As we continue to put money to work in our latest fund at MiddleGame Ventures (“MGV”), we have completed a series of deep dive reviews of the FinTech startup landscape in B2B and B2B2C financial services to help structure how we prioritize our efforts across the broader fintech ecosystem. This blog, the fifth in a series, is focused on Environmental, Social, and Governance or “ESG”. The title of this blog, “Embedded ESG” is quite meaningful. After decades of public discussion and largely unsuccessful attempts in the investment community, ESG-associated issues have moved past the “analyze & argue” phase and is now entering the “implementation” phase. While admittedly broad, ESG for our purposes, in financial services and fintech, is a relatively new (and welcomed) entrant into the startup world. After six months of research, we believe there are exciting new opportunities in FinTech ESG.
My own journey (Michael) is relevant and emblematic of the segment’s evolution. At university, I participated in “divestment” protests which demanded that the Yale Endowment divest all investments that were somehow connected to South Africa and the Apartheid regime. This was my first glimpse into the power of shareholder activism and it served as a powerful lesson. Next, I wrote a graduate thesis on “Socially Responsible Investing” or “SRI”. SRI was the precursor to ESG but, as my paper would attest, did not have a solid set of data and relatively poor conclusions (ie correlation vs causation was difficult to prove). Unfortunately, that early data actually showed that SRI investing chronically underperformed the market. My next step at Wellington Management Company was to manage a “green fund”. Again, using poor sorting tools, I was only able to identify “not bad companies” for investment. It was a frustrating experience. Various entities have attempted to improve the tools and results over the years, with little real progress.
All of which brings us to the present. After our deep dive research, we can safely say that “this time is different”. The data, tools, systems, regulations, investor sentiment, and technologies have all combined to create ESG’s moment, its Phoenix if you will. Innovation in the sector is booming, and exciting. We believe that investors, regulators, and the general public will no longer tolerate ESG as a mere reporting element. ESG will now be required as an embedded element of operations, recruiting, results, and outcomes. In order to facilitate that massive change, new technologies will be required.
Our research included a wide scan across Europe for self-identifying ESG startups. We uncovered XXXXXXXX startups and just as importantly, 5 Key Trends in the “Embedded ESG” innovation community which we will discuss further below:
Five MGV Focus Trends in Embedded ESG
We have organized our research and investment efforts around five key trends that will influence a cross-section of functions within and beyond the financial services landscape:
These focus trends in Embedded ESG tie into MGV’s “3D Finance” meta thesis, which encompasses the transformation of financial services around a core of Digital, Distributed, and Data-Driven processes. Within the 3D Finance construct, we have further developed investment themes that focus our attention on the transformation that is just beginning to unfold across the financial services industry, many of which were highlighted on MGV’s introductory blog.
If you are a high-potential pioneering startup in the Embedded ESG ecosystem or if you are an incumbent seeking to identify opportunities within this ecosystem, please reach out to us. We are committed to supporting the transformation of financial services over the next decade and welcome any and all feedback and opportunities to engage constructively on a shared vision for the future of financial services.
In addition to the MGV team, underlying research credit goes to Antonin Gury-Coupier, Sarah Finnegan and Matt Lobel.
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