastructure – the metaverse infrastructure includes network providers, programming standards, and virtual worlds/platforms.

Network Providers

By expanding the reach of high-quality internet access, more people will be able to access and participate in the metaverse. One example is Starlink, SpaceX’s satellite Internet constellation, which hopes to provide high-bandwidth, low-latency internet, particularly to clients in areas underserved by traditional telecommunications firms.

Programming Standards and Protocols

 

NVIDIA is one of the major tech firms which has made significant investments into the metaverse.  NVIDIA Omniverse provides the programming infrastructure to create and connect virtual worlds into a shared universe.  This includes the interchange of assets between multiple users/world creators, the rendering and simulation of virtual worlds, and engines for simulating real-world physics and materials in a virtual space.

 

Virtual Worlds/Platforms

In the current state of the metaverse, virtual worlds have been created on both centralized platforms (i.e. platforms that are controlled by a single entity like a corporation) and decentralized platforms (i.e. platforms that are governed by the community of users or stakeholders).

Two key examples of centralized platforms are Roblox and Fortnite.  Roblox lets users create virtual worlds and games. Users can personalize their own avatars with virtual gear which can be applied across multiple worlds or experiences on the Roblox platform. Fortnite allows players to create and monetize their own content, including anything from digital clothing (skins) to dances (emotes). Fortnite Creative Mode also allows users to create their own games and experiences.

 

An example of a decentralized platform is Decentraland, which runs on the Ethereum blockchain network.  In Decentraland, users can buy and sell digital real estate, while exploring, interacting, and playing games. Real estate transactions are fueled by MANA, Decentraland’s native currency which is used for payments, and LAND –NFTs which represent ownership of virtual property. Smart contracts allow MANA owners to vote on policy modifications, land auctions, and new development subsidies on Decentraland.

 

Hardware – hardware companies develop and produce devices which will allow users to immerse themselves in the metaverse.

 

Tech giants and startups alike are working to create fully immersive user experiences.  Oculus has dramatically improved its virtual reality headgear in recent years by improving resolution quality and mobility.  Magic Leap provides AR glasses, with the vision of embedding the digital world into the physical world.  Immersion provides haptics technology that can make metaverse experiences feel more realistic.  Google’s Project Starline is a hardware-based booth designed to make video discussions feel as if both parties were in the same room. The hardware in the booth is used to create a projection that looks real to the other party.

 

Content – content in the metaverse includes digital assets and marketplaces, avatars, and virtual experiences like gaming, work, and social events.

 

Digital Assets and Marketplaces

The metaverse will require users to be able to own digital assets, such as NFTs which may reflect ownership of items such as digital files, skins, or even virtual land.  Many major brands like Nike, Coca-Cola, and Disney have recently launched their first official NFTs as they begin exploring how to engage users in the virtual economy.  Marketplaces like OpenSea offer opportunities for users to buy and sell these digital assets.

 

Avatars

One of the exciting features of the metaverse will be the ability to represent oneself as an avatar within virtual worlds and to find new methods of self-expression by personalizing and customizing avatars.  Companies like Genies, which raised a $65 million funding round in 2021, allow users to create fully personalized avatars to represent and express themselves in the metaverse.  Other examples of virtual avatar creators include Ready Player Me and CryptoAvatars.

 

Experiences

Experiences is a subset of content which refers to events or activities in which users can participate, and which may mimic or enhance events or activities users traditionally would have engaged with in the real world.  One example is Strivr, an enterprise VR training company, which partnered with MGM on a number of metaverse initiatives. MGM’s Human Resource Department announced a rollout of VR headsets as part of staff training. MGM is also exploring the implementation of this immersive technology by hosting virtual career fairs. Strivr’s clients include other big names such as Walmart and Verizon.

 

Opportunities in the Metaverse for Financial Institutions