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Jan. 11, 2023

Ep 15 - Bertie Crawley – Intentionality of ESG

Ep 15 - Bertie Crawley  – Intentionality of ESG

Welcome to the latest episode of the ESG in VC podcast where we are joined by Bertie Crawley. 


Bertie is the co-founder and Managing Partner of UNTITLED, an early stage venture fund based in the UK which has backed companies like Fabric Nano, Hide Biotech and Mytos. They are also an investor in venture funds. Prior to this he co-founded Zulu Forest Sciences - an applied science and asset management group focused on financing nature-based carbon offset programmes - and was a Partner at Zulu Group, an investment business focused on high impact start-ups. 

Together with Bertie, we discussed if ESG leads to value creation at the fund and portfolio level and if ‘ESG’ can be an investment strategy for fund managers to consider. We also tried to tackle a big question that many raised over the course of last year - if ESG should be disentangled as having three big problems mixed up in one is a hard ask and much more. 


Guest: Bertie Crawley


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Hello and welcome to ESG in VC, a podcast where I continue to interview top players in the ESG space and where we dive into ESG-related topics exploring how investors, regulators, and founders try to build a more sustainable and inclusive society. I'm your host, Oksana Stowe, and today we have Bertie Crawley joining us.

Bertie is the co-founder and Managing Partner of UNTITLED, an early-stage venture fund based in the UK, which has backed companies like Fabric Nano, Hide Biotech and Mytos. They are also an investor in venture funds. 

Prior to this, he co-founded Zulu Forest Sciences, an applied science and asset management group focused on financing nature-based carbon offset programs. He was also a Partner at Zulu Group, an investment business focused on high impact startups. 

I think you will enjoy this episode, so let's dive in. 


Hi Bertie. First of all, thank you so much for joining us today. I thought we could start our discussion with you telling the listeners a little bit about Untitled because there is not much information out there about you, so it would be a nice intro to have. 


That's a very good point, and firstly, thank you so much for having me on your podcast. So yeah, Untitled is maybe a little bit different from a conventional venture fund. We are thematically a generalist fund. I wouldn't say we're specifically focused on ESG, impact. But we have a very active interest in companies who are using we'd say sort of science and technology innovation to solve significant problems and by their nature have significant environmental and commercial impact.

We're structured as a HoldCo, which gives us more sort of financial flexibility and freedom than we would have in a GP-LP structure. And we think that's particularly important because it allows us to be more creative or inventive with other financing mechanisms that we see as being essentially necessary to carry through this sort of transformative type of innovation.

So a lot of the businesses that we're involved with or interested in have as part of their scaling plan, something to do with hardware, not exclusively as such, but we see that as a major barrier for venture in terms of their investments into the climate space. A lot of these businesses need project finance, they need debt and otherwise they end up raising very large equity rounds at valuations that they're not really justified to have.

And they're doing that because they need to be able to fund a facility, but the facility as a standalone entity might actually be quite sort of financially robust. And so we might be able to bring debt to bear on that particular project, or we could work with another business and do a kind of joint development agreement.

And so by being a HoldCo, we have a sort of longer duration approach to our capital, and we have less sort of restrictive areas that we can get involved with. And we see that as being sort of advantageous. So I guess it's been structurally baked into the sort of bottom of the fund that these are the sorts of things we would like to be good at doing.


Understood. And just also to confirm, you invest directly in companies, but you also invest in funds or fund managers?


Correct, yeah, that's a good point. So we do some fund of funds and we are currently seeding that strategy. We'll develop it into a kind of more separate pool of capital. So at the moment they're combined and they will be adjacent to one another.

And we try and work with early-stage managers where we can have the sort of good long-term relationship. And I would say, I mean all fund of funds I'm sure say that. Our intention is to be quite specific and select only up to a maximum of maybe 10 managers where we spend a lot of time, energy, attention, making sure that we can try and support them in the right ways and they get benefit from being part of our ecosystem and a kind of long-term financing perspective so that they know that we will follow into subsequent rounds and we want to help them sort of operationally speaking. 

So it's more of a hands-on approach. And that comes with being able to do some direct investments later down the line as many fund of funds have done to enhance the alpha on that they can generate. So we have a sort of aspiration for that. 

