SumZero Manager Q&A Interview: Building an ESG Framework Around “Quiet Innovators”

Catch SumZero's latest manager spotlight with Koon Boon ("KB") KEE on designing an ESG framework around "Quiet Innovators" solving complex global challenges from microbiological food production to extreme weather forecasting. [SumZero is the world’s largest community of investment professionals working with the industry’s most prominent hedge funds, mutual funds and private equity funds.] 

[From SumZero] "For the fourth instalment of SumZero’s Active #Investor Series, we are excited to share an in-depth conversation with KB on his proprietary ESG framework, which hinges on the UN’s Sustainable Development Goal #9 and seeks to root out the most effective global innovators solving critical social and environmental challenges.

The rise of ESG as an asset class has been broadly covered by the financial media, with over $21T of generational wealth predicted to change hands over the next two decades. According to numerous studies by J.P. Morgan, Accenture, ImpactAssets and others, the next generation of asset-owners imbue a much deeper sense of social responsibility in their investment decisions.

In this interview, KB Kee offers his insights on industry perceptions of ESG, the K-shaped pandemic recovery, and the importance of investing in innovators during times of crisis. Kee also walks us through several H.E.R.O. Innovator portfolio companies from weather forecasting technology to microbiological food production to pharmaceutical drug products."

Public link to Q&A: https://sumzero.com/sp/HERO_innovators_qa

LinkedIn: https://www.dhirubhai.net/feed/update/urn:li:activity:6720023157199118337

FB: https://www.facebook.com/SumZeroInc/posts/3624882470876505

Our big thanks to SumZero's Avery Pagan, and her colleague Lorig Stepanian, for her thoughtful questions. Truly appreciative of the opportunity to share with the SumZero community about our H.E.R.O. investment framework in ESG investing.

[Excerpts from the Q&A]

"My decade-plus career - in the buyside from a boutique hedge fund to Korea’s largest mutual fund firm to H.E.R.O. - has been assisted by two mentors whom I am very grateful for their valuable guidance and kind encouragement.

My first mentor is Mr. TAN Seng Hock, who is the founder of a Singapore-based boutique investment management firm specializing in Asian small- and mid-cap stocks using the tenets of fundamentals-based value investing, GARP-style. I started out my buyside career here in December 2001 as an intern analyst and then senior fund manager and head of research. I learnt a lot from Hock’s philosophy of “Lion Entrepreneurs vs Hyena Businessman”. Both Lion and Hyena possess survival skills to win in the stern strife of actual life, though Hyenas are short-term thinkers with an opportunistic mentality. The most important difference between a businessman and an entrepreneur is that a Hyena businessman can always make money for himself in opportunistic arbitrage dealings (“doing this can make money”) but does not really care about the products or services or the customers he is serving, while a Lion Entrepreneur focuses on building an idea larger than himself or herself to serve others with a greater Purpose. The best way to preserve and grow capital in the long run is to identify honest, hardworking and farsighted Lion Entrepreneurs in whom to invest.

Another superhero is Professor LEONG Kwong Sin (“KS”), and he is the kindest and wisest teacher ever, like karate master Mr. Miyagi and Jedi Master Yoda of Star Wars. Prof KS Leong taught me the language of business – accounting - at the Singapore Management University where he was one of the key founding members who helped started and built the university, where the School of Accountancy is now ranked first in Asia and third in the world for Archival Research (All Topics), and second in the world for Archival Research in Financial Accounting. Above all, Prof Leong inspires his students to be critical thinkers and become a better person through his unique Socratic-style of teaching.

Later, I was fortunate to have the opportunity to teach at my alma mater for several years as a full-time faculty member at the School of Accountancy, where I pioneered the 15-week course and module on Detecting Accounting Fraud in Asia. I remained grateful to be invited by Singapore’s top financial regulator, the Monetary Authority of Singapore (MAS), to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community.

As a fund manager and educator in the Asian capital jungles since 2002, I have witnessed a number of investors and friends who invest their hard-earned money in companies with financial numbers that look good, have lots of cash in the balance sheet that’s audited by the Big Four, and have attractively cheap valuations, only to find them unravel into accounting frauds, in which financial numbers were propped up artificially to lure in more funds from investors, and the studiously assessed asset and cash had already been “tunneled out” or expropriated. This issue is compounded as western-based fraud detection tools and techniques have not been adapted to the Asian context to avoid these traps. It is disheartening to witness many fraud perpetrators go away scot-free and live a life of super luxury, on these unsuspecting minority investors’ hard-earned money. 

In response, I went on to develop a proprietary system to detect accounting fraud in Asia. This is now embedded in Step 1 of the four-step H.E.R.O. framework in the often-overlooked ‘G’ in ESG to eliminate the downside risks from accounting tunneling fraud and misgovernance which escape detection by western-based forensic tools. For instance, prevalent across Asian companies, previously Big-4 audited “cash” in the balance sheet are often misclassified “cash equivalents” disguised from improper short-term related party loans employed by the insiders to expropriate or tunnel out cash from the company after initially propping up financial numbers artificially to create false positive signals to lure in funds.

In this journey that’s full of trials and tribulations, there have been also several kind and supportive heroes whom I would like to express my heartfelt thanks: John Mihaljevic, founder and chairman of MOI (Manual of Ideas) Global, and his brother Oliver; Dr. Hendrik Leber, founder and managing partner of ACATIS Investment Group; Professor Dr. Hermann Simon, founder of global strategy consulting firm Simon-Kucher & Partners; Mr. Hemant Amin, founder, CEO & CIO of single family office Asiamin Capital; Fran?ois Badelon, founder and president of Amiral Gestion; and Mr. Benjamin Ng, founder, MD & CIO of Whitefield Capital; Value Investing 3.0 supporters Mr. KC Ong and Michael Roukounakis; my business partner Keith Wong; as well as our institutional investor client."

We have posted on our website: www.heroinnovator.com an uncut version of the Q&A, which include more cases from SaaS innovator in the Nordic to B2B e-commerce platform in Japan, and a meaningful conversation I have had with the happily-retired former CEO of the multi-billion family office of Tetra Pak, Mr. Beat Burkhardt, who once shared with me the inspiring entrepreneurial story of Tetra Pak and why next-generation asset owners should care deeply about purpose-driven investment. Download the uncut PDF.

Continue to read: https://www.heroinnovator.com/sumzerointerview