The Brief | April 19, 2019

The Brief’s Big 9: Mitigating hidden risks, Opportunity Zone rules and tools, muni-bond makeover, McDonald’s of diabetes, Agent of Impact Mark Kahn

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TGIF, Agents of Impact

Risk, adjusted. Impact data may be inconsistent and portfolio strategies still nascent, but that doesn’t make environmental, social and governance risks to investments any less risky. Mitigating or avoiding them means better risk-adjusted returns, and who doesn’t want that? In the U.S., the Trump administration is again pushing back on ESG investing, but asset managers are increasingly touting their ESG strategies as not only not dumber, but likely smarter (see No. 1, below). Municipal-bond investors are finding that social and environmental benefits lower repayment risks (No. 3). There’s increasing recognition of the rising systemic risk posed by increasing income inequality (No. 2).

Extending the theme, blended-finance structures and new Opportunity Zone regulations appear to lower the risks of investing in low-income neighborhoods in the expectation of capital gains tax breaks (Nos. 7 and 8), while the adoption of broad impact investing principles by major firms may lower the perception of risk for investors looking to increase their allocations to impact (No. 9). The integration of risk, return and impact is well underway.

– David Bank, editor

Featured: The Brief’s Big 9

1. Are asset managers exposing clients to uncompensated risk by not considering ESG? Big asset managers are touting their ESG offerings as a way to reduce downside investment risks. But if awareness of environmental, social and governance factors lowers risks, the inverse must also be true: portfolios not optimized for ESG likely contain undisclosed and uncompensated risks. So are leading money managers exposing the rest of their clients to hidden risks? “We believe ESG is a risk mitigator and an alpha generator,” Rakhi Kumar, head of ESG investments at Street Street Global Advisors told ImpactAlpha. But of State Street’s $2.5 trillion in total assets under management, only about $179 billion, or 7%, are explicitly managed with ESG considerations. Are your assets at risk?

2. Capitalists new rallying cry: ‘Share the wealth’ (podcast). That may be overstating it, but hedge-fund billionaire Ray Dalio and others have made it safe for investors to talk about income inequality as a systemic risk. In a recent episode of ImpactAlpha’s Returns on Investment podcast, the roundtable regulars took up the age-old tension between capital and labor. To paraphrase the old song, which side is impact investing on? “It’s better for everybody in the entire marketplace for more people to have more wealth,” suggests ImpactAlpha’s David Bank. “That’s an impact investing and ESG imperative for long-term sustainability and a cool and interesting policy and technology problem for everybody to work on.” Join the debate.

3. Muni bonds get an impact makeover (podcast). The $3.8 trillion market serves municipalities’ need to borrow money to build roads, bridges, schools, wastewater treatment plants, solar arrays, wind farms and other vital infrastructure. “I can’t think of anyone who looks at the municipal-bond market and thinks of it as exciting, unique, novel or sexy,” says AllianceBernstein’s Eric Glass in the latest episode of ImpactAlpha’s Returns on Investment podcast. “But when you think about it from an impact perspective, that’s exactly what it is.” Glass manages AllianceBernstein’s $500 million municipal impact strategy, which invests only in underserved and low-economic-status communities, and in bonds that have specific intentions, like closing racial educational achievement gaps. Higher risks in disadvantaged communities are balanced with lower risks driven by social and environmental benefits. Listen in.

4. Agent of Impact: Mark Kahn of Omnivore. Demand for resource-efficient and sustainable food production has pushed the global agriculture technology, or agtech, market to $17 billion. That demand is urgent in India, which has the largest number of smallholder farmers – 110 million – in the world and where there are few large farms. Omnivore was launched in 2010 as India’s first dedicated impact agtech venture capital firm. The fragmented market combined with the country’s tech savvy makes Indian agriculture ripe for disruption, Omnivore’s Mark Kahn told ImpactAlpha. “Agriculture in India is impactful by default,” he says.

