How to Ensure Climate Impact Investing Actually Has an Impact with Amit Bouri

TRANSCRIPT:

TRANSCRIPT:

Katherine Gorman: You are listening to Climate Now. I’m Katherine Gorman.

James Lawler: And I’m James Lawler.

KG: And on today’s episode, we are looking into climate investments. Impact investing has been a rapidly growing field in the last several years. According to the American financial services firm Morningstar, Environmental Social Governance investing – or ESG investing – in 2020 was more than double 2019 ESG investments.

JL: So that begs the question – what are these impact investments, and what kind of impact are they having? How can investors ensure their money is making a positive impact – especially in mitigating or adapting to climate change.

KG: In order to understand this world better, we spoke with Amit Bouri, the CEO and co-founder of the Global Impact Investing Network, an organization that connects impact investors to resources and networks to scale effective impact investments. Amit, thank you so much for joining us.

Amit Bouri: Well, thank you so much for having me. I’m really honored to be here.

KG: I’d like to start with the same question we start with for all our guests, how’d you get where you are today?

AB: What really got me here today from a professional standpoint was an interest in figuring out how to merge my interests in the private sector and the role of business and investment with a strong sense of social environmental purpose. And ultimately I landed a great place as a strategy consultant. And my client was the Rockefeller foundation, this is back in 2008, and they were looking at how to move more capital to social environmental. That was what led us to the term of impact investing and let us to really start the Global Impact Investing Network (GIIN), my organization, to really take this idea of investing for positive impact, to global. I would also add, from a personal standpoint, why this work is so meaningful for me, is that I grew up in a low-income home. I spent a good portion of my early childhood on welfare raised by a single mom and I’ve had a tremendous number of opportunities. But, I know that those opportunities are not available to most people who start in a similar circumstance. So I see my work as very much, you know, trying to create more opportunity for folks, but also trying to do so in a way that is sustainable, for nature and for the planet more broadly.

JL: Amazing. So, you are the co-founder and CEO of the Global Impact Investing Network, as you mentioned, or GIIN for short. And I wonder if you could describe GIIN a little bit more, what exactly is GIIN? How big is it and what does it do exactly?

AB: So we are an organization that is relatively modest in size, but our ambitions are huge. We are trying to change the way that the world invests, and fundamentally trying to change this idea of the purpose of money being just for the sake of making more money, and rather thinking about the role that money and capital can play in helping to advance planetary health, to improve society and to create more opportunity for all people.

And so the work that we do, we’re a nonprofit organization. We support a global network that includes over 40,000 people around the world. We have just under 400 formal membership organizations. They’re primarily investors, huge global institutions, philanthropic foundations, small boutique firms, spread over 50 countries. But they all share in common an interest in using their money to invest in a better world. And specifically to make impact investments, which we define as investments that are made to generate a positive social and environmental impact alongside a financial return. And we see a lot of interest in investing for climate impact and also in a lot of interest in the intersections with climate and issues around equity and inclusion, which I think is incredibly important for, you know, as we think about how to get the world on a path towards climate sustainability.

JL: And what are the kinds of investors that comprise that 400 entity membership that you just described?

AB: Great question because it is quite a diverse mix that we have, by design. We have, you know, huge global financial institutions, so pension funds, insurance companies, big banks, asset managers. We also have development finance institutions. Government-backed entities investing in emerging markets. We have philanthropic foundations that are thinking about their investment side of the house and how to invest their capital to compliment their missions and also family offices and small boutique firms, venture capital funds, debt funds, and others that may be very small in the grand scheme of things, but are often a hundred percent focused on impact. So it’s a very diverse set of institutions, but what I love about that, is that if we’re trying to think about how to address an issue as systemic as climate change, we have to be mobilizing all kinds of investors. It’s not just the work of big banks or philanthropic foundations or individuals, but it’s rather, like, how do we actually drive a systemic response to address a systemic crisis?

KG: And along those lines, what is the current climate of climate investments? Where are these investments being made today?

(05:12) AB: Well, one of the exciting studies we have underway now is what we’re calling an impact performance study, focused on climate change mitigation. Now that’s a mouthful, but effectively, what we’re doing is looking at the portfolios of 33 investors who all shared the results on 56 investment funds, including 386 deals. Together, it represents about $20.7 billion in impact investments. And on average, each investor’s managing $750 million. So it’s a decent size to take a look at. Some of the things I think are so exciting, is that we do see that these portfolios span the globe with 20% of investments made made in Sub-Saharan Africa, followed by just under a quarter in the US and Canada, and 15% in South Asia. We also see investments are ranging from large scale solar and wind energy projects all the way down to regenerative agricultural practices on community farms. Food and ag represents 35% of the sample, energy 21%, and those are the two biggest sectors.

JL: And out of curiosity, how does that conversation typically begin with a new member or prospective member?

