Two new reports highlight the expanding adoption of Environmental, Social, and Governance (ESG) criteria among money managers, as well as the benefits to the bottom line that accrue to ESG-savvy investors.
The biennial Report on US Sustainable, Responsible and Impact Investing Trends from US SIF, the trade organization for the SRI industry, shows a continuation of the rapid adoption of ESG criteria among mainstream money managers that was noted in the previous Trends Report. In the last two years, the value of portfolios that include consideration of ESG factors has mushroomed by 69%, to over 8 trillion dollars, under the management of 777 money managers and institutional investors, and over 1000 community investing financial institutions. While the number of more active money managers who filed shareholder resolutions
In May, the SEC finalized its long-anticipated new rule that opens the door for more investors to take part in the most exciting—and risky—realm in the investing universe: innovative startups. Previously, only “accredited” investors ($200K/yr income or $1 million in assets) were allowed to take these risks, and thus to reap the outsized rewards that can accrue to early investors in companies that are not yet available in the public stock markets.
Indiegogo announced this week that it will begin allowing small companies to offer equity investments on its platform, rather than just the rewards-based pre-sales that have been the core of crowdfunding up til now. Many small companies have used crowdfunding platforms to get rolling and prove that there’s a ready market for their new products, only to turn to the super-rich when the time came to scale up for mass marketing their innovations. Oculus, for example, raised millions from early adopters, but it was equity funders who reaped the windfall when the company was sold to Facebook for $2 billion.
In these early months, the potential is just beginning to be realized. According to WeFunder, the largest equity crowdfunding portal so far, about 55 companies have successfully raised a combined total of $12 million from small investors. WeFunder is currently hosting several dozen offerings, which range from
In the face of continued grim climate news and disturbing societal trends, it is increasingly clear that governments cannot marshall the resources—or perhaps even the will—necessary to the tasks before us. Increasingly, though, forward-looking investors are stepping in to help lead the way forward. Two recent reports offer some encouraging signs that global finance does indeed include many actors who are committed to the changes that we need.
Domestically, a progress report on an impact investing initiative from the White House Office of Social Innovation and Civic Participation shows actual investments to be outpacing and outperforming the initial commitments and expectations. When this private-investment initiative was announced in June 2014, they had $1.5 billion in new commitments to impact investments from private funds, foundation programs and endowments, investment banks, small family foundations, and nonprofit organizations. By the time the dust settled on the first round of planning, that total had grown to $2.5 billion to be invested over the five years from 2014-2019. The recent report followed up and found that in just the first eighteen months, through December 2015, almost half of this total had already been invested, suggesting that in the long run the goal may well be exceeded. This is especially likely when we turn to the returns coming in on the early investments, which universally have exceeded expectations. It turns out—no surprise to the SRI community—that investing in projects with strong social and environmental impact is very good business! So far, about two-thirds has been invested for social impact and one-third for environmental impact, especially climate solutions. 81% has been invested here in the U.S.
Internationally, the news is also encouraging. A recent UN report outlines the challenges before us: to meet both the UN’s 2030 Sustainable Development goals and the targets in the Paris climate agreement, $90 trillion of investment is needed over the next 15 years. This amounts to about 8% of global GDP over this timeframe, a daunting but not unrealistic goal. But to get there, it will mean marshaling the same power of private financing. As former Secretary of the Treasury Hank Paulson points out in an op-ed entitled How to Raise Trillions for Green Investments:
“The good news is that there is a global abundance of private capital. To unlock these riches, governments must create conditions that encourage private investment in clean technologies and sustainable development. With smart, well-designed and coordinated policies, financing models and instruments like bonds and incentive programs, countries have the potential to solve some of the planet’s most pressing environmental challenges while still maintaining economic growth.”
Paulson is especially enthused about the explosive growth of green bonds, which nearly quadrupled from 2013 to 2015, up to $42 billion. Of this, 40% is being deployed in China, where the government there has set ambitious green energy and building targets. The Building Energy Efficiency and Green Development Fund is a public-private partnership that will bring leading-edge technologies from U.S. companies to China to increase the energy-efficiency of new buildings there. (One more reason to NOT start a trade war with China!)
