The challenges of doing ESG when investing across geographic locations worldwide with Mundi Ventures

Mundi Ventures is a global technology venture capital headquartered in Madrid, Spain, with offices in Barcelona and Paris. Established in 2015 by Javier Santiso and Moisés Sánchez, the firm manages five thematic funds worth $500 million, initially focusing on Spanish founders creating businesses internationally. Now, Mundi Ventures invests worldwide, particularly in Insurtech, FinTech, circular economy, and deep tech. Their approach to ESG faces challenges like varying regional regulations and founder sentiment. The firm leverages its culturally diverse team and extensive global connections to address these issues and promote sustainability within its investments. We had the opportunity to dive deep into the company's strategy at our latest Zero One Hundred Conferences ESG & Impact Talks with Yoko Kojima, Head of ESG at Mundi Ventures.

Tell us a little bit about Mundi Ventures. Now you're based mostly in Spain, but you invest globally, right?

We are unique in that when you come to our office, you cannot tell where we're based because most of our employees and colleagues are very diverse in nationalities and ethnicities. But you're right, we have a headquarters in Madrid, Spain. We have three offices in Madrid, Barcelona, and Paris, and we're investing globally from here.

We are a technology VC with different thematic funds. So we currently have five different funds that total 500 million under set management. We were launched as a VC in 2015 by two general partners, Javier Santiso and Moisés Sánchez. We started as kind of a diaspora fund established by Spanish-renowned business professionals. So we started investing in startups founded by Spanish founders, but creating businesses outside of Spain. So that could be Latin America the United States or everywhere else. We also started investing in foreign founders coming to Spain and creating businesses. So that was kind of the origin of our fund. And now we have expanded to other things. So one thing that we invest in is Insurtech, and another one is FinTech. We also have a fund for circular economy and deep tech.

You started with a focus on Spain, either investing in Spanish startups or that had something to do with Spain. Is that still part of your investment strategy or has that changed?

That was the origin of our first two funds.

Since then, we've already created three different funds, which now have a global focus. So the latest one is related to Instratech and that we call a global Instratech fund. From there, for example, we have investments in Latin American startups and American startups. Some of them are in Australia, and Singapore as well. Another theme is circular economy and then that's also something we invest globally.

So when it comes to doing ESG at Mundi, since you have this international presence in diverse markets from Europe to the USA, Asia, and Latin America, what are the major challenges when you have to do ESG? Because, I mean, and you're the one in charge of this, you have to manage all these different backgrounds, different points of view, and different laws as well, right?

Yeah, that's correct. I wouldn't say it's easy. I would say two challenges are one related to the regional differences in terms of the regulation. And the second one is related to the sentiment of the founders. Maybe before going into those two challenges, I wanted to clarify that. I would say I'm very lucky because our fund has a culture of working very closely with founders. And we have our platform team, sometimes it's also called value creation, and we talk to founders on a day-to-day basis. And that helps my role as head of ESG to work on different sustainability issues with the companies. So at the end of the day, what we don't want is just to bombard them with basically a checklist or a list of obligations for them to just go through. That's the last thing we want to do. And we want to work on things that startups also see value in. So in that sense, the whole culture kind of helps me to do that relatively easily. Having said that, the challenge is basically to stay up to date with all the regulations that are coming out from different regions.

European regulators are relatively ahead in terms of sustainability regulations such as SFDR, CSRD, and e-taxonomies. And that helps as other regions are trying to do something similar, but slightly in modifications. So it helps that we're in Europe, but also it helps that some of our colleagues are from different countries.

So, for example, I'm from Japan, so I'm used to paying attention to the financial regulations coming from, for example, Singapore or Japan. And that would be the same for some of our colleagues from Latin America. Another taxonomy came out from Mexico as well, and another one from Singapore. So the challenge is to stay up to date with all the different regulations. Having been based in Spain, I guess how we are tackling it is to use our cultural backgrounds and then our connections and also our startups are everywhere. So that's also helpful for us to stay up to date there. 