AB: Well, usually it’s a mix. We have kind of two kinds of conversation. There are those organizations that are already kind of committed and interested in impact investing. And that usually, is pretty straight forward because the value of being part of the network is being part of a global community. People who are all trying to change the way that the world invests, but also trying to build their own portfolios and get smarter about how they can maximize the impact of their investments. This is a relatively new field in the grand scheme of things. Now it’s taught in business schools and other areas, but for most finance professionals, they’re usually part of a small team in a huge institution. And so it’s very powerful to be part of a community of practice to share ideas, experiences, opportunities, and to collaborate. The other conversation that we have, that’s increasingly common though, is investors who are saying, we’ve been thinking about how to, you know manage our climate risk but we’re also curious about how we can compliment that work and have a positive impact. You know, how do we not just reduce the risk that climate change poses to our portfolios, but how do we actively play a role in helping to address the climate crisis, and invest in climate solutions and another areas that help us move the needle, as opposed to just navigate this changing landscape.

KG: And how have you seen that interest change over the years?

(7:47) AB:  I think that in our early days, you know, we had a very dedicated small group of investors, and so we had just over 20 members, it was an incredibly, that felt like a very successful launch. We were thrilled to have 20 members. And what we saw is that they were largely, kind of the outlier in their. respective space. We had an insurance company, we had a pension fund, we had a couple of different types of asset managers, but none of them were part of, you know, they were more the exception than the rule. What we now have is a growing set of recognition globally, you know, active on six continents, that we need to change the way that we invest.

Not everyone is convinced, not everyone’s there yet, but it’s actually quite common if you’re talking to a major global institution for them to be thinking about impact investing, if they haven’t already made some type of a commitment. So we now have shifted our focus from catering to that original kind of flock of impact investors to actually thinking about how do we change the way all investors think about impact.

And with that, we have a very strong focus on scale with integrity. We need to move capital at a scale to rise to the occasion of crises like the climate crisis. We need to invest in equality at a global scale, but we also need to make sure people are investing with great integrity.

You know, we don’t need capital at scale. We need impact at scale. And I think that has been a big part of our focus on how do we mainstream impact investing. And on what terms are we engaging in a much broader set of investors and how to make impact through their investments that really moves the needle on these global issues.

(9:30) JL: In your impact report from 2019, it was listed that there were $404 billion in impact investment assets under management by GIIN members, if I understood that correctly. And I’m wondering, what exactly is an impact investment asset?

AB: So we count impact investments across different asset classes. So it can be anything from how you deposit your cash and what type of institution you bank with, all the way through to private equity and venture capital. So it’s a whole mix of different types of assets including things like debt, real assets, so sustainable agriculture, clean energy assets and beyond. But what is common is the way that those investments are made. We define impact investments as investments made with the intention of achieving a positive, measurable, social or environmental impact alongside a financial return. And that can be done across asset classes. And increasingly what we’d like to see, and what we are seeing, is investors activating their entire portfolios for impact. And they often start with one specific strategy, but then it kind of begs the question of how else can we make impact investments. And that’s part of the power of being a network is that we help accelerate that journey. So people learn from one another and learn about new opportunities much faster than if they were just tending to their own portfolios.

(10:50) JL: And so within that definition, you know, an “investment made with the intention of achieving measurable impact alongside financial return”, are there sort of the measurement piece is the challenge, right?

AB: Yeah, from our outset, we knew that if we were going to build an industry that would be on a global scale, that it was going to be critical for us to have the tools and sophistication around how we understand the impact, because you know, stories and anecdotes alone are not going to be sufficient for moving capital at the scale that would need to address the climate crisis.

And so we actually embarked on setting up a system for impact measurement, it’s called IRIS+, the latest incarnation was launched just over two years ago and it is a system for measuring, managing and optimizing impact. So you can start with a sustainable development goal or a specific theme, so let’s say let’s take clean energy access as an example. And so this refers to investments in companies that are doing things like providing households solar, off-grid energy that’s renewably developed. And as a way of helping to, you know, ensure that the billion people who are not formally tapped into the energy system are using renewable sources as opposed to those that are heavily polluting. Now this has tremendous potential for impact, from an environmental and climate standpoint, in terms of greenhouse gas emissions, but also from a social standpoint, because access to energy can help with things like education, with ability to work, and a whole host of other issues.

And so in IRIS+, you can identify the specific strategies that an investor can use in clean energy access all the way through to the tangible metrics that are standardized so you can track your performance. Now this is incredibly useful because without it, investors are just trying to figure out their own metrics, which may end up well, but may not. But even if it does end up well, it then leads to fragmentation. Because a bunch of investors investing in the same type of a company may all have different ways of defining the same thing, and it’s a lot of friction in the system where we don’t want people focused on how to define the metric. We want investors and companies to focus on how to perform on the metric. And that’s where a system like IRIS+ is so valuable.

JL: So I wonder, is there an example of an impact measurement that you’d be comfortable talking us through in any particular fields?

