Interview with Ma Rui, partner of Fengrui Capital: ESG investment, a protracted battle for VC self-cultivation

Rui Ma, partner of Fengrui Capital

Walking on the road, you can often see many shared bicycles falling on the side of the road, or densely stacked together, if you want to cross them to the steps, you can only continue to walk forward a few meters, go around the head, in short, it is very inconvenient.

Looking back at the earlier years, those who obstructed traffic, plunged into the sidewalk, piled up the barren grass of small red and green small purple fans, as well as the "grand situation" of more than 13 million people online and offline flocking to return the deposit, and the epic classic battle that burned 30 billion, we most likely forgot that the original story was "low carbon" and "environmental protection".

"You may think that investing is about making money, but if you really understand it, investing should be the right allocation of funds and resources." Ma Rui, a partner at Fengrui Capital, told Titanium Media venture capitalists.

Obviously, the original shared bicycles were not properly allocated. Although it is inevitable that the reasons for the destruction of the myth of sharing bicycles will be discussed later, but among the many horse hindsights, few people analyze the whole thing from the perspective of ESG. I came across a good summary: Bike sharing is the tragedy of ESG's absence in China.

However, things are developing in a positive direction, since the implementation of shared bicycles in the past six years, the concept of ESG has received more and more attention in China, and some investment institutions have also established a relatively complete evaluation system. With the advent of the "double carbon" environment, China has embraced ESG with an unprecedented attitude.

Among them, Since its inception in 2015, Fengrui Capital has continued to lay out ESG projects such as Blue Crystal Microorganism, Qingtao Energy, Xizhi Technology, Maihai Environmental Protection, Aobei Environmental Protection, Kunshan Meimiao, Songchen Power, Shenzhen Hande, Jineng Technology, Sandun and a Half, JUNO, etc., and is one of the earliest institutions in China to practice ESG investment concepts.

Recently, Titanium Media Venture Capitalists held a dialogue with Ma Rui, a partner of Fengrui Capital, to further understand the logic behind institutional ESG investment and how companies should find a balance between income and ESG performance.

Long-Termist Code: ESG

To make a long story short, ESG is an investment philosophy and corporate evaluation criterion that focuses on the performance of the corporate environment, society, and governance rather than financial performance. The concept can be traced back to the ethical investment that arose in religion more than two thousand years ago, such as not profiting from the arms, tobacco, slave trade, etc., and people regulated investment behavior with religious and moral standards.

Until 2006, the United Nations Principles for Responsible Investment (PRI) were established, and the ESG indicators composed of environmental, social and governance factors became an important indicator of sustainable development, and the ESG investment concept gradually gained global attention.

For a long time, with the active policy formulation, the development of the market environment, and the popularization of ESG investment concepts, we can see the rise of this more refined investment method in domestic institutions.

The prevailing belief is that in order to achieve better ESG performance, it is necessary to give up some of the gains. This seems to contradict the high returns that investors are pursuing, and some investors also say that higher ESG ratings are not necessarily linked to higher investment returns.

In this way, implanting ESG investment philosophy is not a stable and profitable transaction. So why should we value ESG investment today?

In other words, "do the right thing" and "be a friend of the time" are taken as guidelines by investors, and it just so happens that ESG fully meets these two criteria.

"ESG, as I understand it, is to better price the risk of assets. Consider multidimensional factors when assessing risks and benefits, not just profits; consider long-term development rather than just short-term temptations. Investing with the ESG framework can avoid a lot of black swans or gray rhinos, which can ensure long-term returns. Speaking of Fengrui Capital's original intention of practicing ESG investment, Ma Rui believes that long-term mentality is the key to early investment, and many of the concepts of ESG investment are very consistent with fengrui's daily training risk pricing method.

From the traditional two-dimensional investment model that considers returns and risks to the three-dimensional model with returns, risks and ESG as the axis, we can increasingly see the long-term characteristics of investment institutions like Fengrui Capital that insist on promoting ecological sustainable development.

ESG cultivation of start-ups

At present, the transmission of domestic ESG concepts is mostly a top-down form: society, policy - LP - GP - enterprise.