Kahn launched the Mumbai-based impact investment firm with Jinesh Shah, the former chief financial officer of Nexus Venture Partners. Nexus and Accel have made ag investments, as have impact investors Aavishkaar and Ankur Capital, but Omnivore remains India’s only dedicated agriculture impact fund. Omnivore invested in 12 companies with its first fund and has been closing deals this year from its second fund, which is raising a targeted $75 million fund. In just the last month, Omnivore has closed investments in agriculture robotics company TartanSense; farm products and services marketplace De Haat; and commodities platform Intello Labs. Omnivore looks for companies that have an explicit impact mission and tracks metrics like farmer income, farm productivity, and job creation. “We find that the best startups are the ones where that intentionality is built in.” Follow ImpactAlpha on Instagram.

  • Follow the talent with ImpactAlpha’s weekly report on career moves, job openings, events and opportunities.

5. Deals of the week. Stay on top of the dealflow all week long on Some deals that stood out:

6. These one-stop centers are lowering the cost of diabetes care in Mexico (video). More than 12 million Mexicans—nearly 15% of the country—have diabetes. The burden on low-income people, in particular, makes the epidemic a “catastrophe,” says Javier Lozano, founder of Clínicas del Azúcar. Lozano’s solution is low-cost, one-stop shops that serve all of patients’ diabetes needs – the “McDonald’s for diabetes care,” Lozano calls it. Clínicas’ dozen clinics have treated more than 20,000 patients, making it the largest provider of diabetes and hypertension care in Mexico. “Typically innovations in healthcare increase costs, because they’re looking for better technology,” Lozano told ImpactAlpha at the Foro Latinoamericano de Inversión de Impacto, or FLII. “The challenge is how we use innovation to reduce costs.” Check it out.

7. New Opportunity Zone rules and tools open the door for investments in local businesses. The 169-page Treasury document of proposed new rules for Opportunity Zones removes obstacles for investments in local businesses. In a digestible Twitter thread, Economic Innovation Group’s John Lettieri lays out 10 reasons why. The new regs expand the ways local firms could qualify for investment and clarify and extend the time funds have to deploy capital and reinvest “interim gains.” The rules clarify how multi-asset funds can wind down after 10 years without blowing up the tax benefit. “Not all of these issues come with the label ‘For Operating Businesses,’ but in tandem they dramatically impact the ability of investors, fund managers, & businesses to organize/execute,” Lettieri says. The rules, he adds, “shape the kind of local benefits that can accrue to communities.”

  • Cliffs Notes. Develop Advisors’ Steve Glickman recaps the draft rules in a his own tweet thread. Novogradac & Co.’s Michael Novogradac offers a comprehensive breakdown of the rules.
  • Support for entrepreneurs. Alongside the new rules, the Department of Housing and Urban Development is working to streamline federal resources in economically distressed communities, including Opportunity Zones. The plan includes strategies to boost entrepreneurship and increase access to capital for minority, female, rural entrepreneurs.
  • Unlocking capital.

8. Opportunity Zone capital stacks explained. Opportunity Zone incentives can push a whole new set of community projects into financial viability, write Lori Bamberger and Bruce Katz in “Voices from the Field: How Financial Innovation Can Enable Inclusive Opportunity Zones.” As deadlines loom for claiming full tax benefits, the evolution of the Opportunity Zone opportunity will be driven by “market norms and policy and practice innovations that are invented in one city and then replicated or adapted in rapid fashion across multiple communities,” the authors says. The field guide includes insights from Rachel Diller of Hunt UrbanView, Shekar Narasimhan of Beekman Advisors, Graham Richard, the former mayor of Fort Wayne, Ind. and Access Ventures’ Bryce Butler. Open season.

9. Investors sign up for impact investing market standards. Investors crave discipline in impact investing practice, said International Finance Corp’s Philippe Le Houérou in launching the IFC’s nine operating principles for impact investments. Sixty investors and institutions managing $350 billion in assets invested for impact signed up, including KKR, Nuveen and Credit Suisse, as well as Calvert Impact Capital, Capria Ventures, LeapFrog Investments, and more than 15 development finance institutions. Signatories will have a year to disclose how their investment practices stack up to the IFC’s principles. Dig in.