Another challenge that I want to discuss is the sentiment of the founders. This is just my personal experience, but I would say having worked with different startups in different regions, European startups, and also Latin American startups are usually keen on sustainability issues, just as my personal experience. So maybe there are no statistics around that, but for example, in the US, you know, last year over the summer, there were some anti-ESG movement as well.

And then some of the startups are skeptical about including ESG in their investment decisions or just in general, not paying attention so much on climate or sustainability in general. So that could be a challenge. But having said that, even in those regions where some of the demographics are a bit skeptical, the latest sentiment coming into 2024 is looking slightly more positive.

And I think the SEC has approved the climate disclosure regulation in the US as well, although it's watered down a bit. But having that as a headline saying that, OK, the capital market in the US also cares about climate is helpful for us to move forward with the conversations.

And maybe you can go a bit deeper on what you just said, how this anti-ESG movement naturally will work harder. I mean, seeing startups paying less attention, I guess they were mostly based in the US and the movement has more relevance and maybe more force.

Yes. Yes, we have quite a handful of portfolio companies in the US and also whenever we are speaking to potential investors as well, some might be slightly skeptical about including ESG in our decision-making process.

So I will start with the startup part. So we collect ESG data annually and some of the portfolio companies in the US would come back and say, you know, here in our day-to-day conversations in the US with the US markets, mostly they're talking about their clients, ESG is not that big of an issue. So why do we have to deal with the sentiment that's coming from the European district? So that kind of conversation can happen.

And whenever that happens, what I would remind them is, A, OK, well, if you're looking at the global investor base or the market base, that will come inevitably necessary for them to consider the ESG issues. And also not just about the client segment, but also the potential employees of the startups. Most of the millennials nowadays, more like Gen Z, consider company culture to be very important whenever they decide to join a company.

Yeah. So those are the typical maybe like day-to-day look in terms of the challenge that's been brought by the anti-ESG conversations, which is also fair for us to kind of move forward to to talk about this. You know, I don't think it's healthy to have just one view on the issue that ESG is only good and everybody should be doing it.

That's not really my position. I think we should be welcoming on all the skeptical points and all have to be very transparent about what could be the short-term negative of ESG, you know, like maybe there are some clients who can be very skeptical about ESG and if startups don't know that and start promoting or branding themselves as a sustainable company, they might lose on certain contracts. So we have to be very careful about what to do when we say, OK, we want to start an ESG initiative.

Another point about potential investors or just in general to talk to our peers, peer other VC firms in the U.S., there have been some conversations or more provocative discussions around whether having ESG in the investment strategy could negatively affect the financial performance. And I remember I went to an offsite of the United Nations pre-principle of responsible investment, and I had some discussions with some participants there about this topic. And I think it's interesting to see there are some studies done by, you know, people with different opinions on trying to find either positive or negative correlations between ESG and financial returns.

And I mean I have done my research and I don't think any of the research that suggests a negative correlation between ESG and financial returns has some faults in terms of methodologies or the data is not accurate enough. But those are the types of conversations that now we need to overcome whenever we speak about our fund's approach to having ESG in our investing operations. Well, this makes me remember we were having this conversation at the previous podcast with fund funds, Natasha Franks from Alphas, and she mentioned that one of them, she's the head of ESG as well and she has to collect data and the hardest data collection issue that she has is when she has to deal with American VC firms.

And I think it has to do a lot with what you're saying, you know, it's about the regulation, what you feel the market actually is asking you or requesting locally. But also in the startup's case, it has to do with the priorities, right? When you have to collect data and be compliant with all these ESG requirements, but you also have to sell, you also have to do much other stuff to survive as a startup because startups work very hard and ESG is probably not the priority, right?

Yeah, absolutely. And then I think it's also not, I mean, it really depends on the stage where the startup is at. So, for example, if you're dealing with seed stage companies and then if you're coming to ask for, OK, what's your gender pay gap or what's your governance policy around supply chain management? I think it's a little bit too much for them to have, but maybe for that kind of early-stage companies, it's more beneficial for them to have company missions and then what would be the employee's handbook, you know, because the people at the time is very valuable, even more than the system or the operating fabrics of a company. And then obviously going up closer to the pre-IPO or series C or D, then that will come to more governance issues or specific regulatory issues that they can deal with. Then it will be important for them moving to the next fundraising as well to have all that ESG related data ready as the regulation is asking more and more and also other later stage investors will be asking more on those data.

