Podcasts | June 12, 2019

Institutional Shift: Investment trends to watch in the second half of 2019

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Follow the talent.

The first wave of talent in impact investing came largely from social enterprises or non-governmental organizations. Now, “Almost every firm is reconstituting those groups and bringing in seasoned mainstream investment professionals,” says Equilibrium Capital’s Dave Chen, co-host of ImpactAlpha’s occasional podcast series, “Institutional Shift.”

The career choices of such smart, dedicated professionals are as strong an indicator of future developments as the time-honored maxim, “Follow the money.” (ImpactAlpha delivers a weekly bonus Brief each Friday called, of course, Follow the Talent). Driven by both career ambition and mission focus, such talent is flocking to sustainable finance and impact investing.

Chen gets an early look at such talent as an adjunct professor at Northwestern University’s Kellogg School of Management and an organizer of the annual Kellogg Morgan Stanley Sustainable Investing Challenge. “We’re seeing the next wave of human capital going into this sector,” he says.

Institutional investors come for the risk reduction, stay for the impact

In our conversation, I asked Chen to update some of the forecasts we discussed in January in our look-ahead to 2019. In that podcast, Dave had signaled the arrival of a raft of new ‘sustainable infrastructure’ funds from major asset managers like Ares Management Corp. ($137 billion in assets under management) and Blackstone ($512 billion AUM).

Lo and behold, in the past month, Blackstone announced it is building an impact strategy to advance health and well-being, financial access, sustainable communities and green technologies and hired Tanya Barnes, a former Goldman Sachs merchant banker, to lead the initiative. Los Angeles-based Ares is raising Climate Infrastructure Partners, aimed at cutting greenhouse-gas emissions and making better use of natural resources.

The inside joke, as Chen put it, is that Ares is historically a provider of distressed debt, was entering into a sustainable infrastructure fund. “In the financial services world, It’s gotten to the point of who isn’t getting on this bandwagon?”

To be sure, perhaps 90% of financial services firms continue to chase “client demand.” But at least 10% are looking for ways to shift capital markets in the direction of “sustainable macro trends,” Chen says.

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Among the trends to watch for in the second half of the year:

Climate-change investing. The low-carbon transition is opening new opportunities to bet on climate change and climate solutions. “The smart money is playing that the low-carbon industries are where the growth is,” Chen says. By next year, he says, expect neon banners in Times Square offering ways to “Invest in Climate Change.”

Plastics. The glut of plastics in the world’s oceans, along with a growing revulsion at our throw-away consumer habits is prompting a raft of initiatives to cut plastics (Secretary of State Mike Pompeo this week told a Senate hearing the U.S. won’t stand in the way of a 180-country effort  to create a legally binding framework to regulate plastic waste). “We’ll see some innovative financial instruments that incentivize the counter-use of plastics,” Chen says.

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Market segmentation. The arrival of big new players is going to challenge early movers. Industry pioneers like B Labs (the nonprofit that certifies “B Corps” and GIIRS ratings for impact funds) as well as the Global Impact Investing Network “are going to have to wrestle with new players with very different starting points, backgrounds and objectives,” he says. “It’s a classic market segmentation.”

Product development. New funds and new financial instruments that can attract capital at scale will drive the industry forward. “Now it has very little to do with strategy, but everything to with products that can be created, launched and deployed that match to the sustainability objectives,” Chen says. “The days  of the white paper are long gone.”

“Now that we understand the markets can be used in some cases to solve these planetary issues, we’re going to see the next wave of innovation from a financial instruments standpoint,” he says. “It gives me great optimism, that firms that are household names are paying attention to it.”