The Truth About Impact Investing
The Truth About Impact Investing
Read transcript highlights or listen to the full episode to hear Katherine Fox and Josh Hile, founder of Citizen Mint, discuss:
Is impact investing all “greenwashed?”
Are impact investing and ESG the same thing?
Can I make money and invest in impact?
Do impact investments make the same returns as “normal” investments?
Posted on April 1, 2024 by Katherine Fox.
The Truth About Impact Investing
Is impact investing all “greenwashed?”
Katherine (00:35)
So I mentioned we're going to be covering impact investment myths, where these myths come from, why they're not true, if there are elements of them that maybe have some truth, and where we hear these myths coming from. So I'm going to start with what is probably the most common myth that I hear talking about greenwashing. So the concern that impact investing is just greenwashing. For those that don't know,
Greenwashing is when you have an investment product, so maybe it's a mutual fund, maybe it's a private investment, an alternative investment that claims to have some impact benefit, but really it's just sort of putting a coat of green paint on it, if you will, pretending that it has a positive impact component of the return.
in order to generate sort of some buzz and hop on that impact investing bandwagon, but it really isn't doing what it says it is. Greenwashing is a thing. We would both agree on that. But that doesn't mean that it's a brush that we should paint across the entire industry. So Josh, what are your thoughts on this?
Josh Hile (02:14)
Yeah, I mean, I think there's greenwashing everywhere in the investment industry and people are usually utilizing it for their own means. And so it's in most cases, it's raising capital and it's like, okay, how can I change this messaging to raise capital from a greater group of individuals? And to some I can present it this way, to others I can present it this way. And from an impact lens, I can say, yes, this is helping so many people are doing this, but it's not actually having the impact that we would want or expect or having a dramatic change to the industry.
I think what I've seen like even for, to a certain extent is like, all VC investing and it's impact investing. I've literally heard this pitch. It's like, well, cause we create jobs and jobs are great. And it's like, okay, well that's awesome. But what, what kind of like specific issue are you solving at maybe if we were in a huge unemployment issue, but at the current point in time, it's like, maybe it can be impactful. Maybe the underlying companies can be impactful, but they're not solving the specific issue. More what impact investing is, is actively addressing.
One of the major issues we might be facing at this current point in time. So some of these big issues could be around climate change or the energy transition that we're dealing with and like trying to reduce that in some form or fashion with renewable power or better sustainability. It could be around affordable housing. I mean, everybody in this country, it's a bipartisan issue. Affordable housing, affordability is a huge issue across the landscape. And it's something that, you know,
Maybe the one thing that Republicans and Democrats can agree on is that we need more affordability. Education is a massive issue in this country. Health care is a massive issue. Water scarcity, while not the biggest issue in the US, is a huge issue across the world and will continue to be an issue. So these are more the big impact opportunities that we can see.
So it goes beyond just like that, like...creating jobs, it's more like, hey, how am I impacting this big opportunity set? And that's what ultimately we're trying to do when we're reviewing an impact investment. And it goes beyond just talking to a manager. It actually goes to, okay, well, let's actually see that impact in play. And are you actually doing what you're saying you're going to be doing? So like from a diligencing perspective, we're auditing these managers or going and talking to references. We're like saying,
If they are creating affordable housing, well, let's see the pricing of this housing. Let's compare it to what market rate housing is. And if it's above market rate or it's market rate, then that's not necessarily what we're trying to impact. So it does take a little bit more work because people can tell a story. People can lie and or tell close to truths, but that aren't truths or are truths in some manner.
So, we need to like really spend some more time about it, but it isn't true impact investing is not trying to be greenwashing.
Katherine (05:23)
Yeah, I am familiar with some investors who do a lot of biotech, like early stage biotech or pharmaceutical investing and call that impact investing because those products are going to go on to save lives, which is true, but I think is also counter to what I would call and I think what we would agree is the spirit of impact investing is that you're solving intractable, what feel like intractable problems in our society, and you're bringing capital to find creative solutions to those problems. So if you're talking about like solving disparities in healthcare, then yes, I would think that that qualifies as impact investing. But if you're just talking about funding for pharmaceutical companies, does that really check that same box in the same way?
