Impact measurements, ESG ratings, SPACs & Sandwiched social enterprises (Sep’20 Monthly Reads)

Welcome to the “Monthly Reads” article series, where I compile interesting articles I chanced upon in the previous month. Here, we cover the fields of impact, startups, venture capital, and general business. Key takeaways are summarized into sub-headings, followed by additional commentary for each article. Content for this series is adapted from my LinkedIn posts.

Key takeaways in this article:

1. Don’t be overly obsessed with impact measurement: sometimes, it just doesn’t make sense
2. We need the startup ecosystem to build a pipeline of companies delivering impact alongside financial returns
3. ESG rating systems face significant challenges that limit their usefulness
4. SPACs are growing in prominence and the implications of this growth deserve more study
5. We need to strengthen the system’s ability to help scale financially sustainable, but non-venture-backable social enterprises

Don’t be overly obsessed with impact measurement: sometimes, it just doesn’t make sense.

As I wade deeper into the impact space and start to look through, evaluate and meet founders of impact startups, the first question I often ask is “how do you measure impact?”

To me, impact measurement is always necessary and useful. Hence, I find the ideas presented in this article is quite intriguing: that sometimes, it may not be an appropriate time to measure impact, or that measuring impact may simply be unfeasible or not worth it in some cases.

The article also covers insights into how to measure impact (metrics selection, what to do after measuring etc.). We shouldn’t measure for measurement’s sake (after all, it takes up time and resources). Measurement should be done in a thoughtful manner that results in actionable insights that further the impact goal. A good read for anyone interested/ involved in this space:

Ten Reasons Not to Measure Impact-and What to Do Instead (SSIR)

We need the startup ecosystem to build a pipeline of companies delivering impact alongside financial returns

Recently, there have been numerous articles celebrating the rapid increase in the flow of funds into SRI/ ESG/ impact in public markets. Happy to see that the players in the private markets (particularly the startup ecosystem) are making a move toward focusing on building impact companies too.

If people who have signed this pledge do take actionable steps toward fulfilling it, we would soon see a more robust impact space. As the startup ecosystem churns out more financially viable impact startups, a pipeline would be built supporting the increased appetite for responsible investing in public markets.

A Joint Pledge for Responsible Innovation

ESG rating systems face significant challenges that limit their usefulness

It’s surprising to hear that some ESG fund managers conduct self-initiated investigations to complement reports from ESG rating agencies in determining the sustainability of investments. That really is going the extra mile.

However, the fact that some fund managers find the need to do this suggests that flaws exist in the current ESG rating system:
1. Companies may use self-reported ESG data to paint a positive image of themselves, highlighting sustainable areas of their business while trying to hide unsustainable practices
2. Small companies with limited resources for reporting and disclosure may be rated more poorly compared to large, less ESG-friendly companies that can hire experts to present themselves in the best light
3. Huge variability of ESG ratings caused by the intrinsic qualitative nature of ESG standards that make them very subjective

It looks like the ESG industry is struggling to mature, with these complex problems holding them back. These are issues that no single entity can effectively address. We’ll have to see how different players in the space collaborate and even then, solutions don’t seem that straightforward.

The fund managers, the sleuths and the mystery of the missing ESG

SPACs are growing in prominence and the implications of this growth deserve more study

Just learned about the existence and rise of SPACs. A rather interesting exit method/ investment vehicle which has left me with more questions than answers:

1) With its growing popularity and credibility, will more companies view this as a viable exit option? How do SPACs evaluate which private companies to acquire and how would this affect upstream VC/ PE activities?

2) From a company’s perspective, why go public via SPACs? The main argument is increased ease and lower costs (vs IPOs), but direct listings seem to take care of that problem quite well.

3) With money returned (and no payday for SPAC managers) if no acquisition occurs after 2 years, wouldn’t that incentivize them to push for lower quality deals or rush due diligence when time is running up? While investors may vote against a deal and redeem their capital, that would mean 2 years of idle illiquid cash and lost yields. Would institutional investors just vote ‘yes’ so they don’t look bad for placing clients’ money in SPACs (as long as the deal isn’t too bad)

4) Interested to see data on SPACs’ performance from investors’ POV (returns + distribution of returns). Is performance changing as more ‘credible’ players enter the space?

Almost everything you need to know about SPACs

We need to strengthen the system’s ability to help scale financially sustainable, but non-venture-backable social enterprises

Just last year, I held a rather idealistic view of business: ‘a tool that can scale impact in a financially sustainable manner’, as phrased in my college admissions essays. To me, Business was the answer to nonprofits’ struggle with impact at scale, which was heavily constrained by the amount of altruistic donations received.

As I dove deeper into the field, things turned out to be much more complicated. There exist social enterprises that are not venture-backable or investable. Though they are financially sustainable and create tangible impact, their risk-adjusted returns are simply not sufficiently attractive.

While there are business models that can rapidly scale and drive impact alongside financial returns, it is not easy to think of and build such a model (especially for some social issues). This leaves many social enterprises in an awkward position, in a grey area sandwiched between nonprofits and investible business.

This article proposes a possible solution to this. Hope to see more ideas tackling this issue in the coming years:

Social Entrepreneurship Needs a New Funding Model (SSIR)