All this investment is still just the first few drops in the $90 trillion bucket, but the rapid ramping up of these and other green investment commitments suggests that the financial powers that be are finally waking up to the scope of our challenge and are ready to put their massive wealth to work making the changes that are needed. Time will tell whether it will be enough, but we’re encouraged that it’s happening on a scale we haven’t seen before.
A new set of regulations issued by the US Department of Treasury opens the door for private foundations to direct more of their investments to socially and environmentally beneficial projects. Foundations are careful to separate their investment portfolio, used to grow their asset base, from the funds used to further their charitable mission, distributed in the form of grants or loans. In recent years, many foundations that wanted to support social entrepreneurship or make loans to organizations within the areas of their missions had to treat these as part of their grant-making budget, rather than as part of their investment portfolio.
The new rules clarify that foundations “can factor in how the anticipated charitable outcomes from the investment might further the foundation’s mission in addition to the financial returns that are typically considered. Thus, a foundation may prudently choose to make investments that provide both a charitable and a financial return without fear of facing a tax penalty.”
For more on this welcome new Zone 8 and 9 development, see this press release, issued by the Director of what sounds like a fantastic place to work: the White House Office of Social Innovation and Civic Participation.
Earlier this year, a new talk by Al Gore was posted on the TED site: The case for optimism on climate change. The 20-minute talk and subsequent short interview with TED-meister Chris Anderson is well worth a look. Much of his optimism centers on the rapid shift in electricity production:
The best projections 14 years ago were that we would install one gigawatt of solar per year by 2010. When 2010 came around, we beat that mark by 17 times over. Last year, we beat it by 58 times over. This year, we’re on track to beat it 68 times over. We’re going to win this. We are going to prevail. When I came to this stage 10 years ago, this is where (the growth curve for solar) was (see arrow on image at top of post). We have seen a revolutionary breakthrough in the emergence of these exponential curves.
Gore quotes economist Rudi Dornbusch, who said, “Things take longer to happen then you think they will, and then they happen much faster than you thought they could.” Importantly, the business community has been quick to jump onto the bandwagon, and in fact has been crucial to the rate at which its been gathering steam. “This is the biggest new business opportunity in the history of the world, and two-thirds of it is in the private sector,” notes Gore. “We are seeing an explosion of new investment. Starting in 2010, investments globally in renewable electricity generation surpassed fossils. The gap has been growing ever since.”
Beyond these trends, Gore stresses the underlying nature of humanity, and of fundamental social changes:
In the wake of a recent conference on Finance & Democracy, Leslie Christian highlighted a fundamental tension within the philanthropic and impact investing community: at what point, if ever, do those with extreme wealth begin easing up on the “do well” side of the equation, and start putting more of their resources into the “doing good” mission? In a brief post titled Confluence…or Collision?, Christian is pleased to see that “the rarefied world of Wall Street investing and its ‘good investors’ is now being infiltrated and questioned by a small, vocal, and growing number of people with wealth who are eager to question and redefine investing.” She shares a striking moment, when one of the conference participants rose to challenge the underlying mindset of the managers of the Rockefeller Brothers Fund, which has been praised for its decision to divest from fossil fuels:
Here’s an author interview that takes some fresh new angles: Michael Kramer recently spoke to the folks at Urban Farm about the ways that permaculture has informed both his life and our resilient investing approach. The interview can’t be embedded here, but you can hear it on the Urban Farm page: Michael Kramer on Permaculture and Economics. Poke around their site a bit; you’re likely to find other articles and interviews that’ll be of interest.
The World Bank plans to continue its aggressive funding of climate-related projects over the next four years, gradually increasing its combined total funding and leveraged co-financing from private investors to $29 billion per year, 28% of its total outlays (up from today’s 21%) and enough to meet nearly a third of the global target of $100 billion per year that was set at the Paris climate talks. In addition to these funding plans, all World Bank programs will consider climate impacts in future investments.
