A new breed of investor is pursuing a “triple bottom line” strategy, including in their due diligence an analysis of the social, environmental and governance risks and impacts of investments. As result, there are new opportunities for investing in transportation networks, alternative energy infrastructure, textiles and even farmlands. The motivation is to make money on the deals but also to clean up some messes. It puts a new spin on the idea of super returns.
In April, the venture arm of Patagonia, the outdoor apparel maker, invested in Swiss startup Beyond Surface Technologies, to develop its toxin-free, breathable textile business. In June, DBL Investors, the venture capital partnership that was an early backer of electric sports car manufacturer Tesla, raised a new USD 400 mn fund, its largest to date. In July KKR paid USD 1 bn for a majority stake in Spanish solar plant developer Gestamp Renewables Corp. In August, a US institutional investor raised an over-subscribed USD 3 billion fund with the aim to invest in global farmland projects.
This activity prompted DealMarket Digest to reach out to Robert Rubinstein, founder and CEO of Amsterdam-based TBLI Group, to find out more about emerging opportunities that exploit “the triple bottom line” investment strategy.
DM: What kind of money is flowing into impact investing? The latest JP Morgan GIIN report says it is tracking around 310 fund managers with about USD 15.7bn under management. Half are PE/VC fund managers. Does that sound correct to you?
RR: Before answering the question it is important to make clear that triple bottom line investing, which is also known as Environmental, Social, Governance (ESG) themed investing, is not illiquid. Only impact investing is illiquid and it is a small part. The real and wider investment opportunities are measured in the trillions of dollars. It is things like public transportation infrastructure, fuel free energy [non-fossil fuels] infrastructure, electricity grid infrastructure and forest preserves, to name a few.
There are also green bonds (similar to debt bonds). Anthos Asset Management is a proponent of that. [DM notes that The Economist says that spending on basic infrastructure—transport, power, water and communications—currently amounts to USD 2.7 trillion a year but could be USD 3.7 trillion if private capital flows into it.]
Just to put it in perspective. GIIN says there’s USD 15 billion allocated to impact investing. That’s about the same as it cost to upgrade the London Underground for the Olympics. There are many more public transportation networks that need to be upgraded and it’s a low-carbon investment.
The instruments include Green Bonds, and other structured products. This kind of investing is illiquid. REDD Plus (Reducing emissions from deforestation and forest degradation), which is a United Nations-initiative that makes it pay to preserve forests. I expect the hedge funds to get into that once they understand it. It’s steady — it’s not sexy like being an early investor in Facebook, Tesla or Alibaba.
DM: Can you tell us about impact investing and some of the opportunities and strategies that you are seeing?
RR: Some examples, from companies that have presented at our TBLI Conferences. There is a two year old Full Cycle Energy Fund, which works with Synova as technology provider and project manager. Synova is a Shell spinoff. Full Cycle makes equity investments in efficient power plant projects that convert solid municipal waste to energy.
Another one with an interesting strategy is Wermuth Green Gateway Fund. It is a German EUR 200 million fund investing in European growth companies. It has a very specific strategy to expand energy & resource efficiency ventures into East European markets through the gateways of Kazan, Doha, and Hong Kong. Its investments are high-tech and high growth.
Cleaning up and de-risking global supply chains is another private equity opportunity. Big name brands like Apple, H&M, Coors and The Gap – to name a few – face reputation risks, weather-related risks, political and fiscal risks along their supply chain. These risks affect their margins, customer relationships and share price. TAU Investment Management, is a private equity outfit that does turnarounds on factories and other suppliers, improving productivity enough to increase workers’ wages and safety, all the while aiming for top quartile PE-like returns. It is raising USD 500 million in its first fund targeting textile producers in Bangladesh.
Another group active in East Asia is EcoRegions, an investment platform for financing and developing large scale eco-tourism in Indonesia, in a circular economy model.
DM: There are clearly some new strategies emerging in impact investing. You said there are other alternative assets that are all about sustainability. What else is available?
RR: Essentially, the activity is investing in resource efficiency on a massive scale. We are trying to get this message to finance professionals and asset managers. There are funds in the making. That’s part of what TBLI is involved in, advising on funds creation.
Most stock market investors tend to be short-sighted and inefficient. Buying shares in GE is easy but investing in Sub-Saharan African growth is a lot more difficult. The efforts required for risk mitigation and due diligence constrain the market. We are often asked for a track record in triple bottom line. The DFI’s (Development Finance Institutions) has a 50 year track record, only they called it “poverty alleviation”.
One milestone we welcome is the news that Morningstar announced in August its first scoring service for responsibly investing global mutual and exchange-traded funds. But that one has been a long time in coming. The company it is partnered with for the data, Sustainalytics, is 20 years old. It has taken that long to hit mainstream investing.
Despite the difficulties, the lack of fiscal policies and tax incentives, and minimal media coverage, impact investing, ESG and Infrastructure investment is growing. It is hardy and enduring, like a weed that grows and grows.
Conclusion: Call it a weed, call it low carbon investment, patient capital, impact investing, or call it what you will, from Rubinstein’s vantage point, the next wave of opportunity sounds like it will be a lot more than hunting for the next green unicorn.