The daily work of investment institutions is to calibrate the scale of corporate returns and risks, in short, the potential return of an enterprise exceeds the potential risk deserves the attention of the institution, and it is not recommended to invest. The ESG framework can help calibrate the scale more precisely.

It can be seen that the enterprise of the ESG chain terminal is the protagonist.

For example, in February this year, Alibaba released the third quarter of fiscal 2022 results, for the first time to write ESG progress into the financial report; in April, Tencent released its first ESG report, explaining its performance in key areas such as HP technology, digital inclusion, responsible products, youth protection and business ethics. Even on the homepage of the official website, ESG can be seen in a prominent position.

The larger the corporate responsibility, the greater the social responsibility, and for large enterprises, ESG is naturally a trial that cannot be escaped in the future. So, for start-ups or small businesses, should ESG performance also be the focus?

Marie's answer was "yes."

"For small businesses, you don't necessarily need to have an ESG department, and you don't necessarily need to do ESG reporting every year, but early implantation of dominant genes for ESG is important. You need to know whether your business direction and strategic direction are in line with the ESG theme and framework, and gradually consider how to accumulate data, and do a good job of dataization within your ability. Marie said.

In the recently revised Guidelines for the Management of Investor Relations of Listed Companies by the China Securities Regulatory Commission, it is stated that the communication content of investor relations management will be included in the "ESG" for the first time from May 15, including overseas listings, which is also a mandatory requirement to disclose ESG reports.

On the other hand, the importance of enterprises to ESG reflects their anti-risk awareness and long-term planning capabilities, and investors must be more willing to bet on companies that have prepared early rather than sharpening guns.

You can't wait passively, but you need to actively control the field

Although the enterprise is the protagonist, the GP plays a very important role in it. Green finance is actually to use the green label to guide the flow of money, money from the state to the bank to the LP to the GP and finally by the enterprise to practice, which is sustainable investment.

"But GPs don't just fund businesses and then passively wait for businesses to make changes. If GP establishes the ESG investment principle and covers this principle to the invested enterprises, it is that everyone has built such an ecosystem together, which I think is actually quite important. Ma Rui told Titanium Media Venture Capitalists: "In the six years since the establishment of Fengrui Capital, it has invested in more than 150 companies, and we hope to spread the green principles to these enterprises." ”

Investment institutions are more like playing a "sparring" role, accompanying the invested to carefully track and record ESG data, and helping companies find a delicate balance between ESG and earnings.

For example, Fengrui Capital was invested in Aobei Environmental Protection, an Internet company located in Chengdu that is engaged in garbage sorting business. "From Microsoft engineers to super rag king" is a summary of the media's entrepreneurial story of Wang Jianchao, the founder of Aobei; "let the garbage entering the incineration plant and landfill plant become less", which is Wang Jianchao's original intention in establishing Aobei.

At present, Aobei Environmental Protection has a layout at the B-end and C-end, and also cooperates with closed places such as primary and secondary schools, government agencies, public institutions, and state-owned enterprises in Chengdu.

In the company of Fengrui Capital, how much recyclable and degradable garbage Aobei users recycle each time will be recorded, and then the data of each user will be returned to the user to establish a database of its own. And according to the data cashback to users at market prices, Aobei will recycle recyclable waste into treasure, reducing the amount of incineration and landfill.

In 2021, Aobei Environmental Protection assisted 26,081 households and 552 institutions nationwide to recover a total of 1,214 tons of recyclables, equivalent to reducing CO2e (carbon dioxide equivalent) by 2,270 tons, reducing tree felling by 14,350 trees, saving 1,493 tons of oil, and saving 5,388 cubic meters of landfill.

From the perspective of the framework of ESG investment, Aobei is definitely in the positive list, but at the beginning of the investment, Fengrui Capital had some controversies about Aobei Environmental Protection.

At that time, Wang Jianchao was more of a public welfare person than an entrepreneur. Ma Rui even once persuaded Wang Jianchao to participate in less public welfare activities and find more ways to make the company turn positively.

