Responsible Investing and ESG as a Growth Strategy

Well before ESG, Net-Zero and Diversity became the concepts they are today –  we viewed “responsible investing” and ESG not merely as good governance, but strategic business practice.  For years I heard the quip -   " what did you say? 'responsible' investing'?   - if you’re investing 'responsibly', does that mean I'm investing irresponsibly'?!"   (perhaps…)  

 Today I still field concerns that actively integrating sustainability, climate solutions and even diversity, into the equation are at best, “nice to haves,” and at worst, impediments to profitability. 

 These comments make me smile because it means there’s still upside.   I know we are simply being thoughtful and strategic in the way we invest.  We invest with an eye toward creating competitive and durable market rate returns.  Call it what you will - my experience is that incorporating a holistic lens drives alpha returns. 

“Triple bottom line" or "people, planet, profit"  is about being smart and intentional about our strategic decisions and investments. The first hurdle to overcome is the notion that investing with an environmental or social lens will naturally result in lower returns or performance. Data shows it is just the opposite.   It’s imperative for growth, durability and longevity.  To put in an economic context, it is not a zero sum game - “you give up economic profitability or returns if you integrate ESG factors.”  In fact, this holistic lens is actually central to business strategy and driving growth.  

This is how firm’s will scale,  how they will gain new market opportunities, attract and retain the best quality human capital/talent.   It weaves through everything, encompassing each facet of business operations and critical to every investment decision.

 ESG and Diversity

As you build a diverse team, the data shows that not only do you open up new markets, you make better decisions.   McKinsey’s most recent research from 15 countries and more than 1,000 large companies show there is positive correlation between diversity of the executive teams and likelihood of financial outperformance.  Their 2019 analysis showed companies in the top quartile for gender diversity were 25% more likely to have above-average profitability than those in the fourth quartile, and 36% more likely with ethnic diversity.

However, progress on diversity in corporate board rooms continues to lag.  Since 2016, the number of women on Russell 3000 boards has risen by by only 4.2%, rising to 22.6 percent  as of September 2020.  On the S&P 500, it’s still shy of 25%.   And, almost 80% of the S&P 500 board members, where race is identified, are white.  

Board and executive staff diversity are imperative.   Why?  Gender, race and ethnicity and age diversity improves board performance and overall governance.  Diverse teams see new opportunities and understand risks from completely different perspectives.  As companies face new strategic challenges, climate change risk, generational wealth transfer, digital transformation, pandemic response, cybersecurity exposure – it’s important to have a wide range of voices at the table.

Two years ago California mandated that any public company having its principal office in the state have at least one female board member.  The state recently passed similar legislation for those considered “underrepresented”  minorities.   If approved by the SEC, which is expected to rule on this by August 2021, NASDAQ’s diversity rule proposal would require listed companies to publicly disclose board-level diversity data and require a diverse slate of directors  - at least one who identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+.  

Triple Bottom Line Investing

We are investors first. Like anyone else, when we deploy capital, we want to get it back with a return - either in yield or appreciation. The TBL/PPP principles are about creating a strong and healthy foundation, be it in the context of a company, a building, neighborhood or city. By consciously using our natural resources, reinvesting in our people and our communities and recognizing that diversity results in better decision making and stronger ties, we putting firms on a trajectory for success and creating a higher quality asset. If we raise the standard of living for all, we will create jobs and healthy and safe places to work and live.  In turn, raising the tax base,  supporting investment in infrastructure and community programs, driving art, music, better education and individual agency and commitment.  As you create vibrant, healthy, desirable neighborhoods you also raise asset values. 

Climate Change and Environmental Equity

I’m currently tracking the overlay between climate change and populations which are disproportionately impacted. Frankly, if we don’t get our act together on this one, we will continue to see rising unrest as our resources are strained to capacity - water fights, food shortages, migration and dislocation; the typical sustainability issues - water, energy, waste, carbon; increasing income disparity. Let’s look at water (or lack thereof). If you invest in infrastructure that delivers clean and accessible water to communities in need you start to tackle gender inequality and economic returns. In many countries, women are the ones who collect water from far away places, often at great risk. By investing in water delivery, you reduce the amount of time and effort they must go to to provide for a basic need - thereby freeing up time for them to go to school, increasing the educated population, reducing health care costs and allowing them the opportunity to engage in commerce, providing a positive benefit into the local economy. 

Investing for Impact and Long Term Growth

With every investment we make (money, time or capacity) we are making a clear statement of what we choose to impact. We can be far more intentional in how we develop and redevelop. Doing mixed-income, cross-generational development. Use responsible contracting to ensure living wages. Reduced resource use. 

How can we motivate more investors, business leaders,  and capital providers to take these concepts into account?  Ultimately, I think it is a shift in focus. Change the questions that are being asked to make them more meaningful and so they are tracking a higher level of significance. Instead of focusing on whether or not returns have increased over the quarter (or some other short period of time), we need to be asking whether or not we are stronger companies, building adaptable and resilient buildings, cities and systems. Are we creating assets that can withstand and flourish given the future?

We are facing unprecedented change - we have narrowed our perspectives needlessly and frankly, to our own detriment. When we only look at investing as what shows up on the most recent P&L, we shrink our field of vision, limiting our opportunities, opening ourselves up to risk and excluding some of the most important factors and consequences. It provides an inadequate and incomplete view of investment returns. And it keeps us in a mode of extraction - which as we all know is unsustainable. (The healthiest plants and food grow in soil that has been tended and replenished.) By expanding our focus, it is easier to see the true cost and profit, which allows us to optimize our investment decisions. Ultimately the capital markets and our investments can be a positive force for change.

Rinse, Repeat...Reprise

I recently watched a presentation by Spencer Glendon at the Sohn Investment Conference on the impact of climate change on our way of life and our economic fortunes. It got me thinking about some of my past posts. I thought it might be worth a reprise this one I did back in 2016 on Responsible Property Investing. It was pretty good back then and holds true today.

We invest with an eye toward creating competitive and durable market rate returns.  Call it what you will - my experience is that incorporating a holistic lens drives alpha returns.

I believe that the Responsible Property Investing is the leading edge. Call it "triple bottom line" or "people, planet, profit"  - it is about being really smart and intentional about our investments. The first hurdle to overcome is the notion that investing with an environmental or social sense will naturally result in lower returns or performance. I think it is just the opposite. We are investors first. Like anyone else, when we deploy capital, we want to get it back with a return - either in yield or appreciation. The TBL/PPP principles are about creating a strong and healthy foundation, be it in the context of a building, neighborhood or city. By consciously using our natural resources, reinvesting in our people and our communities and recognizing that diversity results in better decision making and stronger ties, we are creating a higher quality asset. If we raise the standard of living for all, we will create jobs and healthy and safe places to work and live.  In turn, raising the tax base,  supporting investment in infrastructure and community programs, driving art, music, better education and individual agency and commitment.  As you create vibrant, healthy, desirable neighborhoods you also raise asset values.

I’m currently tracking the overlay between climate change and populations which are disproportionately impacted. Frankly, if we don’t get our act together on this one, we will continue to see rising unrest as our resources are strained to capacity - water fights, food shortages, migration and dislocation; the typical sustainability issues - water, energy, waste, carbon; increasing income disparity. Let’s look at water (or lack thereof). If you invest in infrastructure that delivers clean and accessible water to communities in need you start to tackle gender inequality and economic returns. In many countries, women are the ones who collect water from far away places, often at great risk. By investing in water delivery, you reduce the amount of time and effort they must go to to provide for a basic need - thereby freeing up time for them to go to school, increasing the educated population, reducing health care costs and allowing them the opportunity to engage in commerce, providing a positive benefit into the local economy. 

With every investment we make (money, time or capacity) we are making a clear statement of what we choose to impact. We can be far more intentional in how we develop and redevelop. Doing mixed-income, cross-generational development. Use responsible contracting to ensure living wages. Reduced resource use. 

How can we motivate more investors, developers and lenders to take into account these topics?  Ultimately, I think it is a shift in focus. Change the questions that are being asked to make them more meaningful and so they are tracking a higher level of significance. Instead of focusing on whether or not returns have increased over the quarter (or some other short period of time), we need to be asking whether or not we are building adaptable and resilient buildings, cities and systems. Are we creating assets that can withstand and flourish given the future.

We are facing unprecedented change - we have narrowed our perspectives needlessly and frankly, to our own detriment. When we only look at investing as what shows up on the most recent P&L, we shrink our field of vision, limiting our opportunities, opening ourselves up to risk and excluding some of the most important factors and consequences. It provides an inadequate and incomplete view of investment returns. And it keeps us in a mode of extraction - which as we all know is unsustainable. (The healthiest plants and food grow in soil that has been tended and replenished.) By expanding our focus, it is easier to see the true cost and profit, which allows us to optimize our investment decisions. Ultimately the capital markets and our investments can be a positive force for change.

Capital is Just a Tool

Check out my discussion - Capital is Just a Tool - with Eve Picker on her new Impact Investing in Real Estate podcast.

Opportunity Zones & Impact

I had an interesting discussion this week about Opportunity Zones and the challenges many communities have simply due to the compressed timing the legislation imposes. There are so many places where a given community hasn’t really thought about what they want and are just getting started, where the local skill and capacity is limited, technical assistance is needed, investors are reluctant to take a risk and there are few shovel ready projects that have already made it through community engagement. I fear without some changes (extension) to the legislation, many communities are going to miss out on the opportunity.

I got pulled in early into the O-Zone conversation in January last year when EIG reached out to get a perspective on the legislation might play in real estate. At the time I was the Chair of the Responsible Property Investment Council. Since then I’ve been working with investors/developers and cities in developing their O-Zone strategies and O-Funds. I’m presently working on 4 funds - 2 project specific (mixed-use - community library, housing, maker space; the other a multi-family project), one a local/regional fund for the Rocky Mountain West and the final one for our work with the Lotus Campaign - investing in workforce housing and making units available for people experiencing homelessness.

I’m working to integrate a series of metrics for investors that include a variety of social equity, community outcomes and environmental touch points so that when they make investment decisions, they have a sense of how the investment aligns with their values. However, that doesn't necessarily address how a community can ensure the incoming capital meets those same needs. Looking forward to having some further conversations with communities on how they can optimize their O-zones.

Navigating the Land of OZ: Understanding Opportunity Zones and Opportunity Funds

Flying under the radar in the 2017 tax reform package was a sleeper provision that authorized the designation of “opportunity zones” and the creation of “opportunity funds.” This versatile program has the potential to stabilize and revitalize distressed neighborhoods and surrounding communities by unlocking private investment capital through a series of tax benefits.

The provision allows individual and corporate investors to defer capital gains tax until 2026 if those gains are reinvested into new construction or major rehabilitation of projects in economically depressed areas via designated opportunity funds. If held for five years, the original amount of capital gains tax due is reduced by 10%; if held for seven years it is reduced by an additional 5%.  If the investment is held for at least ten years, gains on the invested amount accrue tax-free. 

Estimates suggest that $6.1 trillion of unrealized capital gains is held by American households ($3.8 trillion) and American corporations ($2.3 trillion). Getting to that capital will be a bit trickier. Much of the money is disaggregated across individual accounts managed across myriad institutions and platforms. 

At least 90 percent of the assets in such funds must be invested in government-designated low-income zones. The governor of each state was able to designate up to 25 percent of the state’s low-income communities (LIC) as opportunity zones. Up to 5 percent of the designated zones could be contiguous to LIC tracts. The zones are designed to be in areas that have a poverty rate of at least 20 percent or that have a median income that does not exceed 80 percent of the metropolitan area’s median income. The final designations were made in spring 2018. In total, 8,700 opportunity zones were chosen by state governors and approved by the U.S. Department of the Treasury. These zones range from a few blocks in large metro areas to entire municipalities in some rural states. The Treasury Department has indicated that no additional opportunity zones will be added. 

The expectation is that the added tax incentives will make investment in these disadvantaged areas just a little more enticing and add another option to the capital stack. Concerns exist that the investment capital that may come flooding in also has the potential to push out residents and achieve value primarily for investors. It is expected that states and local communities will provide guidelines to ensure that the objectives of affordable housing, strong neighborhoods, and vibrant, diverse, and sustainable communities are met. 

As of the third week in August 2018, final rules from the Treasury Department were still pending.

The Freshwater Trust - Streamside Series

Molly McCabe never saw herself in Montana. Neither did her friends and family. She grew up in the San Francisco Bay Area, studied business, and built a thriving career in finance. Bozeman wasn’t on her radar. But she fell in love with a fly-fisherman and moved to Big Sky Country. That was 20 years ago. McCabe now runs a strategic real estate advisory firm and serves on The Freshwater Trust’s board of directors. When we jumped on the phone one afternoon, she told me about the bluebird day they were having, the snow-covered mountains outside her window, how she planned to take a spin on her cross-country skis in the late afternoon, and why The Freshwater Trust is an organization she believes in.

What’s a day in the life of Molly look like?

There’s never really a day in the life. It’s looking out at the mountains and reviewing investment profiles and trying to incorporate sustainability and social equity into projects that I’m working on. Then when I’m on the road I might be working with investors, or doing a lot of advisory work with companies or communities to help make them healthier, stronger and more resilient. It’s a bit of intuition, a lot of creative problem solving, numbers and writing. I focus on making the business case for impact.

How do you make money while making sure the environment is healthy, that communities are strong, that everyone has a fair chance at life and that we are treating people well?

Is this what you always imagined yourself doing?

First, I didn’t have any idea what I wanted to do before I went to undergrad. I wanted to be a doctor, and then I realized blood was not my friend. Then I changed to business and still didn’t know what to do. Then, what do you do when you don’t know what to do? You go to grad school. I came out and got into real estate finance. I’ve always liked the tangibility of it. One of the first projects I worked on was a project to develop 30,000 acres of land in California. I thought at the time, this is pretty crazy. I never really asked myself: Should we be developing this kind of sprawl in southern California? I wish I could tell you from a young age that I was really sustainably minded, but I don’t think I was that aware of it. But I never really liked being motivated by profit without recognizing impacts.

So when I moved to Montana, I had to recreate myself and figure out how I would make a living with my finance background really being in the middle of nowhere. That’s when I ran across responsible property investment.

What’s a project you’re particularly proud of?

I’m happy when I’m able to go into communities to solve big, hairy problems. I got to go as part of a multi-disciplinary team into the Northern Colorado Range after they’d had a big flood and discuss what the community needed to be more resilient. You can’t be resilient if you’re having to helicopter in all your first responders. You cannot have a resilient community without having a diverse set of people in it, so a mix of affordable housing is a component of resilience. Right now, I, along with three colleagues, are developing a new private capital investment model to accelerate housing for homeless people. It’s marrying philanthropy with private money. We believe it could be a lever that changes the dynamic. It’s about having full awareness really and looking at things in a holistic way. By weaving together different threads you can create new opportunities for solutions that are not merely band-aids.

Molly and a guide on a trip to South Africa where she worked on a sustainable development project.

So how do you tie your work to a passion for the environment and in particular for The Freshwater Trust? 

What I love about TFT is that you are practical, pragmatic and visionary. It’s like you see in Technicolor what others see in black and white. What I like about TFT is really the same as what I like about my job. TFT takes a holistic view to create solutions for rivers and watersheds. You don’t settle for the obvious path.

You’re asking insightful questions and weaving a bunch of things together. You ask the same kinds of things I ask when working with the built environment. You work with a lot of different stakeholders and bring them all to the table around one solution. One challenge I have with a lot of conservation organizations is the notion that they should be supported just because it’s the right thing to do. Just saying it’s the right thing to do doesn’t get you there. We need to ask where we have common interests and we need to understand our impact. TFT gives people the tools to do that.

If you were going to be a fish, what fish would you be?

I’d probably pick rainbow trout because it swims in our little creek and is native here in Montana.

What’s a surprising fact that you learned about recently?

The two fastest growing segments of people moving into homelessness are teenagers and families, especially women with children. Frankly, this recovery feels like such a strong one if you read the stats. But there’s a huge contingent of our population that’s one major crisis away from homelessness. Oh, I recently learned there are something like 50,000 homeless people in LA; that’s up 75% in the last six years.

Is there a certain project or program that really resonates with you? 

I love the Streambank Toolkit and your ability to drill down and identify not only where to put something but also which action is going to be the most beneficial and cost-effective. We always tend to throw solutions at things and hope something sticks and you have actually refined that process. It’s far more effective. I also love that you’re working in California because that’s my home ground.

If we asked your friends to tell us something about you, what do you think they’d say?

I think they’d say they can’t believe I up and moved to Montana. Is that a great story? Probably not. But it’s mine. My husband would tell you the time we went camping in Idaho and the mosquitoes were so very unkind to me. He tells it frequently.

What’s your home river?

Wolf Creek runs through my property. It’s a spring creek which runs into the Swan River.