So I would say as a VC investor, we have to be mindful of where the startup is at in terms of the stage, but also about their business priorities. We do not want startups to do something that doesn't make much sense from the economic or business point of view. So I think you have a point there.

That's perfect. Let's move on to the U.S. and let's go back to Latin America. I love talking about Latin America. You are based in Madrid, but you have like a big relevant relationship with Latin American startups, but also investors, right? What's the relationship between Spain and the different Latin American countries? Because there's this language benefit, no? And maybe that makes it easier to invest there and also communicate with the companies. What's the relationship that Spain has with the different Latin American countries when it comes to investing?

 Yeah, and I also love talking about Latin America. And I have to say when I was working in Tokyo, I didn't know much about that region.

And I'm very happy to be learning, and breathing in the conversations around Spain and Latin America in terms of business relationships. Maybe here, I want to, because we are now talking about ESG and impact as well, that maybe I want to lay context on the difference between Spain and Latin America, to begin with. So related to impact, Latin America has attracted enough, maybe like development capital from the big DFIs, you know, for example, there are inter-American development banks and in the world banks and some countries, including Spain, has been pouring development capital into the region to support their economic development.

However, related to, for example, the progress in terms of sustainable development goals, I was kind of surprised to see how little progress has been made, especially after COVID-19 happened. I can even throw some numbers that I think as of now, only 12% of the entire UN SDGs are on track. And since 2021, so the past three years or so, almost 30% of the SDGs goals have been deteriorating, so like moving worse to the opposite directions.

So maybe just to kind of highlight that there's so much that needs to be done in terms of sustainable development in the region still, and I believe that the startups and venture capital can play big roles there, especially as most of the VC investments in Latin are currently going to FinTech related startups, I think something like 60%. And that's very important because without having any digital, digital finance, like fabrics, other businesses cannot serve, right? Like whenever you're shopping online, you need a digital bank account, or at least a bank that allows you to use and transact digitally, and that will be the same for insurance. If you don't have a bank account, you can't have health insurance.

 So I think it's important that the vision will continue to attract the VC investments in terms of the sustainable development goals. And maybe having said that about the relationship between Spain and Latin America, in terms of investment, especially related to VC investing, Latin American VC investment has been falling by almost 60% since 2021. And I think we all know that 2021 was one of the highest peaks in terms of VC investing and, you know, all the startups could attract more capital than ever before, but since that, since the European war broke and in so many other geopolitical issues, that's the amount has been decreasing and Latin America has experienced the sharpest decline. Whereas for example, in Spain, I think the decline was about 45%. So it's, it's still a decline, but so much better than Latin American ones. That's in now for us, it's a good time, to look for good startups in the regions, especially because there are so many good startups, but the capital inflow has been declining.

So maybe that's, that's an interesting point to make. Another one is the, not necessarily related to the VC, but in general, capital that's flowing from Latin America to elsewhere and the foreign direct investment from Latin America to other countries has been actually growing in contrast to the VC investment into the region. And I think, yeah, that's a problem.

I mean, I think I understand that economic disturbance has been, you know, motivating them, the lots of investors to look elsewhere, to, you know, look for more stable investment opportunities, but it's important for the region to, to attract those local capital as well as foreign capitals like ours. So I think it's important to shed light on good opportunities that are happening in the region and it's, I mean, for us, we don't have a specific mandate for development of the Latin America, but we invest in the startups in the region just because they're, they're the best in best in class. So I think it's maybe slightly overlooked and I think it's important, for, for the region to start promoting all those good opportunities to foreign investors.

