When venture capital meets sustainability: an interview with Cho Kang-hee

Beyond renewable energy and CCS, climate action also starts from venture capitalist firms that make sustainable businesses financially viable. Venture Capitalist Cho Kang-hee, founder and CEO of an Investment firm Xquared, offered perspectives on how investments for ESG companies work, and future hopes for investments that contribute to netzero.

Could you please start by introducing your company?

We are a company called Xquared, an investment firm. In Korea, there are licenses such as the VC (venture capital) license, the PEF license, and the private equity fund license, and we are a company that makes investments with those licenses.

We were established about three years ago, and three people including myself founded the company together. We all started as lawyers after graduating from Yonsei Law School, and mainly worked in M&A and fund-related work at a law firm called Kim & Chang, but none of us intended to stay as lawyers for long. After that, I worked in the investment team at Coupang, which is a delivery company; another worked in investment at IMM Investment, which is a large Korean-based investment firm; and another started a startup. The three of us went our separate ways for a while, but then three years ago we came together and founded the company.

In what kind of fields do you mainly invest?

Basically, the idea is to provide capital to companies that are expected to do well in the future, and then of course we also make money from that. As a result, we try to allocate capital in a way that fits with big trends in society. Naturally, the hottest area recently is AI, which is clearly an investment that not only Korea but the whole world needs to make. And among those fields, ESG is also obviously part of the trend toward a better world, so we continue to pay attention and invest in that area as well.

Have you actually made investments related to ESG, the environment, batteries, or renewable energy?

Well, in the end it depends a lot on how you define ESG. Each person may define it differently, but we continue to keep interest in related fields and we are making investments and also reviewing potential ones. So yes, we are. ESG is a very broad concept, but ultimately we are always looking at companies that have a direction in terms of environment, social issues, or governance, and we are investing in them.

Then not just your company, but in the bigger industry as a whole, how much investment is happening in this area?

I can’t say the exact proportion, but it’s already been close to ten years since terms like ESG investment and impact investment began to be used, and I think in the Korean investment industry there has been a very strong movement to invest in ESG-related fields.

But honestly, if I put it a certain way, we don’t want to call ourselves impact investors or ESG investors. There are firms in Korea that introduce themselves as impact investment or ESG investment houses, but if you look closely, the basic principle of capital is that it has to create returns. Yet in some cases, companies invest not in businesses that can generate returns, but just in companies that have a very strong ESG “color.” I think from an investor’s perspective, that can be a dangerous issue.

So the type of ESG companies we want to invest in are ones that are in the flow of strengthening ESG ecosystems across industries and therefore will benefit greatly in the future. We expect such companies to grow quickly, which is why we want to invest in them.

However, in Korea there are some investment firms that emphasize impact or ESG so much that they overlook profitability or growth and invest just because a company smells strongly of impact or ESG. And the problem with those companies is that many of them rely on government regulations or global policies, meaning their main profit source comes from subsidies. We try not to invest in those kinds of companies.

From the investor’s perspective, what are the advantages of investing in ESG companies?

Basically, we are not a company that only invests in ESG for its own sake. We invest in companies that are running a solid business and making money, but if that business field also aligns with the ESG direction, then we invest. We believe those companies, in the long run, have much larger upside potential because they are in line with social and institutional trends. They are sustainable and have very large upside potential, so at some point, even if they are already profitable on their own, they will grow even faster if they align with ESG trends. We try to find those kinds of companies.

For instance, among the companies we’ve invested in, there is one that collects dirty dishes from cafeterias of large companies and washes them in a centralized facility. That company doesn’t have “saving water” as its goal. Its goal is simply to collect many trays and make money from that business. But as it grows, it automatically reduces water usage and pollution because its centralized, automated facilities are much more efficient than individual cafeterias. At some point, that business model will naturally align with things like carbon credits.

Do you think one reason those kinds of companies do well is because consumers also tend to prefer ESG companies when they choose products?

Yes, I definitely think so. For example, recently we have been paying attention to and reviewing the field of pyrolysis oil. Pyrolysis oil is basically produced by collecting waste plastic, melting it down, and making it into something like crude oil. Refining companies buy that, make new oil from it, and then chemical companies and others further down the chain buy those products. 

Of course, producing oil from melted plastic will be more expensive than oil extracted from the ground. But even so, there is a growing movement to keep using it. And in real life, products like Nike shoes that include pyrolysis oil are already being sold, and consumers are paying higher prices to buy them. So I believe consumers’ preferences for ESG products will continue to shift the flow in that direction, and the field will grow larger.

Then how do you think these kinds of investments can help with environmental protection or reducing carbon emissions?

Basically, the companies we’re talking about are all in directions that reduce carbon emissions or environmental burdens. So as these companies grow as businesses, I believe they will reduce society’s overall carbon emissions and environmental impact.

From an investor’s perspective, what do you think needs to improve for ESG or green investments to increase even more?

As I mentioned before, there was a time when just saying “ESG” or “carbon credits” made people very excited. But now it’s not like that anymore. A company must align with ESG, of course, but that alone cannot sustain a business.

So companies in these directions need to show that they can be more profitable and grow faster. On top of that, they need to take actions that align with ESG. Only then will more investment flow in, because at the end of the day, companies need to grow quickly and make money. That’s the only way private capital will flow into them and support their growth.

For example, Patagonia is now known as a very ESG-focused company, but in the beginning, it first achieved commercial success. Later, at a certain point, it transferred ownership to a foundation and strengthened its ESG color. But it was only because its products sold well and the company grew fast that people supported it and bought more, and investment flowed in.

So in the end, if you ask what companies must do to advance ESG more quickly, it’s that they must make money. They must grow fast. That’s the fundamental requirement, and it is what companies need to focus on most.

Cho further commented that he refrains from investing in businesses that claim to engage in the Emission Trading System (ETS). Aware that the financial amount of trading remains low, he doubts the scale of businesses that utilize ETS, signaling the need for ETS to improve its market stability for entrepreneurial appeal.