And we've been investing in some funds recently, so you are right. We do a little bit of direct and a little bit of fund of funds. 


Great. Thanks for sharing that. Shifting the focus to ESG, it's been viewed in the past as a PR activity sort of in public markets and somewhat in private markets. The shift has been kind of happening in the industries that it does add to value creation, and we can debate if it is really so or not, but at least that's kind of where the focus is.

Do you agree that ESG leads to value creation at the fund and portfolio level? 


Actually, it's a really interesting question. I think that, well, firstly, we have to look at what the intention of ESG is, I suppose, and for me, it's really just the implementation of a science-based goal that COP sort of translates into a legal or regulatory framework.

And then the real question is whether what is currently a sort of self-governed and slightly ad hoc series of rating mechanisms that are kind of poorly understood, I think really does a good job of what regulation should be doing. So, I personally believe that ESgG right now as a sort of general idea is mostly PR. 

We see this in, there are a couple of good examples, many good examples at the moment where ESG continues to be proven to be sort of useful in some sense and also slightly destructive in others. I mean, the S&P’s ESG Index currently has ExxonMobil in it and it also chucked out Tesla recently. And I was reading the other day, I think it was sort of middle of the summer, there was a German asset manager who had rated Wirecard as the second-best governed company that they had in their portfolio. You know, this is a business where three of the senior managers are probably going to prison. 

So I think because of a lack of standardisation and real understanding, it's currently being used as a measurement of the intentionality of a public company. And actually if we look at what is really going to move the needle, it's much earlier stage. Like these technologies, truly transformative technologies, many of which are really, at the earliest iterations of commercial scale. Obviously we have a big opportunity with green energy that I think the markets are rightfully leaning into and rewarding in the right ways. 

But ESG, I think for me, there are certainly issues with it. Now, if I flip it down to the public markets, right down to venture, I think it's kind of, that's where it starts to get interesting because we don't really need specific ratings mechanisms if we have the right sort of intentionality and we subscribe to sort of first principles, scientific approach to things.

So for our companies, we might say, we are working with a business called Zulu Forest, and they are applying bottom up scientific thinking alongside well understood asset management and infrastructure investment principles to say what does it take to restore land or landscape restoration at a large scale.

And for them it means that they focus in on areas where they have robust rule of law, where there's good governance, there is known financial principles, and that excludes a huge amount of the offset market, which a lot of people, or almost the majority of it, where the majority of corporate capital has flown recently.

So I think the short answer to your question is I'm not a massive fan of ESG because I think it obfuscates a lot of the problems and we have these sort of, we end up having semantic discussions around is something ESG or not. But in terms of investment, I just think decarbonization is the greatest economic shift in human history.

So it is inevitably an enormous investment opportunity, and it's rarely that you can say with any certainty that something is going come to pass and in my opinion it is, or we're all screwed. So for me, I'm more interested in the sort of timing of different technologies needed to tackle that, because I don't think that's homogenous and, and not enough is being done to focus on bottom up, where should the money go?

And I would conjoin that with basically harsher regulation. I think there's a massive, the regulator at the moment, broadly speaking, is dragging its heels in any developed country in the world with regards to the size of this problem. 


So yeah. Yeah. There are so many interdependencies, and I think as always, when issues are very complex, it's never easy to find one measure or one solution. 

But then just following up on your thought about decarbonization being the biggest problem. Then there has been a lot of debate recently that ESG should be disentangled and broken up, and that having three big issues in one package is really too much. Do you agree that it should be broken down? 


It's an interesting point, but I think there's a danger in disentangling those.

I think there are some advantages to it, but at the same time look, you could go out and plant a bunch of trees. They're all the same tree. You could plant a eucalyptus and you could say you're drawing down carbon. You could say you are re-greening the planet.  And actually all you are doing, you know, one of the largest natural disasters in North American history was the result of planting only spruce pine on what turned out to be a mostly likely peat soil substrate.

Got hit by lightning, the peat had dried out because the pine had absorbed all of the water and the whole thing was a tinderbox and it burnt for ages. It was one of the largest wildfires ever recorded. That was about 30 years ago, 40 years ago, I think now. 