Yeah, I guess that the region is going through like a lot of political, well, uncertainty now and not for COVID, you said before has slowed down, down a lot, the SDGs commitments and goals in Latin America, but maybe it has to do with the fact that it may, maybe internally, locally in the countries, it made us realize that we had other major needs, you know, like basic needs to, to cover, you know, because a lot of, during the pandemic with all the lockdowns and stuff, a lot of people didn't have anything to eat, you know, so it's complicated, right? Because you go back to like trying to fulfill basic needs and you cannot think, I mean, and then you, you cannot think about actually going like farther with the, when it, to ESG metrics, no, like try to, to come to be competitive with this metrics when you actually, I think, I don't remember who mentioned this, but yeah, I mean, in the end, you have to fix the, the major issues first, no? And that's maybe something that the pandemic showed, like internally in some countries.

Yeah, absolutely. I think maybe because most of our investments in Latin are related to insurance companies, including, for example, a company providing health insurance, more like digital health insurance, life insurance, and those companies work with people, right? So it's more that ESG S part of the ESG, I would say.

And what's interesting is maybe that's one of the reasons why the founders of those companies are more willing to incorporate certain ESG topics, such as the S part, and because they, they know the importance of paying attention to, you know, inclusivity of the services, right? Like it's, it's one thing if you're in Brazil and then maybe your main market is Sao Paulo and then, but so many people need that type of services, like outside of Sao Paulo and some of the employees and founders are thinking about, okay, how can we make the service more accessible and affordable for those people who are not necessarily in the urban area as well? And that's, that's kind of what I like about my job, that those people who have experienced personally certain ESG issues, maybe related to themselves or their families, and now they want to, to do something about it with their own start-up journey.

That's like putting the metrics into making them tangible, right? Because then, I mean, you do ESG, you collect data, I mean, numbers and graphs and stuff, but then when you have to like actually make them tangible and see what it actually means, you know, the impact, the real impact of this strategies, it's actually what matters...

Yeah, absolutely. And then I think it's always important whenever you're doing ESG initiatives, you think about the final beneficiaries, right? So then you can have this, this actual people with smiles, or, you know, like maybe with a sad face, two smiles, to think about, okay, well, this is the difference, this is the additionality that I'm bringing by doing this, you know? And then when the, when the person on the other side gets it, it's, it's very rewarding.

Yeah, that's the real impact of ESG in emerging countries like the ones in Latin America. And maybe you can tell us a little bit more about, okay, besides the whole data collection challenges, you know, that you mentioned before, and what other challenges do you have in emerging countries where you invest? What are the major challenges that you have besides data collection?

I think maybe it's similar to data collection, but one thing that comes to mind is the lack of a good benchmark. So one thing is about collecting data from portfolio companies.

And then once we collect the data, we want to make sense of it, right? But most of the available benchmarks are either on a global basis, meaning that most of the available samples are in developed markets. So if I'm comparing the gender balance of some of our portfolio companies in Latin to the ones in Europe, I think it's, unfair or like, it doesn't really make sense to compare them. So I think having a good benchmark is still relatively difficult.

We are trying, to work on it by looking for different data providers or best practices or initiatives that we can be a part of and also having our data collection, but I think that's, that's one of the challenges. Another one is that the fact that Latin is not one country, right? So I think it's important to say that as a VC industry, I think we are looking at mostly the big players, like the usual suspects, like Mexico, Brazil, maybe Chile, whenever we are talking about Latin, but it's important that there are so many other countries, um, coming to play and in each country has a different ESG topic for it. So for example, I think for Brazil on the national level, biodiversity and anything related to deforestation is something that usually comes, to the conversations, whereas maybe for some other countries, it's more related to the governance issues and et cetera.

So I think, another challenge is again, Latin America doesn't necessarily have coherent policies or regulations like the European Union. So here, uh, having based in Spain, but I'm aware of all the regulations that are going on in other countries, just because if you go to the, you know, European unions, uh, list of directives and then go through the specific countries regulations, you can kind of find at least like the common framework, and then obviously there will be country-specific regulations. But so, in terms of the regional coherence is something that's lacking, so that's making our job more difficult and there's, uh, some Mexican regulation, I think Colombia has some regulations as well, right?

So do you see, are there any spaces where the regulation actually is coherent? I mean, where you can say there, some things are similar, so we can rescue them, or in the end, it's completely different.

