I decided to become a financial adviser specializing in sustainable, responsible and impact investing when I tried to answer what should be a fairly simple question: What is the impact of my investments? At the time, I was in college, studying philosophy with a focus on ethics and logic, and my family’s financial adviser introduced me to the theme of socially responsible investing.
From the early days of SRI, investors have sought to avoid investing in companies that are at odds with their values. As the field evolves, the universe of available strategies has grown to include negatively screened investments, funds that integrate environmental, social and governance analysis into traditional financial analysis, and a new breed of emerging ‘impact’ funds, which claim to be able to actually create a positive impact on the planet and society.
I have a problem with most of the funds that use this label. Of the 20 mutual funds and ETFs that use this label in the U.S., three do not have a formal ESG policy (according to MSCI), seven have more than 5% of their holdings on an SRI exclusion list, and only one ETF, which is specifically designed around the UN’s Sustainable Development Goals, is invested in companies that derive over 50% of their revenue from activities that (again, according to MSCI) create “sustainable impact.”
While this data is incomplete and has some significant structural challenges (which are outside the scope of this piece but are important to acknowledge), this prima facie analysis shows, in my view, that the term “impact” should be viewed with extreme skepticism. I’m not trying to name names or shame asset managers here; my goal is to propose an alternative way to think about the term.
When we use the term impact in our practice, it has the connotation of change. “Impact” is an action word, which should mean that something happened because our investors took action that would not have happened without their intentional act. Impact does not happen by accident, but must be mindfully and intentionally designed.
Taken together, this concept is called “additionality,” which asks a herd question: what change did our actions make, compared to what would have otherwise happened? This is a counterfactual question, which makes it quite difficult to answer. In the public markets, this can be created primarily through lowering the cost of capital, which is extremely difficult, or by investing in companies that have enterprise impact, which is what MSCI attempts to measure with their “sustainable impact” metrics.
So, what does a true “impact investment” look like? The answer is that they’re quite hard to find – harder than most investors and asset managers are willing to admit. In my career, I’ve helped a growth stage company that worked to solve ocean plastic pollution issues raise capital to grow, worked with my partners to create custom impact bond portfolios for our clients, and placed money with Community Development Financial Institutions. Even with all of that, to date I’ve found exactly one offering that I’m willing to call a true impact investment and that is also available for retail investors, not just accredited investors. Let’s use this as a case study.
World Tree is a company founded in 2015 as a way to promote the benefits of the Paulownia tree, also known as the Empress Splendor tree. This particular tree boasts some very impressive stats: it’s the world’s fastest growing hardwood tree, matures in only 10 years, and can regenerate up to 7 times after harvest. The Empress tree is also non-invasive and produces some of the lightest hardwood lumber.
The World Tree eco-tree program
World Tree grows the Empress tree with its network of farmers in North and Latin America. The farmers provide the land, labor and care of the trees, with World Tree’s guidance. The Eco-Tree Program is funded by investors, where every $3,000 invested allows World Tree to plant 1 acre of trees (about 100 trees).
After approximately 10 years, World Tree harvests these trees and sells the lumber. The potential profits of the sales are then split three ways, with 25% going to World Tree, 25% going to the investor and 50% going to the farmers.
Making an Impact
An investment in World Tree impacts many different corners of the world. Here are just some of the ways investors can make a difference with the World Tree Eco-Tree Program.
- Reduce their carbon footprint. The average amount of carbon emissions generated by one person in the U.S. is 16 tons per year. The Empress Splendor sequesters 90 tons of carbon per acre per year, helping investors to offset their carbon footprint with only one acre of trees.
- Support farmers. World Tree provides farmers with the Empress trees, along with training and support, at no cost to the farmers. The farmers receive 50% of any profits from the harvest. After the harvest, the trees regenerate and regrow without replanting. This provides farmers with an ongoing source of income that can last for up to 70 years.
- Support nature. The Empress provides soil with a natural fertilizer. Additionally, its flowers provide nectar to honey bees; one acre of trees will help produce 100 jars of honey per year.
Bringing it all together
The term “Impact” needs to be used carefully. As a consumer, when you see this word used it should be accompanied by something real and measurable. The person or firm claiming to have an “impact” solution should be able to point to metrics, goals and intentionally designed Key Performance Indicators that show real stories of the impact the investment intends to have on the environment, society, or some other extra-financial area. In my experience, these investments are rare. World Tree is, in many ways, the first one I’ve seen that hits all of my criteria. In full disclosure, I receive a 5% commission on sales of World Tree investments. You can learn more about World Tree, watch a few videos on the subject, and view the offering circular here.
Max Mintz is a partner and financial adviser at Common Interests.