How Venture Capital Can Help Startups Set and Meet ESG Goals

Being a first mover ESG-oriented VC fund can become a source of competitive advantage. It will help attract high-quality portfolio firms which are eager to help address some of the most pressing challenges of today such as the climate emergency.

London Business School conducted detailed research into the key challenges facing ESG integration. Their research was conducted through 17 interviews with 25 individuals, from five different countries, representing 15 investors, LPs, and other market participants and they found the following key challenges facing ESG integration:

  • Promoting ESG objectives among portfolio firms is contingent upon the development of specific, practical tools, as well as measurement and benchmarking frameworks. Venture capitalists need to be able to assess, monitor, and advise on ESG performance of their ventures both from the risk mitigation and the value creation standpoint.
  • Promoting ESG practices among startups requires that venture capitalists first enhance and solidify the legitimacy of their own claims. This depends on integrating ESG objectives into VCs’ own operating model via incentives, processes, and structures. These changes are necessary for building VCs’ capabilities to influence startups as well as their authenticity in the eyes of startup firms.
Source: PwC Consumer Intelligence Series survey on ESG, 2021
  • Finally, VCs need to find ways to support startups to increase the authentic incorporation of ESG factors. Processes required to apply ESG factors to startups differ from those applied to large, public firms because the costs of measuring, monitoring, and reporting on ESG factors will be higher in younger ventures, given that they face more considerable constraints in terms of human capital, management capacity, and financial resources.

“Having identified these systematic barriers to ESG integration, we believe that the critical next step for VCs involves building in-house ESG integration capability and ESG-based evaluation capacity within their own business model”, said the research leading team Luisa Alemany, Loannis Ioannou, and Olenka Kacperczyk. To do this, VCs need to evolve their selecting and screening capabilities, rethink their valuation models and redesign term sheets to incorporate ESG issues. (Harvard Business Review)

Brazil Credit Fintech Raises $40 Mln in Softbank's 1st Take on Farming

Brazilian rural credit fintech TerraMagna raised $40 million in a debt and equity funding round which included SoftBank Latin America Fund, to expand its regional presence and diversify its offering of financial products.

According to TerraMagna, it is the first time SoftBank invested in a company with farming-related activities. Shift Capital and Milenio Capital and existing investors invested in the deal.

The lender stated its credit portfolio reached $120 million last year, more than 10-fold higher than in 2020.

TerraMagna offers loans in partnerships with distributors and industries that already have a long-term local relationship with small and medium-sized farmers. The firm had raised $2.2 million in its previous funding round, led by ONEVC, MAYA Capital, Accion Venture Lab, The Yield Lab and Canary. (Reuters)

Policy Suggestions From LSE Development Economist Amir Lebdioui

A new powerful research report from LSE and Canning House Development Economist Amir Lebdioui highlights how persistent income inequality in Latin America undermines socio-economic progress and results in social unrest, aggravating political and economic instability across the region. The COVID-19 crisis has further exposed and exacerbated existing inequalities affecting both the health outcomes and livelihoods of the poorest segments of the population.

The policy suggestions in the report offers three main messages:

  • Conditional cash transfers (CCTs) are useful but are not sufficient beyond a certain level in the context of a limited supply of productive jobs. This common practice offer the opportunity to the poorest segments of the population to have a better access to education and health. The CCT model not only assumes that schooling will enable recipients to access available jobs, but also that those jobs will exist when young people enter the labour market. Policymakers in Latin America therefore need to make sure there are fish in the lake when people are taught how to catch them.
  • Policies aiming to promote economic diversification should be key ingredients of inequality reduction strategies. Improving the pre-distribution of income. This requires a coordination between social, education, industrial and innovation policies to generate the demand for skilled workers and their newly acquired skills. This could avoid skills mismatches, and ensure the integration of unskilled workers in the labour market. To achieve coordination modern and sophisticated government intervention is needed.
  • Inequality reduction should be treated as a policy priority including by the business leaders to avoid further social unrest and conflict. The inability of governments in the region to increase taxation has historically been related to the strong relationship between wealth and political power. Inequality reduction through structural transformation would be pragmatic approach to complement redistribution taxation, as such agenda should face lower political resistance than over reliance on redistribution taxation on its own, but it requires a long-term vision, strong social conditions, and state capacity.

(Canning House Research Forum; Sustaining Inequality Reduction beyond Commodity boom in Latin America)

Source: Amir Lebdioui, Canning House Research

WorkerTech in Latin America

The shift from traditional salaried work to new modalities such as independent work implies that workers must reengineer the existing labor structure. This is where WorkerTech comes in. Defined as digital services, which offer benefits, assistance, access to protection systems and defense of worker rights.

This type of solution originates primarily from two different fronts. The first is “insurgents,” newly created startups that are committed to the development of products and services to support independent workers both individually and collectively. The second is “incumbents,” or existing, traditional companies (insurance, finance, training, etc.) that have seen an opportunity and are beginning to adapt their service offerings to the emerging context.

WorkerTech services in Latin America and the Caribbean are highly relevant due to:

  • The number and volume of non-traditional workers with and without platforms as a way to start generating incentives towards formality and financial inclusion.
  • The ease or difficulty that these workers have in accessing social protection and support systems.
  • The level of digitization of the economy, public services and the degree of digitization of citizens in general.
  • The state of regulatory debates about platform work and new work modalities (e.g.: teleworking).
  • Impacts of COVID-19 as an accelerator of pre-existing WorkerTech trends.
Source: ILO, 2018b; for El Salvador UNODC, 2020
Source: World Bank, 2019

WorkerTech services may cover the needs of workers in non-traditional modalities and can be grouped into three main blocks:

  • Access to coverage and basic labor rights, such as health insurance, vacations, pensions, etc. In the digital environment, new rights must also be considered, such as the right to a sovereign digital identity, a portable reputation, and the right to be forgotten.
  • Productivity and professional development, such as training, work tools, administrative management, financial services, access to clients, etc.
  • Collective organization, at trade union and professional levels alike.

(IDB LAB)

Citi's Banamex Unit Could Receive Bids from Moguls, Global Bank

After Citigroup announced plans to sell its Mexican consumer banking business, analysts said homegrown billionaires such as Carlos Slim and Ricardo Salinas Pliego were among front-runners to buy the Citibanamex assets.

Citibanamex, Mexico’s No. 3 consumer bank, is being watched by the finance ministry for signs of undue market concentration.

Alejandra Marcos, an equity analyst at Intercam Banco (Mexico’s seventh-largest bank) said Slim’s Inbursa had the means to present a strong offer and would not face the same obstacles as peer Grupo Financiero Banorte from antitrust regulators due to the latter’s market share.

Meanwhile Salinas, who controls the supermarket and banking chain Elektra that includes Banco Azteca, said on Tuesday evening he had asked his team to study the purchase of the Citigroup unit, which analysts said would likely carry a price tag between $4 billion and $8 billion.

“We would expect (Scotiabank) to at least kick the tires on (Citibanamex),” said Barclays Canadian financials analyst John Aiken. “We do not know if Mexico is necessarily where it would like to deploy all of its excess capital.”

Financial sector sources said Mexico’s left-leaning government was likely to want a buyer that did not increase the market power of the top banks in the country, such as Spain’s BBVA, which currently has over a fifth of the market.

It also appeared probable that a Mexican successor to Citi would be preferred, opening up the possibility that a consortium of buyers could club together for the assets, they said. (Reuters)

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