Combining Impact and Profit: Young Innovators Designing Investment Vehicles to Promote a Sustainable Future

Posted by Audrey Choi, CEO, Morgan Stanley Institute for Sustainable Investing; Christine Driscoll Goulay, Associate Director, Social Entrepreneurship Initiative, INSEAD; Jamie N. Jones, Director of Social Entrepreneurship, Kellogg School of Management, Northwestern University

Must impact investing sacrifice financial returns for social or environmental good?

Ten finalist teams of graduate students from around the world came to the Morgan Stanley Sustainable Investing Challenge on April 4 to demonstrate how shrewd investing and positive social impact can go hand in hand.

The students, selected from more than 200 applicants at 39 graduate schools in 10 countries, presented bold ideas for tackling global sustainability challenges through investment vehicles that target market-rate returns as well as social impact. This work is critical because today, sustainability is no longer a “niche” issue – it is front and center, informing the way many investors design their portfolios, manage risk, and think about the long term. The Challenge – a joint initiative of the Morgan Stanley Institute for Sustainable Investing, the Kellogg School of Management at Northwestern University and INSEAD – is a forum for cultivating the intellectual tools and skill sets necessary to advance this approach to investing.

The winning idea, pitched by a team from Kellogg, proposed turning brownfields into forests, thereby decontaminating large tracts of land and producing revenue streams from the timber – while also potentially boosting property values. The second-place winners from the Haas School of Business at the University of California, Berkeley, focused on providing funding for small, independent fishing communities to improve their efficiency and ability to compete against large, unsustainable fisheries – thereby potentially bolstering both the profitability and sustainability of the catch. These teams had to show that their proposals were innovative, feasible, and scalable – that is, capable of attracting large pools of investment capital.

The teams were grilled by a panel of judges who have collectively helped manage hundreds of billions of dollars in assets at institutions like CalPERS, Soros Economic Development Fund, Overseas Private Investment Corporation and Prudential Financial. The teams’ diverse proposals reflected the Institute for Sustainable Investing’s philosophy that in a world of continued population growth and resource scarcity, capital markets can, and must, be mobilized to address global challenges at the nexus of public health, ecology, industry, economics and policy.

The winning team – consisting of Nicole Chavas, Nathen Holub, Laura Kimes, and April Mendez of Kellogg – proposed a fund that would lease brownfields from municipalities and subsequently plant the land with hybrid poplar tree farms. This land-use, the students explained, would have multiple benefits: The poplars would remove soil contamination (through a process known as phytoremediation), thereby restoring the land’s value and that of surrounding properties. In addition, the trees also could be harvested for commercial use in the pulp, paper, and biomass power industries.

According to the team, the fund’s returns would come from these harvesting operations. In addition, by remediating the brownfield, the process would remove a blight from the community, increasing the land value of the site itself as well as that of surrounding properties. Judges scrutinized diverse aspects of the proposal, from the fund’s cash flows in the early years of its anticipated 10-year life, to the ways in which social and environmental impact would be measured – along with a variety of logistical, regulatory and execution risks.

The second-place winners, Zach Knight and Chad Reed from the Haas School of Business, proposed a lending vehicle, called MyCatch, that would provide loans to small fishing cooperatives that practice sustainable fishing. The use of trawlers by large-scale fisheries, they explained, may cause overfishing and waste, degrading marine ecosystems and their ability to capture and absorb greenhouse gases. Under the MyCatch proposal, loan capital would be invested in catch shares – which entitle fishermen to a portion of a catch, and are meant to prevent overfishing – along with fishery improvement projects. Both uses of capital would support the cooperatives’ pricing power and ultimately become the source of returns for investors.

The 10 teams that presented at the Sustainable Investing Challenge finals took on sustainability issues across a range of industries including shipping, irrigation, sanitation, lighting, modular energy and agriculture. The proposals spanned asset classes, from futures contracts to microfinance funds; geographic regions, from the US and Costa Rica to India and Indonesia; and issue areas, from ecology to human development. Indeed, some proposals addressed fundamental challenges facing the world’s poor, from lack of access to toilets to complete reliance on off-grid, rudimentary energy sources like kerosene lamps.

The more than 200 students who entered the Challenge provided powerful reminders that finance and business can be agents of large-scale, transformative change. These passionate innovators strengthen our optimism that the world can meet the many sustainability challenges of the 21^st century.

To learn more about the Morgan Sustainable Investing Challenge, which will be held next year in London, visit www.sustainableinvestingchallenge.org.