Over the past year, many ESG (Environmental and Social Good) focused funds have reported dismal returns and are either shutting down, or dramatically lowering expectations for performance with their LPs and hoping for mercy. And yet, with our fund I, performing remarkably well, we have INSANE ESG impact without looking for it per se.
However, upon closer inspection I realized that our massive consumer surplus definition of a good investment embeds within it an Easter egg that can not be uncoupled from consumer surplus: environmental and social good.
Consumer surplus is a economic foundation that most VCs ignore, but I cover exhaustively. It is the difference between what you’re willing to pay, and actually pay. Great stuff that can be adopted faster will always dramatically improve consumer surplus. Embedded within this economic truth is an ESG reality: services and technology that massively improve consumer surplus not only improve economic outcomes, they improve social and environmental ones by default.
If consumer surplus goes up, ESG impact must by definition increase. Consider these two examples from our portfolio.
1: Fila Manila is now the #1 Filipino food leader in the US. When we invested in the company, the space was pretty empty. If you wanted Filipino food in the US, you had to either go out to eat at one of the hard-to-find restaurants that served it, or spend hours in the kitchen preparing it. When you buy it in the store, you save time, gasoline, effort, etc. There is an environmental and economic benefit. Socially, we benefit from an expanded culinary palette with greater awareness of the rich culture and beauty of the Philippines.
2: Nitex is quickly becoming the largest supply chain management system for the global fashion economy. By implementing this software, fashion companies save millions of dollars by dramatically reducing travel to manufacturing sites, often in hard-to-reach developing economies around the world. They also can respond faster to changes in demand, dramatically reducing overproduction in an industry responsible for most industrial water use and contamination. In short, Nitex is not only a good choice economically, massively driving down supply chain costs, but cuts out an insane amount of carbon from air travel and dramatically reduces the need to over consume precious water resources.
As we look across our portfolio, we see that when selecting companies based upon strict consumer surplus benefit criteria, our process bakes in an automatic ESG component because improved economics ALWAYS improves ESG if you measure value by this metric. By flipping ESG selection around, looking for incredible consumer surplus impact first, we’re hard-coding our fund to only invest in ESG positive companies because they secretly go hand-in-hand.
Perhaps ESG funds should consider doing the same? Focus on game-changing, consumer-surplus generating ideas, and reap the ESG benefits that naturally occur when you invest for impact with strict economic benefits in mind.
To do ESG right, let consumer surplus be your guide. Economics align with environment and social good when we invest wisely.
A final note: new, exploitive technologies do not generate consumer surplus, they profit from monopolies or exogenous factors such as chemical addiction and resource exploitation for short-term financial gains and massive negative externalities born by someone else. Again, consumer surplus leads the way in accounting for and avoiding such schemes.
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