I think the general thinking is alike, I would say like overall, you know, a similar, basically the similar approach. So having different definitions for what is sustainable and then maybe having certain stress holes on basically similar approaches, like do no significant harm or like, what are the minimum things that the company should be paying attention to? So that overall approach of how we have to think about sustainable finance is, is something that I see as a common denominator, but also the devils are in the details, right? So, uh, in that sense, I haven't really found common taxonomy per se that goes through the region and maybe for, for regarding this topic, more like private initiatives are interesting to see. So what I've been paying attention to, uh, for example, like the activities of, um, NAB, uh, or IMP, like the impact measurement project or even B Corp, B Corp is pretty big in certain countries in Latin America as well. So those private initiatives where they attract members from SMEs or startup communities, are interesting for us to pay attention to more than the country-driven regulations as of now.

Yeah. I love the insight that you just gave. Like it's true. A lot of, there are a lot of private initiatives, uh, because, in the end, it happens everywhere, right? Regulations are always behind reality, no? So as you said, the B Corp is a very big certification in the end, no? In, Latin America. So at least someone's doing something about it.

The private world is taking care of it. And, so at some point, probably the governments will also take really good care of it. No, but it's about, as we said before, it's about what you really need, what is your priority, no? So let's see what happens.

So since we're running out of time, I want to ask you one question, you mentioned, for example, in Latin America, there's a lot of fintech, no? But then you mentioned like in insurtech also, and you have like these few sectors where you are focused your investments, no? So how do you balance the impact needs with the business needs when it's, when you make this investing decisions in these different sectors, where originally the sector is not directly associated with? Climate or environmental sustainability, etcetera.

I personally really liked this question because I think, you know, whenever you're talking about, either like trade-off or, you know, balance between impact and, you know, business needs, I think we can be creative and then, you know, show where you stand. Right. And so I think it's, it's great that you're asking this question when it comes to, you know, our investable universe. So mostly related to fintech and insurtech, although we do, you know, invest in more typical environmental focus, like cycle economy and deep tech as well, but for the sake of this conversation, if we are looking at fintech and insurtech or more like a traditional business is that, that that's not capitalizing on the trend of climate change or biodiversity.

I think we have to also acknowledge that mostly in the short term, there could be a conflict between sustainability and business needs. So, I can give you an actual example. If a startup is looking to hire the next chief growth officer and also want to hire diverse talent.

So they have this, you know, imagine that they have this diversity, equity, and inclusion hiring policy that they have to interview at least the same number of candidates for both genders, for example, and then, unfortunately, it takes longer for this startup to fill the position if they have this hiring policy, because it's not easy to find the good candidates coming from the minority backgrounds and having that chief growth officer or commercial officer today or in a week is crucial for, for a startup, right? We see the impact of having the right person in the VP or C-level jobs. So that kind of trade-off can happen at least in the short term or like, you know, quarterly basis. However, when you see in the long run, we really see the sustainability or ESG objective is really aligned with most of the time the business needs.

And that's mostly coming from larger customers who want to do business with startups, with good governance and a list of certificates etcetera. Later-stage investors are asking more and more about ESG data. And of course, if they go, if the startup is thinking about doing an IPO, that's almost like a must, you know, like it's even like a list of prerequisites related to the SEC's regulations or CSRD regulations, and also the public sentiment on branding.

And so in the long run for the success of the startup, ESG topic has never, can never be a conflict, however, in the short term it can be, so it's more about the fact of thinking about, okay, well, these are the building blocks that a startup has to go through, when will be the right time to implement this, you know? So maybe right after securing a big contract or securing big funding is a good time for them to maybe implement some of the long-term plans related to ESG.

Perfect. So it's about building a strategy, right? In the end, you know, it's about like making the, like the sustainability strategy coherent with business strategy, which is something that we are trying to in general with all companies worldwide and it's a big challenge, you know, especially if they are established already, at least the startups have, they are starting from scratch so they can still build this culture and put this into their DNA, you know, whereas when you think about big companies when you think about established companies, that's much harder.