So I think the challenge with it is if you just look at one mechanism as the mechanism of driving change, whatever that be, and you do that at the expense of all other things, then you're not really taking into account many of the reasons that impact is multivariate in its application. 

And so by definition it's easy for us to say we must decarbonize and we could be brutal about it. And we could do that at the expense of huge areas of the world and vast numbers of people. And we could do a better job of decarbonizing faster. We will not be able to do it, I think, by brute force.

And so the problem we're dealing with has its relationships with systemic inequality. It has its relationships with power imbalance and so that needs to be addressed too. Whether it can be brought together in a single ratings mechanism is a different question. Like whether we should be adjudicating it and putting money to work on the basis of some arbitrary index that has a numerical value that's based on basically bullshit I don't agree with.

But how do you feel about that problem? 


Well, I mean, I agree with you and I agree with the sort of the fact that you can't because S drives E. Because if you educate society, then they will be much more conscious about the environment. And also if you ignore governance. As a concept, I very much agree with keeping it together.

How you measure and how you rate and how you audit is kind of a very, very big task. And do you bring in regulation and what sort of level of regulation you should impose and how it will evolve and should ESG be called something else? I mean, all of it I feel is a work in progress, but I'm super happy that work and progress has started.

And that people are paying attention both in public markets and in private markets. And so I think it's a very good start. It's a little bit messy but like with many things that are sort of very big and touch on all points of society, we will get there. So that's my opinion. 


It's really interesting and I kind of think you raised a good point and I also think there's an additional element perhaps around, you know, for, we use it currently as a catchall term, and the reality is the majority of businesses that describe ESG or have them in their, you know, quarterly board meetings as a topic are not really businesses that have anything to do with transformation.

We are currently measuring their risk exposure and we're saying, okay, does this company take ESG seriously? Therefore, is it de-risked in relation to the future? And that's how we're rating it. We're not saying, does the company take an active role or is the product the company produces actively involved in what it means to be transformative for the world. 

And for very few companies, that's the case. So you could say Twitter has good ESG insofar as it has maybe governance principles, but taking that holistically, it's very difficult to have any kind of ratings mechanism that looks at what that company should or shouldn't be doing because at a larger scale, its impact is not as great. 

So the other thing is we're not average weighting ESG by the impact that companies have. We're not saying, Exxonmobil should or should not be in the S&P’s ranking in the ESG index because by the way, it has an enormous negative impact on the world.

It's like just because it has an enormous negative impact on the world and because its intentionality is to be slightly better, we currently have a rating for it. There's a huge lack of sophistication in that, and I really disagree with the channelling of money based on very broad and arbitrary principles.

I think abstraction of all sorts is always dangerous. I think the only thing that matters is fundamental focus, and if you are the biggest investors in the company, in any company, public or private, should be sufficiently aware of that company's goals and targets such that they can make a determination.

And then the real question is, what training expertise or influence do they have to actually understand or believe whether that thing does or does not have an impact in the world. 


Yeah, and that's where it becomes difficult. But just taking ESG as an investment strategy for, let's say for a fund manager, would you believe that it's a viable investment strategy if there have been a few ESG funds being raised and they say we will invest in companies that try to fix environment, social, governance is slightly, there is less venture activity. Would that be appealing, or do you think that it's too broad and not focused enough? Very curious to know about your views on that. 


That's a really good question.

I disagree with the idea of investing in a fund, as I've put someone who also invests in funds because they are ESG. I'd want them to come to me and propose economically speaking why that makes sense. And for me, it's not that those things are at odds. So it's no longer the case, maybe 20 years ago we had to be like, ESG is going to have a lower return profile than non-ESG. 

Or ESG came out in 2004 basically as a conceptual framework and all of a sudden it gets applied, but it's low return profile, and so it's really domiciled for the edges of family offices and pension funds with a particular view of the world. That's not the case. 

Right now, the combined valuation of the sectors that need to fundamentally change is sort of 20 trillion pounds. You've got the whole of the energy market and energy infrastructure, which is about 4 trillion. You've got materials, which is three and a half. You have industrials and chemicals, which is about six or seven. So these are enormous areas of the market, and we're already seeing companies merge that have huge valuations now because they're transforming just a tiny segment of that.

