Podcasts | August 28, 2018

Getting to Yes: Would-be impact investors start to run out of excuses

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What will it take for investors to make the big bets on a better future?

In this summer of climate reality, a dozen large wildfires burned across California, a heat wave gripped much of Europe and heavy rains and floods killed hundreds in Japan, India, Vietnam, Myanmar, Laos, the Philippines, and Sudan.

At the same time, renewable energy investment fell by 7% to below $300 billion last year, reported the International Energy Agency (though solar power and energy efficiency investments were up). To have a shot at meeting 2030 climate goals, experts say investment in renewable electricity needs to nearly double to about $550 billion per year.

“The inflection point should have already come and we should now be cranking on exponentially higher amounts of capital, and it’s just not there,” I complain in the latest episode of ImpactAlpha’s Returns on Investment podcast.

Impact investment is similarly flat-to-down in other sectors key to meeting the 2030 global goals. More capital than ever is being raised by emerging-market private equity and venture capital funds, but less of it is going to small and growing businesses key to sustainable development goals, according to the Aspen Network of Development Entrepreneurs. “The numbers that we see do not align with the amount of talk around impact investing and social enterprise,” ANDE’s Randall Kempner told ImpactAlpha this summer.

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Roundtable regular Imogen Rose-Smith, an investment fellow at the University of California, agreed there’s a “disconnect between rhetoric and reality.” High-net-worth investors, Rose-Smith said, talk a good game, but “To what extent that results in real dollars flowing out the door is very, very hard to tell.” Likewise, the Millennial generation is said to be keen on impact investing, but “we have yet to see that materialize in real capital allocations.”

And institutional investors have yet to convinced they can make money in impact investing, said Rose-Smith, a former writer for Institutional Investor magazine.

Even the most mainstream “legacy” investors have moved away from reflexive denial about looming risks, particularly around climate. Many are indeed hedging their portfolios with low-carbon indices and holdings screened for positive ESG (for environmental, social and governance) performance.

But few have made a strong call that the world is moving to meet either the Paris climate accord or the U.N.’s Sustainable Development Goals and repositioned their holdings accordingly. Impact fund managers of all sorts report slow and difficult fund raising.

“In many areas we have seen progress, but there are unfortunately many others where we are falling behind,” the UN Foundation’s Kathy Calvin acknowledged in a recent note. “The majority agree on the critical need and direction for sustainable development, but collectively we are not yet acting at the scale and speed needed.”

Podcast host, Brian Walsh of the fintech firm Liquidnet said, “The investment infrastructure is not there to match supply and demand.” Deals, he said, are still mismatched to investor needs in terms of size, liquidity, and other criteria. Reliable performance data, for both impact and financial returns, is still hard to come by.

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All true, I responded. But those objections sound like excuses that investors roll out in order to spare themselves from actually having to write a check.

“They haven’t said, ‘This is the economy of the future and that’s the economy I wanted to be invested in and therefore I’m going to put the money down to make it so,’” I argued in the podcast discussion. “They haven’t made the bet. They’re still hedging.”

“From my maybe over-amped position, the urgency is there,” I said. “I want to say to these investors, ‘Make the bet.’

Imogen countered that what I call excuses, investment professionals call rules. 

“It’s not that they want to say ‘no.’ It’s that this is the way they operate.” Given those restraints, she asked, “How do you help them get to ‘yes’?”

Listen to the lively roundtable discussion, and catch up on all of ImpactAlpha’s Returns on Investment podcasts.