And I think there's also some element, you know, obviously, at Citizen Mint doing a lot more work on the private side, there's a lot of due diligence there. And I think it's really important points for anyone listening to understand that you do have to do a lot of diligence on the private side to understand what you're investing in and what the impact that's being created through that investment is. And also to understand what are sort of the negative externalities of that investment, right?
Where, oh yeah, maybe you are, you do have an affordable housing program, but maybe you're displacing people who already live there. Maybe you're raising a neighborhood to build affordable housing. That's not what you want, right? And so it is easy, I think, for individual investors especially, but also for investment advisors who are interested in the space just to feel so overwhelmed by the amount of the diligence that needs to be done.
And I think that's like...obviously where you provide so much value, especially as someone who's a smaller firm. I don't have a CIO. I don't have an eight person analytics team. So having an expert there that can help with that diligence process. And I think talking about greenwashing in the public markets there, the individual consumer or an advisor is a little bit more able to do some of that own research themselves.
And I think that that is where for advisors or investors who are interested in learning more about impact investing, that can be a really good place to start, is to look at just some of the big ESG or impact -focused funds. Just go on Morningstar and look at the portfolio of those funds, right? See what kind of companies they're investing in and see when you look at what's in there, if you would really consider those companies to be impact -focused companies.
Are impact investing and ESG the same thing?
Josh Hile (08:37)
Of course, this is my favorite one, actually, because it's it's people like, oh, you run an ESG firm.
And I'm like, well, no, I don't. I run an impact investing firm or in like a compelling private markets firm. And so it's, it's one of those things where ESG is really the negative externalities of an operating business. And so as you're operating a business, you're going to have negative externalities. So you think of like Amazon, it's like, it has a ton of trucks on the road. So it's putting a ton of carbon in the air. That's why they made an investment in Rivian to try and like decrease that carbon output. They use a ton of wood products and boxes, but they're trying to reduce like package waste with all that.
But those are negative externalities of their business. That's real externalities. They also have like, you know, like job issues and like, you know, people get hurt and it's like, how do we improve that? And those are real liabilities to the company over time. Or you think of like 3M and manufacturing business and they have these long term environmental and negitive externalities that might not be on the balance sheet right now.
But at the same time it's something that could be a liability to the balance sheet in the future with like long -term chemicals or anything into groundwater and all those kind of things. Or, I mean, even if you're treating your employees poorly, that's not a balance sheet issue, per se. It's not able to be captured in the balance sheet, but that's a real issue that they're facing.
That's a negative externality of their business because they won't be able to attract good employees compared to some other firms that can attract some of the best and most brightest employees. So impact is really focused on these specific issue areas that we can help solve while also gaining, looking for a financial return in those specific issue areas. And there's multiple different variants in that. Some people want to be more impactful with their investments, which also can be concessionary in the return expectations.
For us at Citizen Mint, we've focused on areas where we know we can have an impact and we know we can get market rate or better returns on everything we're doing. But that is really in those focus areas of affordable housing, renewable energy, energy transition, education, sustainability, et cetera.
Katherine (10:59)
And a lot of the, for people who are newer to the impact investing or even the ESG space, there is confusion around those terms because what is publicly available and known are mostly ESG funds. When you're talking about private markets, like sort of the big funds that you might know or come across, a lot of those are gonna be ESG funds.
And so when you think about creating impact in the public markets, do you think, where do you see the shortfalls there? If you say, okay, I understand the difference between impact and ESG investing. ESG investing, you're sort screening out for negative factors. You're trying to get kind of the biggest risk factors that you see out of the portfolio, those biggest negative externalities.
I don't wanna do that. I wanna create positive impact. Do you feel like you're gonna be able to do that using just the public markets or do you think that they're gonna fall short? And if you're interested in this question, we do have a whole episode about it last time. So check out episode one, little plug.
Josh Hile (12:10)
Thank you.
Yeah, no, definitely. I just think you're going to fall short on a of those. There's just not, you know, when you're a publicly traded business, usually there's, you don't have a specific focus.
on one specific impact area, even like some of the big REITs out there, you know, they might have a portion, a small portion of their portfolio investing in affordable housing, but most of their housing is market rate or luxury. And so it doesn't really hit that metric of like, yes, I can actually affect this specific issue by investing in this company. That's not really the case. Whereas like in the private markets, it's like,
I'm going to address this issue head on with this very specific investment. It's meeting my financial return hurdles as well as my impact hurdles. And so you can really pinpoint those exact areas that you really want to affect from a personal perspective.