So in the industrial sector, you have a company like Solugen. It's worth about 2 billion. You have a company like Northvolt in the energy sector, it's worth about 12 billion. You have Redwood Materials in the material sector, it's worth about 3.7. So there is a really clear economic case to be investing in these areas because the confluence of regulation, of sophistication, of types of particular technology and the desirability, the market, the kind of consumer are converging to mean that this is an absolutely brilliant time to be investing in this. 

And I think you see that because instead of there being lots of separate ESG funds, ESG, or whatever it is, decarbonization or synthetic biology, and its application to both medicine and food, for example, are emergent strategies of basically all the large investment managers.


So it's no longer the case that it's specifically domiciled in a sort of siloed bucket. And actually I think what's nice is getting this generalist hedge because we are a generalist fund and we are going to invest in things which will never be antithetical to the principles that we hold to be important.

But at the same time, we can bring some of that thinking to bear in companies that don't have a specific focus on the environment. We're doing B2B SaaS. We might look at like, what does accountability mean? How thoughtful is the senior management? And so actually I think the bleeding of this thinking into just all forms of conventional investment is what needs to happen.

I disagree with the idea there needs to be, I mean, I'm not saying you can't have them, and I think there is a lot of value in very focused fund management, particularly when it's around a technology or a couple of technologies. So I'm not disagreeing with that, but the concept that ESG is a sort of investment theme rather than something which is just necessary emergent feature of basically every investment you do.

I think these are different ways of understanding that. 


Yeah, interesting. Sort and so just to take it to a very hypothetical situation, if a fund manager comes to you and let's say they are very thoughtful about ESG policies that they will implement and how they will track it at the portfolio companies and then you have another fund that doesn't have it, but maybe has slightly more qualified team, does that ESG component within the fund manager, does it hold weight in your assessment or not? 

I know it's a bit of a tricky question, but you see where I'm going because it's never so straightforward. It's never one component. But in a situation like that, let's say, is everything is identical apart from maybe one variable and another variable. How would you think about that? 


Yeah, it's an interesting question. I think it is an abstracted thought to a certain extent, and for us, I mean, we wouldn't be, I think as I mentioned, investing in things I think that we believe are actively damaging. We would want to make sure that our managers have a really strong point of view on this, and we felt that point of view is robust rather than superficial.

So if we felt that there was a sort of superficialness to the knowledge or to the desire or the intentionality, I think we would be wary. By definition, you know, we like to invest in areas where we have some knowledge and we have a network and connection and specialisation. So some of the investment managers we're looking at definitely have ESG as a sort of general condition of what they're attempting to do. I think a lot of thoughtful people, by definition, do. 

But at the same time, I think we probably would. Do we see it as an investment condition? Probably not. But then again, we probably wouldn't be investing in businesses or indeed fund managers that don't have some point of view on that, that we think is real and sincere.

So I think that's certainly a test on the kind of litmus scale for us. But you get some fund managers who are deeply knowledgeable of ESG and lots of other things, and we don't think they're necessarily great fund managers. So just because of it, we're not going to make an investment. I think there's a danger in just backing it, because one should, I'm also seeing some of those funds invest in companies just because they should. 

There are these climate funds that have been raised that have a lot of capital and we need to put money to work, no doubt. But we need to be cautious and prudent about the technologies we do it in. And I'm seeing occasionally there's an aversion to the harder problem and there's a trend occasionally towards what people want to invest in a SaaS tool that defines a market that doesn't exist, or they want to invest in a ratings mechanism of a space that itself is still in flux. 

And I disagree with that. It's the easy thing to apparently do. It looks and smells a bit like all the things that venture has commonly invested in, and therefore we should just be doing B2B SasS. There's totally a place for B2B SaaS in the world of sustainability and ESG, no doubt.

But occasionally I think there's an overzealous desire to go out and hype some of that stuff up, and I think managers by the same measure may overstep what's actually there in terms of the amount of money they can put to work. So I don’t know if that answers your question, but I think sincerity wins. And skill also is obviously a critical component.

So that's how I would view it. 