Ma Rui told Titanium Media Venture Capitalists: "I think some things must be handed over to the market, if my investment can not bring returns, but because of the loss of funds collapsed, it is not sustainable." ESG investment is actually very market-oriented, although it is a long-term feedback for early investment, but there will be feedback in the end, and I am not very willing to pursue higher risks and lower returns for green. ”

To this end, Wang Jianchao has been looking for a profitable sustainable development model for five years. Eventually, through continuous exploration and improvement, it evolved into the current model of "full bag for empty bag, full bucket for empty bucket": let residents sort garbage at home, put it in the surrounding designated places, and Obei will take away the garbage at the scene, leaving new empty bags and empty barrels. A truly effective recycling channel has been established.

Will you give up some of your benefits in pursuit of better ESG performance? Feng Rui and Aobei give a solution. "I still think that if you seriously do ESG investment, you may not be giving up the benefits, but may avoid some unknown risks." The core of ESG investment is to improve the ability to resist risks and ensure long-term, sustainable returns. Marie said.

Look for a standard celestial fidelity

In the current "double carbon" context, there are more and more funds targeting ESG, and there are also many reports of promoting ESG from a carbon neutral perspective, it is worth noting that ESG is not equal to carbon neutrality.

The predecessor of ESG Investment, Sociallly Responsible Investing, did not specifically mention environmental protection at the beginning, and then gradually evolved to ESG. In terms of importance, S (society) and G (governance) are not lower than E (environment), but according to the actual situation in China, there is indeed a phenomenon of paying more attention to E (environment).

Ma Rui explained to Titanium Media Venture Capitalists: "Because the E (environment) indicators look more realistic, such as environmental pollution emissions, carbon emissions and other indicators are relatively easy to quantify, although the carbon footprint calculation is relatively complicated, but in fact, in general, it is still a quantifiable indicator." In comparison, S (social) and G (governance) will be a little more virtual. ”

But this in no way means that S (society) and G (governance) are unimportant or non-existent.

Last year, allegations of unequal pay for women and perennial harboring of sexism and harassment left Activision Blizzard's corporate image pressed to the ground. From the perspective of S (society) and G (governance), it is definitely a catastrophic event, which has also led to a sharp decline in its stock price and valuation. Previously, Activision Blizzard's ESG rating was very high, especially at the E (environmental) and G (governance) levels, and the first ESG report was released in 2021.

Activision Blizzard shareholders BlackRock, Pioneer Group and Fidelity Investment all said they used the ESG index provided by MSCI or FTSE Russell. The Wall Street Journal published an article: "How Did Activision Blizzard Pass the ESG Test?" Questioning why ESG rating agencies can't see the huge risks behind Blizzard. MsCI then said Activision Blizzard was removed from its ESG index at the end of November last year, while FTSE Russell said Activision Blizzard had been added to the controversy watch list.

On April 29, Activision Blizzard shareholders approved Microsoft's $68.7 billion offer to acquire Activision Blizzard. This largest acquisition in Microsoft's history has been evaluated by the outside world as a perfect ESG "bottom-reading".

This also raises a new question: Can ESG bottom out?

If the valuation discount is caused by the performance of ESG, then the bottom reading at this time is undoubtedly a cost-effective investment behavior, but does this violate the real investment philosophy of ESG? That is, companies that should perform better with ESG should be invested.

I have asked this question to many investors, but the answers I have received are mostly vague. Some institutions believe that this problem is still a bit early in China, and even how to define ESG in China is a problem. Ma Rui also said that the establishment of an ESG standard system is an important thing in the next five years.

ESG investment does have a choice of left-handed return and right-hand responsibility, and GPs are also facing an eternal question: what is the right thing to do? It's hard to answer, but I think more often than not, investors need to have a scale in their minds.

As Ma Rui said: "ESG has a particularly multi-methodology, but there is still a consensus on the general framework. In his view, sometimes there is no need to think so complicated, a basic lesson is to exclude particularly negative items such as "double high", P2P, tobacco, gambling, etc., and then encourage the positive list. (This article was first published by Titanium Media Venture Capitalist, author |.) Zhang Yinan)