Projects in the pipeline include quadrupling funding for climate-resilient transport, a project in Mexico to reduce deforestation and forest degredation in an areas the size of Connecticut, and seven solar PV projects in Jordan, and development of an early-warning system for extreme weather events in areas that would help protect one hundred million people.
Michael Kramer continues to put the rest of our author team to shame in the media-appearance department; this time, we find him on ThinkTechHawaii, a daily online show based in his home state. The first half of this interview is a great overview of what Natural Investments’ approach to SRI is all about, including our new resilient investing framework; the second half digs into an initiative in the Hawaii state legislature to have the Employees Retirement System divest from fossil fuels.
Did you hear the joke about why the farmer crossed the road? The punchline is that she wanted to go to the bank to ask about getting a loan. Not very funny, except that by the logic of bankers and Wall Street, the idea that a farmer would qualify for financing might elicit a guffaw or two. Small-scale farming is considered a high-risk, low-return activity that any prudent investor should steer clear of.
And yet, wending their way across the highway to the farm, who’s that? Why, it’s a gaggle of Slow Money investors, taking action on their desire to build local food systems. Are they just being charitable, driven by idealism to donate a bit towards keeping a neighborhood farm alive? Not at all—they actually are investors, doing exactly what a traditional investor does. They are considering their own financial situation and how it fits into their overall portfolio. They are asking lots of questions, getting to know the business, assessing the risks, and looking for ways that not only their money, but their expertise, could help assure the success of their investment. And they are negotiating a deal that works for both parties.
Wall Street “professionals” can’t relate to this new breed of more creative and engaged investors because
Last quarter my article on “Deep Retrofits, Broad Paybacks” generated several questions about how these types of retrofit add value to a house over time. How does a deep energy retrofit compare to something like a kitchen remodel? Is it worth the cost of doing the retrofit? If I spend $50,000 on a deep retrofit will it add $50,000 to the value of my house? Probably not. Or, it depends. Maybe. Possibly. It’s a tricky question, with some complex answers.
Let’s start with whether you plan to sell your house soon or not. If you are planning to sell in the next few years, or are forced to sell, the ROI picture is probably pretty bleak. We can draw some clues from other big remodel projects. Looking at the numbers might scare you. At mid-range national averages for 2015, adding a steel door is the only remodel project that adds value. That is, you’ll recoup a little more than you spent to buy and install it. (Move quickly before a toddler dings up that new door!) All of the other remodel projects are a losing proposition. It’s even worse for upscale projects, where the best ROI is upgrading to fiber-cement siding, and it doesn’t recoup even 85% of the $15,000 average cost of the project.
But anyone spending $100,000 on a deluxe kitchen upgrade isn’t doing it to make money when they sell – they’re doing it to improve their quality of life while living in the house. A temporary reduction in full value because of a quick sale isn’t anyone’s best financial plan. I think this will be true for deep retrofits as well.
Some remodels do add value even when a house is sold soon after,
Joel Makower of GreenBiz.com summarizes the concept succinctly:
The term has no official definition, but at its core, the circular economy is about “keeping the molecules in play.” In such a system, products are made primarily from benign and nontoxic ingredients — “nutrients” that can be returned safely to soil or water or, in the case of more durable components, placed back into service again and again. Toxic ingredients are not verboten; they can be used as needed in products or processes so long as they, too, are continuously cycled back into productive use and kept out of the waste stream. And, of course, as much of this as possible should be powered by renewable energy.
That all sounds like a generations-old greenie dream, but in the past couple of years, it’s gained adherents among corporate giants looking to capture some of the lost value in their products and packaging materials—one accounting found $11 billion of value in trashed U.S. packaging materials alone (see image above). The 2015 World Economic Forum’s annual conclave in Davos, Switzerland, affirmed its commitment to a 2-year-old initiative called Toward a Circular Economy, which will work with policy makers and the financial community to spotlight and scale current circular economy efforts, especially in the developing world. Makower’s valuable overview continues: