Can Impact Investors Play a Trump Card
Open Letter from Stephanie Cohn Rupp, Managing Director, Impact Investing and Ronald G. Albahary, CFA, Chief Investment Officer
While many in the impact investing community have been decrying the advent of Donald Trump as our 45th President, we have taken a few days to reflect on what this means for the impact investing sector. Many have expressed their expected gloom and dismay at the President-elect’s position on issues that impact investors hold so dear – including women’s rights or climate change to name a few.
So we asked ourselves this question: what are the potential implications of this election outcome on the sector of impact investing? And, what can we do? While many questions remain unanswered regarding how the regulatory environment might affect progress on environmental and social issues, we feel confident in proposing two general approaches for impact investors to consider: local economic revitalization and taking the long-term view.
Bridging the Divide
Much of this campaign was comical at best and vitriolic at worst, yet the surprise of the election on November 8th was widespread. Journalists, pollsters and analysts all assumed Hillary Clinton was to be elected. We then saw Trump win over many states that were historically Democratic. The states with larger metropolitan areas and higher median income remained overwhelmingly blue (62% in CA, 52% in NY State ). In the aftermath of the election, the tone of reprimand directed at Trump voters from celebrities, journalists, and protestors only reinforced the chasm that exists between two groups of voters, or possibly two Americas.
While we may harbor strong personal opinions, our role is to apply an objective lens to events with a focus on identifying the risks and opportunities presented by changes in the socioeconomic and political environments. Luckily, some powerful non-partisan issues resonated throughout both campaigns: job creation and economic revitalization. As such, this election’s and voters’ message to asset owners seems clear: there is an urgent need and unique opportunity to invest in economically depressed areas in the United States that have lost jobs, where entrepreneurs and small business owners are challenged to secure access to financing, and whose citizens are yearning for a better future. Investing in small businesses locally, preserving and developing affordable housing units, providing quality education (including professional training), protecting the local environment while creating new jobs, are all interventions that can be offered through impact investing on a national basis. Furthermore, impact investors who care particularly about a region or state can engage in “place based investing” or more localized strategies that target the social and environmental issues they care about. If this election tells a powerful story, it is one omnipresent within the developed world: significant portions of the population feeling left behind while others fearing for the future as populist movements gain momentum. Seeing the issues we face, we believe in intentional economic development as a unifying force for change. As responsible investors, we can help, over the short- and long-term, bridge this gap, to catalyze local economies to leap forward as opposed to being left behind.
Time Horizon Arbitrage
Immediately after getting elected, many socially-responsible investment managers expressed concern (even despair) that a self-proclaimed Climate-Change skeptic would slow down any U.S. involvement on climate change talks. The U.S. has already ratified the Paris Climate Agreement, and has pledged to reduce its GHG emissions by 26% to 28% below 2005 level by 2025 – which the Trump presidency could passively resist. Much like the Kyoto Protocol, the Paris Climate Agreement could become ineffective. Luckily, it would take a process of three to four years to be formally removed from the Agreement and would presumably hurt our diplomatic relations.
But our steadfastness for climate change investing is not founded on the technicalities or complexities of withdrawing from a ratified international agreement. Instead, our thinking is this: the issues we face are global megatrends which should outlive any president or administration and need to be addressed in the long-term. The mismatch of time horizons between our political system (especially the executive branch) and the issues at hand – poverty, welfare, gender rights, housing, access to finance, education, environmental sustainability -- is more than ever, astounding. Additionally, we continue to see a growing universe of compelling opportunities to invest in strategies designed to prevent, mitigate and/or remediate these issues. And that is why we believe that taking the long-term view to leverage finance for positive social and environmental outcomes is more than ever paramount. As many questions about the direction and impact of the new administration remain unanswered at almost every level, a focus on investing for and driving change in the private sector transfers a sense of control back to citizens. As such, tapping into alternative sources of influence, including shareholder engagement – either voting proxies or filing new corporate resolutions, (work we conduct with our friend, As You Sow) is imperative to persuade large corporates to enact pro-environmental, pro-diversity, and pro-women practices. For those citizens lacking the investable capital to effect change via their portfolios, they can and, we suspect, they will increasingly support issues important to them through responsible consumption by favoring companies who adopt positive social and environmental practices.
At Threshold Group, we take a 100-year view with our client relationships. After deploying over $800mn in impact investments on behalf of our clients , we believe taking this same long-term view is beneficial for the issues our clients are trying to positively affect. Although politicians and presidential administrations will come and go, and economic shocks and rebounds are to be expected, we believe in a consistent, stable and enduring focus on impact investing to drive both financial and non-financial positive outcomes. We feel honored to partner with our clients to help deploy their assets in a fashion that is aligned with their values. Investing may not be a democratic process, but it allows investors to “vote” and enact change on a timeframe that will exceed any one or two-term president. Politics will falter by seeking short-term gains, while impact investing is a marathon not a sprint.
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Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances. Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise. Impact investing occurs across asset classes, for example private equity / venture capital, debt, and fixed income.
Impact investors are primarily distinguished by their intention to address social and environmental challenges through their deployment of capital. For example, criteria to evaluate the positive social and/or environmental outcomes of investments are an integrated component of the investment process. In contrast, practitioners of socially responsible investing also include negative (avoidance) criteria as part of their investment decisions. Threshold Group makes no representations or guarantees that any specific investment opportunities will meet such goals of impact investors or impact investments.