​In each of our letters, we plan to introduce a topic of interest. Our hope is that these special topics will give greater insight in to both our process and philosophy. In this letter, we are introducing our concept of Variis Stakeholder Investing (VSI) through the example of Grab, a strategy investment.

​

Variis’ investing approach is differentiated from other concentrated, quality-oriented EM processes by our stakeholder framework, which we call Variis Stakeholder Investing (VSI). Stakeholders are groups without whose support a business cannot prosper. Emerging Markets normally have less developed institutional frameworks. These less developed institutions may be ineffective in protecting stakeholders, at least in the short-term. Our conviction is that, in EM investing especially, stakeholder alignment is a critical element of long-term sustainability and business quality.

​

While we aim to solely invest in businesses that benefit stakeholders, all our investee businesses are on a sustainability journey rather than already at the destination. Where we have something of value to add, we engage to enhance the journey. We believe in the power of engagement over divestment as a mechanism for positive influence. By becoming key stakeholders in leading firms, we have the possibility of engaging with them as they plot a path towards a better future. By focusing on positive environmental and social impacts and avoiding potential pitfalls, our approach strategically aligns our goal to deliver superior returns with our responsibilities, as stewards of capital, around building a sustainable society.

​

Grab: Southeast Asia’s mobility and meal delivery leader

We have an investment in Grab, which is the leading mobility (ride hailing) and delivery business in Southeast Asia—specifically in Singapore, Malaysia and Indonesia.  Anthony Tan is a capable CEO and co-founder, and Uber, which has a 14% stake, is also on board. Grab’s mobility business, which is about a third of revenue, has been consistently high margin, and our perspective is that the remaining segments—delivery and financial services—will see stronger profitability in the future. While we believe that Grab is a quality business with aligned management and emerging dual-sided network effects, it is unusual in the context of our portfolio in that it has historically been loss-making—though we expect a profit in 2024. Our thesis is that unit economics are improving rapidly and sustainably as competition rationalises.

 

The mobility/delivery sector plays a significant role in shaping sustainability outcomes. Mobility/delivery platforms like Grab have revolutionized the sector by enabling real-time, personalized transportation and delivery services. These platforms allow for the immediate matching of supply and demand, making transportation more efficient and accessible. Equally important is the supply chain, where Grab is aligned to UN SDG 8, namely to “Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.” The Grab ecosystem has over 10 million registered partners, half of which are drivers and couriers, and so is empowering a massive group of microentrepreneurs. We see Grab’s business as good for society.

 

Despite Grab’s clear net societal benefit, there are three stakeholder concerns. We have identified the key sustainability concerns facing Grab and its stakeholders as carbon emissions, excessive plastic packaging waste, and labour practices. That said, we’d also highlight that the sector's evolution presents opportunities for reducing carbon footprints and enhancing urban living.

 

Key sustainability concerns for Grab: emissions, waste and labour practices

The key sustainability concerns for Grab overlap with those for other mobility/delivery businesses in our portfolio and on our Focus List. We have identified leading mobility/delivery businesses such as Meituan in China, Grab in Southeast Asia, and Zomato in India. They stand out amongst their competition by showcasing earlier signs of moat characteristics, a viable roadmap toward profitability, and having strong leadership teams in command. Through our valuation framework, we currently have Grab in our portfolio. We also have an investment in Coupang, which, in addition to its goods e-commerce platform, also operates the meal delivery business Coupang Eats.

 

These sustainability concerns have direct investment implications. Any malpractice can trigger significant backlash, as illustrated by Uber's[3] experience in 2017 when its valuation suffered due to a series of controversies. This instance highlights the necessity for companies to uphold ethical, transparent, and socially responsible practices. For investors, identifying such red flags is crucial for risk mitigation and achieving long-term superior returns.

 

As investors across a diverse set of global Emerging Markets, we have the benefit of being able to benchmark performance across comparable businesses in different geographies. The three key sustainability issues for Grab—carbon emissions, excessive plastic packaging waste, and labour practice—are comparable to those for Meituan and Zomato, but with important nuances.

​

Carbon emissions

We assess the companies’ practices on three levels: disclosure, goals set, and commitment to net zero.

​

​

​

​

​

​

​

​

Source: company’ sustainability reports

 

While Grab performs strongly in disclosure, and is making progress in setting goals, it is a substantially more carbon intensive business than Meituan or Zomato. Indeed, on a Scope 3 basis, Grab is about twice as carbon intensive as the average MSCI EM business. MSCI EM has a weighted average Scope 1 & 2 carbon intensity of over 300 tons of CO2/USDm sales. MSCI estimates the Scope 3 three intensity for the Index at almost 1,000 tons of CO2/USDm.

 

Grab may be a higher emitter versus Meituan given its business mix, which is more tilted towards mobility. Additionally, the use of internal combustion engine mopeds for delivery in SE Asia versus electric bikes in China may be important. This is a topic we are currently exploring with Grab’s ESG team.

 

In the case of mobility and delivery, reported carbon emissions are heavily impacted by business structure in a manner that obscures the underlying reality. These platform businesses normally outsource warehouse, service station and driver/courier recruiting to third parties. This is a cost-saving measure, and may increase local alignment, but a side-effect is to shift the most emissions intensive part of the business to Scope 3 reporting. As a reminder, Scope 3 emissions are those not directly owned or controlled by the reporting entity but either upstream suppliers or downstream customers. For most companies across various industries, Scope 3 emissions are 3/4ths of the overall footprint, but in the case of mobility/delivery that proportion is closer to 99%. The Scope 3 emissions from mobility/delivery are dominated by electricity-linked emissions from warehouses and services stations plus the transport-linked emissions from drivers/couriers.

