Beats | April 6, 2014

Watch Out, Wall Street: MBAs Design Sustainable Investment Funds

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The winning team in a business-school sustainable finance competition summoned a vision of groves of poplar trees on polluted industrial sites, delivering competitive returns to private investors while cleaning up toxics and boosting real estate values.

Fresh Coast Capital, from the Kellogg School of Management at Northwestern University, will receive $10,000 as the winner of the Morgan Stanley Sustainable Investing Challenge, which encourages business school students to develop scalable, institutional-grade financial vehicles to solve serious social and environmental problems.

The four-person Kellogg team stood out among finalists from graduate schools from Shanghai Jiao Tong University to the University of Oxford and from UC Berkeley to Yale. A total of 75 business school team entered the competition, which is co-sponsored by Kellogg and INSEAD, along with Equilibrium Capital.

A team from Berkeley’s Haas Business School took second place, and $5,000, for MyCatch, a loan fund for West Coast fishing co-operatives to buy “catch shares” in fishery management schemes. Cooperatives are often the only way for small-scale fishermen to gain access to the quotas, which are intended to curb overfishing by imposing annual fishing limits.

The other finalists included a timber futures fund to support reforestation in Costa Rica, financing for solar irrigation projects in India, and a fund for LED street-lighting in the United States.

Contest organizers said the breadth of proposed financing solutions testified to the shift that has taken place in recent years among business school students. “When I was in school, this wasn’t even a thought,” said Hilary Irby, Morgan Stanley’s managing director in global sustainable finance. “Now there is so much energy and excitement in this space.”

The winning team proposed to rehabilitate contaminated urban and industrial sites by raising a $50 million fund to plant poplar farms on 25,000 leased acres of contaminated municipal land. Poplars naturally clean and restore soil by absorbing toxins, starting from the first year of growth. In as little as four years, they would be ripe for harvest for timber, pulp and paper processing or biomass energy use.

Fresh Coast projects annual returns of 6 to 8 percent over a 10-year investment, in line with returns from tree plantations in the northern U.S. A unique feature of the fund is that it would recoup 15-20 percent of the appreciated value of the land.

More than 5 million acres of “brownfields” in the U.S., are in need of environmental and economic rehabilitation, including near the team’s home base in Chicago. “We visited Gary, Indiana, which has a lot of empty land and no immediate economic opportunities,” said team member Nicole Chavas. “The potential is there. It’s in a prime spot right along Lake Michigan.”

Fresh Coasts’ benefits, including beautifying empty land, driving new revenue to local government, enhancing property values by as much as 15 percent, and bringing new jobs and industry, represent “a compelling proposition,” said Audrey Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing and one of the competition’s judges. “I loved that they could tie all of these pieces together and demonstrate the value to a number of stakeholders.”

The Sustainable Investing Challenge, launched in 2011, was originally called the International Impact Investing Challenge. Previous winners included solutions for food shortages in India, energy in Indonesia and diabetes. The 2015 competition will be hosted by Morgan Stanley in London.

“There has been such a shift in interest, with many students now focusing on how to combine business acumen with opportunities to have a positive impact,” said Jamie Jones, Kellogg’s director of social entrepreneurship. “They see that they no longer have to choose one or the other.”

Photo credit: Melanie Einzig.