Sustainable finance has now morphed into environmental impact investing.
A recent report from the World Economic Forum entitled "From the Margins to the Mainstream: Assesssment of the Impact Sector and Opportunities to Engage Mainstream Investors" has attempted to bracket this asset class as institutional grade. I beg to disagree particularly as it relates to environmental impact investing for renewable energy, forestry, sustainable agriculture, water rights, carbon and cleantech investing. The biggest differentiator is that the sector is still financially immature so that a large asset allocation dwarfs the investible universe. This of course will change as next generation high net worth and wealth managers are more engaged on environmental issues. Basically, they want to put their money where their ideals are.
The key is that private investment in hedge funds, cleantech venture capital and private equity screams for triple bottom line metrics but the knowledge base in the sector remains small. Large scale asset allocators such as Cambridge Investments (check name) are just starting to allocate to the more generic impact sector. This includes public company focused funds, microfinance, and ....
The key to the environmental or green impact sector is how does it scale so that sustainability is integrated into investing. "Investing with Impact" is one nod to this coming wave of investor change. With 52% of the world's population under 30 and with the flatness of the world in terms of access to information, this tsunami is coming.
The key investment centers for impact investing today remain New York, London, San Francisco, the Netherlands, Zurich and Geneva.
Chicken and the Egg
So the question becomes, does deal flow with a proven track record and return model drive this change or do younger risk takers allocate into this sector and invest in real assets. These assets include forestry, carbon funds, water rights, green real estate, species banking, renewable energy and cleantech venture capital. The largest pool still remains private equity with 4,000 private equity funds in New York and 2,000 private equity funds in San Francisco. The hedge fund universe is much smaller for green but did peak at 90 green hedge funds in 2008 (we tracked this as the Energy Hedge Fund Center).
So is this really a product development issue? or is there enough capacity to invest now. More conservative advisories want to architect product for scalability within each market segment. But anothe strategy is to build from the bottom up such as Goldman Sachs has undertaken putting their own capital at risk.
The issue becomes one of client demand versus capacity. I would argue that we are now past the early stage of market transformation and there is a robust assessment framework to vet fund managers and allocate accordingly.
Key due diligence questions will remain on how a deal is structured, the tenor of the deal, risk tolerance of investors, risk management by fund managers, the mechanics of the financial model, use of tax policy to incentivize more social impact investing, and gender lenses.
ESG has arrived with its triple bottom line metrics. The question is can the sector now scale and show a robust return model. It is a journey to commercial opportunity but the train has now arrived as the station as investor demand is there!
Peter C. Fusaro is chairman of Global Change Associates, an energy and environmental financial advisory in New York. He is focused on green investment strategies for wealth managers in the vs, hedge fund and private equity space. He founded and sold the Energy Hedge Fund Center in 2011.