 

Grab’s number one lever for reducing Scope 3 emissions is around supporting driver-partners to transition to low emission vehicles. Specifically, Grab is working on enabling EV adoption in Thailand and Indonesia through their partnership programs. In Thailand, more than 8,000 EVs are expected to be made available to Grab's partners by 2025, with EVs accounting for 10% of vehicles on Grab Thailand's platform by 2026. In Indonesia, 8,500 two-wheel EV rental vehicles and over 8,000 battery swap stations have been deployed.

 

Packaging waste reduction

Takeout boxes generally do not end up recycled. They must be washed first. They weigh so little that scavengers must gather a huge number to sell to recyclers. According to studies, every 1% increase in food delivery drives a 0.28% increase in urban waste[5]. Online food delivery increases the amount of urban garbage driving a negative externality. Our view is that this policy will eventually force the internalisation of this externality. Today most of this plastic is landfilled or incinerated; the immediate financial costs of recycling will be higher.

​

 

​

 

Each of Grab, Meituan and Zomato are making significant efforts towards waste reduction and recycling. Specifically, Zomato, which is still relatively small, has been recycling an amount equal to 100% of all plastic utilized by restaurants in the packaging of food delivery orders placed by customers on their platform from April 2022 onwards. Indeed, in FY23 Zomato voluntarily recycled about 2x the plastic used by restaurants in deliveries. Grab has also made a commitment to reducing packaging waste and has identified specific steps to achieve that. Grab has made commitments to zero packaging waste in nature by 2040[8], mainly by driving circularity at scale, i.e. reduce, reuse, compost and recycle.  Clearly, given the relative scale of Meituan’s business, their challenge is an order of magnitude larger. Plastic waste from food delivery is a socially sensitive topic in China, and Meituan has thus far avoided disclosing detailed data.

 

Short of legislation to ban single use plastics, or a shift to expensive bio-degradable materials, the solution to packaging waste is recycling. Higher plastics prices are needed to provide an incentive for recycling. Unavoidably, consumers will bear this cost as the waste externality is captured in the value chain.

 

Labour practices

Mobility/delivery platforms involve massive numbers of non-employee labour that earn basic incomes. Of course, many of Grab’s driver-partners love the flexibility inherent in gig work. But these workers in many cases are not eligible for normal employment protections such as insurance for pension, medical, unemployment, maternity, and work injury. While clearly government policy has a role to play, our perspective is that Grab having industry-leading labour practices is not only critical for risk management, but key to a sustainable advantage.

 

 

​

Source: company’ sustainability reports

 

While Grab, like its peers, provides work-related accident insurance to driver-partners, the broader suite of social benefits is not yet part of the package. Singapore, where Grab is headquartered, has recommended strengthening protections for gig workers. Similar measures are being discussed and implemented in China and India. It is important that the increased costs linked to greater protections are digestible for companies and consumers.

 

The crux of the issue is whether or when the costs of delivery will include social security-type costs for couriers. Meituan is perhaps closest to this point: we expect Meituan to contribute Rmb0.3 and Rmb0.5 per order to cover these employment protections in 2024 and 2025. For Meituan, this will represent an approximately 10% increase in the cost of each delivery; for customers, these protections will increase order costs by about 1%.

 

Grab has thus far been focused on enrolling driver-partners in local social security schemes. This is often resisted by gig workers as these contributions are funded from their earnings. In our engagement with Grab on labour issues, we are focused on the roadmap to higher incomes and better employment protections funded from delivery fees.

 

Our Engagement:  presenting findings and proposing concrete steps

We engage with companies' management teams by sharing our insights and assisting them in setting ambitious, yet achievable, sustainability goals.

 

We met with Grab’s management team in December and have continued our discussions in 2024. We have presented our analysis and plan to work with their ESG team to offer our assistance in the following areas:

​

Stakeholder concern                                          Priorities

Emissions reduction                                         Map the transition to low-emission transport

Waste reduction                                                Plot a path to more plastics recycling

Labour protections                                           Build towards greater courier protections

​

The importance of participating in Grab’s sustainability journey

At Variis Partners we are excited about the investment in Grab. We accept that urban mobility/delivery services are part of modern life, and love both the consumer benefits as well as the ecosystem value creation. We believe that Grab will continue to be a leader in providing these services in Southeast Asia. We applaud managements’ effort to develop their business in a sustainable way.

 

By actively participating in Grab’s journey towards sustainability we contribute to broader environmental and social goals, while also improving the odds of investment success. Variis Stakeholder Investing involves not just selecting businesses that benefit all stakeholders, but engaging to address and improve the stakeholder issues inevitably present in some EM businesses.

 

Thank you!

​​​​

Leila, Eko, Rufus and Jamie

​

​[3]  https://www.theinformation.com/articles/controversies-take-a-toll-on-ubers-stock

[4] https://sciencebasedtargets.org/net-zero

[5] Research on Environmental Issue and Sustainable Consumption of Online Takeout Food—Practice and Enlightenment Based on China’s Meituan (mdpi.com) https://www.mdpi.com/2071-1050/13/12/6722

[6] Estimated figure based on company specific take rates

[7] https://baijiahao.baidu.com/s?id=1780733522044138191&wfr=spider&for=pc

[8] https://www.grab.com/id/en/sustainability/#environmental

​​​

​

Disclaimer

​

FOR PROFESSIONAL INVESTORS AND ADVISORS ONLY

The contents of this document are communicated by, and the property of, Variis Partners LLP. The information and opinions contained in this document are subject to updating and verification and may be subject to amendment. No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by Variis Partners LLP or its directors. No liability is accepted by such persons for the accuracy or completeness of any information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document. The information contained in this document is strictly confidential. The value of investments and any income generated may go down as well as up and is not guaranteed.