Yeah, it does answer a question. It was actually a very good answer, and just if we switch gears a little bit and talk about venture as an industry, that itself has not been disrupted for a while, do you think it should be disrupted and how could it be disrupted or where a disruption can come from, which is once again, super open-ended question, but just curious about your views.


It's a very interesting question as well, and I think it's much talked about. It's very easy to have an opinion on it and then find that users are subject to the same norms that have afflicted, maybe a generation of investors. So it's all well and good, getting on your high horse and being like, these things must change and then basically doing exactly the same thing because it's easy and you can't think of anything else.

So I caveat my criticism with the nervous apprehension of my own ability, but I would say one of my general fears is, venture has grown up on a sort of diet of low interest rates and low inflation, and basically moving things to the internet. Not exclusively, but in terms of the volume of money in venture, which has just sort of exploded over the last 10 years, there has been an opportunity to markup essentially one's own position, not because one fund is doing it, but because with a rising tide of more capital in the market ends up by necessity causing everything to sort of inflate in value. 

And what we forget, I think, is fundamental performance of a company. What does it mean, if you were going to buy that business, why the hell would you buy something that is growing on negative contribution margins with a systemic operating loss, which I see the majority of last mile delivery as being. I'm sure people much smarter than me, will educate me on why that's not a good idea. 

But I personally think the other thing in venture is the amount of money it's realised. So let's look at the problems within it, and I think we don't know what the outcome's going to be. The majority of venture dollars over the last 10 years have been invested over the last four. So if that's the case, then what's the expectation of the realisation of that? 

And I'm more worried about, I think we've talked about it before, the sort of slow death of parts of the venture industry, which is if we have a reduction in the overall capital available to the industry because the upper echelon of capital has performed lower or isn't producing a sort of alpha like return and we have inflation sticking around and we have interest rate rises for a while.

Then suddenly investing in gilts didn't look as interesting as it does now, and the security profile is different. Now, I'm not saying that those are the same parts of a pension fund manager's mind, but by the same measure if venture is flatlining and not really doing what it's supposed to do in realised returns very different from non-realized, then I think there are dangers. 

So from my point of view, it's like how do we go back to a first principles way of thinking, what does fair value mean? What's the actual likelihood of an outcome? And as I said, as a HoldCo are systemically sort of set up in such a way that we have more intrinsic flexibility.

And I think that, personally speaking, I feel more confident about that as a kind of approach, whereas if I always in every scenario need one company to pay for the majority of my fund and all my losses, then I'm betting on the massive, massive accelerated valuation of one business, and that's not realistic a lot of the time I think. 

It is for some companies, and it's been true of FinTech, it's been true of other parts of the market, but I think there's a saturation of fund managers to a certain extent, there's the barriers to entry both on fund management and with certain types of company are slightly lower. And those things, sort of the confluence of that does worry me a little bit.

The outcome. God knows, I mean, no one, any attempt to predict the future in any capital market is a fool's errand. So, I'm not going to do that, but I think I am nervous about it. I haven't lived through enough financial cycles either to know, so I have anxiety about the way that the industry's set up at the moment.


Yeah, there are worries among many people, but also there was a view maybe two years ago, a year and a half ago, that what will happen to the industry is that all the big funds will get bigger and they will become almost like service companies. So the investment arm will be one part of it, and if you look at what Andreessen is doing, they are essentially adding many people who are non-investors to work with the portfolio companies to really succeed, which is a fund 30, 40, 50 million cannot afford. They can only be good investors in a way. 

So all the middle generalist unspecialized funds will simply fall away and it will basically have a very polarised structure, which I feel has a lot of dangers, specifically in a sense that people who deserve, who are not part of the club or an ecosystem who cannot get to talk guys, we will have too many left out, which I think venture has been very good at fixing slowly that they are really recognizing the fact that you can't carry on investing in a founder profile that is very, very accepted. 

You have to look broader and that will give you outsized returns. So what are your views around that venture industry structure? 


It's a very interesting one. I can only speak for my own experience, and it'd be interesting to see how the Andreessen model plays out. I think versus what Tiger was doing, it's very different.