Can I make money and invest in impact?
Katherine (13:02)
Talking a little bit about returns, you mentioned concessionary returns and how citizenment is really focused in its key impact areas of market rate or above market rate returns. The next myth on our list is that impact investing is concessionary. So if you want to create impact with your wealth, you are necessarily going to have to take a lower than market rate return.
And I think this may have been true to some degree in the very early days when people were just starting to think about impact investing. It very much is not true now. So can you talk, Drush, maybe a little bit about that evolution and what it looks like in the impact investing space with alternatives in terms of return profiles?
Josh Hile (13:44)
Yeah, no, definitely. And I think this is another one where people will be like, hey, I'm not interested in concessionary returns. That's literally what they'll say to me, like first thing, or they're like, my clients aren't really interested in this. And I'm like, okay, well, let's rephrase it. And then let's think about it from that perspective. And it's like,
Would you be like, so this is an example for renewable infrastructure. Like, Oh, I don't really have many clients who are thinking about renewables or impact. And I was like, okay, do you want to invest in the largest capital investment cycle of all time? And then they're like, well, tell me more about that. And I'm like, well, it's the same thing.
And because we're doing this massive energy transition, that's going to take trillions, where big institutional investors are putting up. And you can invest alongside those big institutions, but you're having a positive impact and they're like, okay, well that sounds great. And then I go on to say, okay, these are 30 to 50 year duration projects. That means that these solar wind biogas projects, they last for 30 to 50 years and you have an off taker agreement with Amazon.
And so as long as Amazon doesn't go out of business, you're getting paid that income for the next 20 to 30 years. And Amazon and Microsoft and Google and Meta can't buy enough of this energy. And they all have 50 % energy chains that are trying to sign every contract that they possibly can for their data centers, which now take four times the amount of energy because we all want AI. And so it's like, that seems pretty compelling.
And it's also impactful because you don't have to use coal or you don't have to use oil or these other places. And it's like, yeah, you need those things for the transition period and you need those things like before batteries are in place and other things. And this is going to be a long -term cycle. And there is some negative externalities. There's real natural resources that are used to produce these things. But over the long -term, it's much better than some of the current energy that we use for these specific operations.
Do impact investments make the same returns as “normal” investments?
And it's going to help the climate and it's gonna help these companies hit their carbon goals, which they are all Committed to hitting carbon neutral by 2030 which is gonna be incredibly difficult unless they invest here so it's reframing that to under for them to understand just the return profile and how big of a Opportunity this can be and on top of this the government gives you 30 cents on the dollar for every dollar you put into this So they're incentivizing you to put money here.
So it is important just to really like, it's getting them to understand that level of that. It doesn't need to be concessionary. There is ways to make capital here. And you should take advantage of these big transition opportunities. And that said, once I mentioned that like Blackstone has one of the biggest affordable housing funds in the world, and Apollo has a massive infrastructure fund and all these other places where there's like these big companies understand the big opportunities here.
They might be doing it for different reasons, but they understand that it can or that there's return generation there. Then they're like, it kind of flips a switch and they're like, okay, this is something I should be paying attention to.
Katherine (17:06)
Yeah, I think it is helpful to understand it and to think about it as a long -term investment. And I just think from a personal viewpoint, so much of what we invest in, we don't see the costs of like the true costs of that, the natural resource costs of what we're investing in, the human labor costs of what we're investing in. And...
you just have to think at some point, right, that that is going to come back to you, right? These costs, like they're not visible. I mean, they're visible to a lot of us. You don't see them now in your investing returns, but they're there. We all know they're there. It's clear. And so it just seems short -sighted to me to not like be diversifying, you know, your portfolio or anything like that with an eye towards like...
Josh Hile (17:50)
Yeah.
Katherine (18:04)
What's going to happen in the long term? What does 30 years look like? What does 40, 50 years look like? It can't be the same as today.
Josh Hile (18:09)
Yep, exactly. Yep, 100%.
Let’s take the next step together
Learning how to create positive impact with your wealth is not easy. Investors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can reach out to Katherine Fox, CFP® and CAP®, a financial planner for inheritors to learn how Sunnybranch can help you build a plan to grow your inheritance sustainably while creating positive impact.