Yeah, absolutely. And then I forgot to mention that also Fintech and Insuretech, there are no sectors that are not relevant to climate change or biodiversity loss or even, you know, inequality in the world, et cetera. So I think it's typical for people to think that, okay, ESG, so anything related to green services, of course, that's a big trend and that's something that we really as humanity have to be putting a lot of effort on in terms of combating climate change, however, FinTech and InsureTech can also combat climate change in so many different ways.

So for example, one of the sectors that we are looking at is carbon insurance, for example, biodiversity insurance as well, related to Fintech, obvious ones that we've invested in, and then also I've worked at is Clarity AI or there are some, so many other sustainable FinTech or, you know, anything related to regenerative agriculture, but then like, they also need a particular parametric insurance for their new practices to be implemented, et cetera. So I think the whole ESG trend is relevant to all the sectors. And I think in even like 10 years or 15 years, almost all businesses will have certain business lines related to sustainability, and then I think it's a beautiful trend because all the industry has to transform one way or another, otherwise they will be left behind.

For example, in your case, how are you embedding climate risk as part of investment decision-making? I mean, they are related, it's not as evident as investing in climate tech, of course, but how do you embed this?

Yes, so we started to include climate risk analysis in investment decisions recently, and when we look at it, it's really two ways, so one is the typical climate physical risks, and then another one is transitional risks, and related to physical climate risk, it's interesting to see that, for example, we have one agri-tech companies, and then if you're looking at physical climate risk in Spain, most of the vegetables and fruits will grow even more as the temperature rises, given the fact that it might have a higher chances of getting droughts and floods and so on, so it can be also a positive risk for certain businesses, but it's important for us to be aware of all those potential negative risks that we should be mitigating, and then potential positive risks that we should be putting effort in terms of value creation, so that's how we're embedding that into our analysis, and so far, it's been good feedback from startups as well, because it's a new lens to look at the market, look at the businesses, so I'm excited to implement this further and improve the process.

Perfect, so we ran out of time, but I want to ask the last question, it has to do with AI, you mentioned it before, actually, so because you focus on all types of tech investments, in the end, you have to think of AI from different perspectives, not also as an investment opportunity, also maybe as to include it into your strategy, so what's your approach to AI ethics in general?

Yeah, thanks for that question, this is something that at Mundi we really care about, I would still say that it's a new topic that's coming into not only VC, but also in big corporations as well, our approach is that we really care about the AI ethics, and then also the data privacy of the product or services that these startups that we invest in are using or providing, so we have this as one of the due diligence layer, and there's actually an interesting framework that came out of either ESG VC or Ventures ESG, which are the two industry driven initiatives related to ESG and VC, and there's a flowchart of investment decision-making related to the AI ethics, and this framework is based on the EU's AI directive, I can also quote the actual regulatory names, but there's a EU AI Act that came to place last year, I believe, where it basically asks for transparency of the algorithms when it is in the risk or high risk category in terms of the services, so it can be anything related to HR tech or health or obviously some other deep tech related industries, and I think it's important to have this type of conversations with the founders and also chief technology officers to say that, okay, this is something that we care about, that EU AI Act hasn't been fully implemented yet, but that's a conversation that we will be having in maybe two years or three years, so it's important to have that design principles in place now when we invest in, which is like series A, and then so that when they go to series C or series D, and then when they're getting more and more media attentions and potential scrutiny, depending on sensitivity of the business sector, I think it's our role to bring that seeds of the AI ethics at the stage that we invest in.

That's perfect, before it's too late, right? Because then it's going to, I mean, once the company has been like completely established and going for like growth and stuff, it will be much harder for them to change their AI approach and the way they do stuff, the way they manage this issue.

And then it's kind of connected to another area of ESG, so one thing is about, you know, supply chain due diligence, and then maybe when the company is deciding on tech stacks, you know, like which partner they want to use, they can already think about that AI ethics in terms of the supply chain due diligence. So before deciding on which partner to collaborate with, because otherwise, you know, you will be kind of stuck in the tech stack that you've created a couple of years ago, and it will be so hard to be apart from that. Yeah, it's preventive, no? More than just reacting after you, you already made decisions without taking this into account at the beginning.