I think Andreessen is certainly a more robust and long-term view. There's a real challenge around to what extent you can actually influence the outcome of a company. I mean, as the company grows in size, its needs potentially grow and the problems grow and they really stem from the c-suite. So if the belief is that by the sort of editing of senior staff, you can affect the outcome of a company in a really material way, then yes, then I think that works.

But I would think there's a danger in believing that you can fix a company's problem. And if you do that, you can go down a rabbit hole where you pour more money into a business that actually is doomed because it turns out that my favourite example, last mile delivery, unit economics may just not be good.

And actually, if you've put 50 million to work in that industry and you put loads of time, energy, and intention changing the senior management around without really reflecting that at the core of the company, there are basically intrinsic and extrinsic risks at play. Like for example, right now getting a can of Coke in five minutes is not the number one priority for people.

It might have been during Covid. Right now it's like, can I afford my energy bill? And so suddenly the attractiveness of paying a premium for convenience is diminished by an extrinsic factor that wasn't taken into consideration. So I think there's a danger in believing that you can overly transform a business just because you have power and money, and a lot of money has been lost doing that.

I think at the end of the day, there is a probability that some things will succeed and others won't. And if you try and think that you can characterise what those things are, in every case, it's not a homogenous problem. So I want to say that Andreessen may do a great job because it's of a size and magnitude that might mean my points are irrelevant, but for, I think for more modest size funds like ours, we have to be very cautious about what we can support with, and we have to be very focused with founders on what that looks like. 

So for us, it's really around business model spending a lot of time reflecting on that. Principles of management. How is the management operating and acting? How cohesive is it and how focused are they? And these are things that a really excellent strategy consultancy can do and a group of people with deep sector experience or not can also help facilitate. And so we are bringing on different people to help with that in a minimal way.

And we can do sprints with companies that I think are effective. If we end up getting tied into the day-to-day operations, then we're doing something wrong because we become implicated in building that business, and that's not our job. And I think that can cause more issues than it solves. So I think there's a place in the world for venture studios and they do very well, some of them, but at the end of the day it's very difficult to say whether that is a truly sort of alpha generating strategy. 

I think it's completely dependent upon the types of people involved. So I'm not worried that that's where the industry will split at the seams. I'm really pleased that there is a lot of operating experience going into venture.

I think the alternative, which is sort of indexing with cash is good as a sort of a bolt-on to a very early stage, seed round perhaps, but would be a dangerous idea in the industry at large, which I think Tiger was sort of pursuing last year. And we've seen that obviously the sort of collapse of that strategy to some extent. Over a 20-year cycle that'll really determine whether that was a good idea or not, so I don't want to say it was. But I think it can be dangerous because it inflates everything that's going on. 


Great. And my last question is, what has surprised you over the course of last year? 


That's a good question. 


Doesn't have to be venture related. 


Many things have surprised me. What surprised me most? It's been nice to see that a lot of founders can actually thrive or flourish in adverse financing conditions.

So not everyone is going to survive, and that's a shame, but in a way, the resilience and sort of emotional tenacity of people founding companies is amazing. I think we often overestimate that there's a huge psychological burden on setting up a business and running it. It's very easy to sit in your ivory tower and demand certain things take place and sort of obsess over KPIs as though you could do a better job when in fact that's absolute bullshit.

And I think for us, it's important to be present with founders and say, you know, if the ship sinks, we are sinking with you, and we're not going to abandon you, we're not going to get angry. It's a methodical process and we need to be supportive because, as a founder, having also been a founder myself, you can't disclose that sort of anxiety to everyone in your company, and I think your investor is a good place to do that.

So I think seeing people support one another through troubling and difficult times has been really encouraging. And it's been very difficult geopolitically, financially, et cetera, for everyone. So actually seeing the positive side of that has been, it's very heart-warming, I think is probably the right word, if it's not too emotional.


Yeah, and I have seen some of that as well, which is always when you believe that there is hope. 


I hope so. I hope that geopolitically countries start acting in a similar way. 


Let's hope for that. I really think about it every day.

But thank you so much for joining us. It was great having you, and we will be in touch.


Thank you so much for your time. It's been fascinating having the discussion. I'm also really looking forward to hearing more about your thoughts and feelings on the industry, so I look forward to more podcasts in the future. 


Thank you. 


Take care.


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