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Philanthropic Capitalists?

July 15, 2016
A few weeks ago I attended a briefing on social impact investing. The briefing itself did not provide much specific, compelling evidence on the merits of such investments, however it afforded me an interesting insight into the difference between New York and Washington—between Wall Street and Capitol Hill.

By Rebecca Taichman, C’19

 

The distinction was small but significant, and arose when Audrey Choi, the CEO of the Morgan Stanley Institute for Sustainable Investing, corrected and redirected one of the organizing Congressman’s terminology, pointing out that a briefing titled ‘social impact investing’ would fall on deaf ears in her world. On Wall Street, discussing ‘sustainable investment,’ essentially the same thing, could yield greater returns in terms of actually capturing investors’ attention.

Social impact investing, as defined by SIFMA, the Securities Industry and Financial Markets Association, is “commonly used to describe the direction of investment funds to opportunities of companies that have desirable environmental, governance or social factors (also called ESG investing), and is related to social finance, which involves the use of financial assets or instruments to fund projects that have a positive social or environmental impact.”[1] This can mean investing in a company like TOMS, or a firm that produces free trade coffee. Incredibly trendy right now among affluent Americans who don’t mind spending $4.00 on a cup of coffee, such companies often turn out to be profitable because of how stylish positive externalities currently are. In Washington D.C., we say “social impact investing” because lawmakers are theoretically supposed to work towards a common good, penning public policy that will have desirable social outcomes. It doesn’t hurt that working towards something stylish and trendy, something labeled as socially impactful, can in turn render a politician stylish and trendy, a noteworthy attribute when terms in office last only two years.

There is, however, another aspect to social impact investing that is too frequently overlooked. While 71% of individual investors are interested in sustainable investing, 54% believe that there is a trade-off between sustainability and financial gains. [2] That is the fact that in addition to being trendy and good for humanity, these investments can actually be profitable even when compared to investments with no positive social outcome, the kinds of investments that generally come to mind when we think about money-hungry Wall Street. Such investments can involve bringing clean water to developing countries, or investing in clean real estate practices. The key distinction is again in the terminology—on Wall Street, this kind business move is not termed ‘social impact investing,’ it instead becomes ‘sustainable investing,’ because for some reason that phrasing is more appealing to a venture capitalist. It sounds less like philanthropy and more like capital.

Over the next few decades, populations and living standards are expected to skyrocket, while crucial and finite resources dwindle and disappear. The population 34 years from now is projected to increase by as much as 33 percent, meaning an influx of 2.5 billion more consumers. Meanwhile, an average of $1 trillion per year towards additional clean energy investment is needed through 2050 to prevent global temperatures from rising by more than 2°C. [3] 2050’s global prognosis is deadly. That corporations’ future revenues may thus be obsolete in the face of massive global crisis should theoretically impact today’s investment decisions. But today’s investment decisions are focused on profits, whether that means yields now or yields 10 years from now. And that’s not going to change.

What can change is the way we talk about things like “social impact investing,” and the perspective we have on Wall Street’s potential to profit off of positive social or environmental change. The reality we need to face is that Wall Street is where the money is, and we need money if we want to combat the important macro global issues that threaten to topple our society. We need to focus on what most issues today eventually boil down to: money. Morgan Stanley’s research shows that sustainable investments can actually be less volatile and yield higher returns. This is evident in real estate—sustainable building practices can reduce expenses anywhere between 3 and 30 percent, creating $3.5B to $34.9B of asset value in the top 10 US markets, due to factors such as utility expenses, property value, maintenance and repair, occupancy rates and insurance.[4]There is huge value potential in this market. Unfortunately, while the market for sustainable investing has grown by billions since 2005, it is unlikely to keep up with global sustainable innovation needs. [5]

It is for this reason that the assets of Wall Street must come together with the coordinating powers present on Capitol Hill. Legislators can work to form a pathway that will deploy a share of global wealth towards fighting society’s problems. This goal can be achieved by uniting the private sector and the nonprofit sector with the government acting as an intermediary, and also by making ‘social impact investing’ more appealing to the private sector.

  [1]SIFMA Social Impact Investing and Social Finance Fact Sheet.

 

  [2]Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals: The Individual Investor Perspective,” (Morgan Stanley Smith Barney LLC & Morgan Stanley & Co. LLC, Members SIPC) February 2015.

 

  [3] Audrey Choi, CEO, Morgan Stanley Institute for Sustainable Investing, “Sustainable Investing: Imperative and Opportunity,” (Morgan Stanley Smith Barney LLC & Morgan Stanley & Co. LLC, Members SIPC) November 2015.

 

  [4]Morgan Stanley Institute for Sustainable Investing, “Bricks, Mortar, and Carbon: How Sustainable Buildings Drive Real Estate Value,” (Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC. Members SIPC), March 21, 2016.

 

  [5]SIFMA Social Impact Investing and Social Finance Fact Sheet.

 

[6] https://pixabay.com/en/money-transfer-circle-banking-1448641/ heatherpaque

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