(13:22) AB: Well, I’ll build on that example of clean energy access. I think it’s incredibly important one because it does get to the intersection of a lot of different issues. You know, it’s important for climate change mitigation. It’s also important for inclusion and helping to address some of these issues around climate equity and climate justice, because it is, you know, ultimately, focused on helping to invest in products and services that improve livelihoods for lower income populations that often tend to be very rural and kind of unplugged if you will, from the energy system. What an investor in, let’s say a household solar company would be looking at is an array of metrics that touches upon those different dimensions. So for example, greenhouse gas emissions, one that is often discussed on this podcast, would of course be one of the things that’s measured. But also including dimensions of like, are we diverting people from using fossil fuels. So were they burning things in their home for energy and heat and lighting, and now they’re using solar energy and a renewable source to displace those emissions? And then that also has great impact in terms of the personal health and pollution, just in the household, health for kids health, but then there’s also opportunities to create jobs and improve livelihoods and potentially other types of impacts around health and education. And so there’s metrics around each of those areas that investors can track. And what I think that unlocks is a data-driven way to understand the impact that you’re having as an investor or as the leader of that company.

Now when we zoom out and think about the broader market, one of the things that we’re working on right now is how do we actually build impact performance benchmarks? So for example, how do we actually develop finance? We have financial benchmarks, which are very well known to all, and investors use those to help drive greater performance on a relative basis. We’re actually working on developing impact performance benchmarks. So can we look at the space, like clean energy access, gather data from investors and then help play back to them what performance ratios and averages look like so they can start to understand their performance in context of the market. I think that’s really exciting. It’s very wonky. It’s very technical, but why it’s exciting is that it has the potential of driving a race to the top because we want investors focused on trying to deliver the greatest outcomes for communities and for climate change mitigation when they’re investing in clean energy access, and this type of analytic tool can help drive that just the same way we see it happening around financial performance.

KG: So historically, it seems the term double bottom line, or impact investing, has been seen as more of a marketing strategy, or something that you do with a small percent of your assets. What do you think the future looks like for these types of investments?

AB: Well, I think it’s important for us to integrate impact into the way the world invests, because you know, what we can see right now is that the system we have in place now is not working for people. It’s not working for the planet and it’s actually not working for most investors. Particularly if you think about investors who want to perform over the long run, and so most individuals who are saving for their retirement or for their future generations, pension funds that are looking at 30, 40, 50 year time horizons.

So people who are in the long, like meeting long-term returns are now recognizing that, you know, they cannot afford to not think about social and environmental impact. That said there are many people who are not thinking about it yet, you know, and haven’t come to that conclusion. And then some of them are motivated from a lens of risk. So they’re actually seeing wildfires, flooding. They’re seeing kind of disrupted supply chains and others are starting to say like, actually, I need to start addressing these issues right away otherwise I’m losing money and losing value. Others are motivated by kind of a sense of purpose and saying that, you know, we are a pension fund that is committed to the workers of this country, whatever country that may be, and it’s part of our obligation to invest in the sustainability of the country. And so thinking about like how to provide great health care, how to think about climate sustainability, how do think about biodiversity and nature and trying to avoid ecological loss. And so there’s a lot of different ways that serious mainstream investors are coming to think about impact. But one thing I think is important is around this point of you know, around returns and what expectations are. We’ve, from our research, we see that the vast majority of investors are seeking kind of market rates of return when they think about impact investing. And it’s important to note that there are a lot of opportunities around the world that will generate those types of returns in impact investing. And so there’s a lot of opportunity for that space to grow.  And we increasingly see as the markets and the businesses evolve, there’s more and more opportunities for investments where investors can really focus on, you know, dual objective of impact performance and financial performance.

One other thing though that I don’t want to lose is that, not all impact investments are generating market rates of return. And there are great opportunities that may get kind of overlooked by the mainstream markets that actually can have a tremendous impact and may actually be financially sustainable, but not as lucrative. And we do see a subset of investors focused on those investments. For example, they could include new models. So there’s a lot of interesting nature based models and regenerative kind of farming techniques and others that are not yet ready for kind of the mainstream, but have tremendous potential for impact and may actually be new innovations that eventually are commercially viable at a much larger scale. And it’s important that, you know, we don’t overlook those investments with a short-term view, and we do have a number of members in our network who actively seek out those investments. And it’s a huge issue around climate, because there’s a lot of climate solutions we need that are still at a very nascent stage.

KG: It feels like in the past if you focused on impact investing it was pretty niche, and you were kind of considered a do-gooder. But today it feels like everyone is focused on ESG, and if you’re not, you’re kind of behind.

(19:40) AB:  I think for, you know, investors that have a public profile, there’s just generally an expectation that you need to be doing something on impact investing and you need to have some strategy on climate. And I think that that is, for some FOMO or fear of missing out is a powerful driver.

You know, you’re now more likely to be the exception if you don’t have some type of approach to talking about sustainability and impact, but I also think it’s paired with a moment that we’re in that I don’t think will go away anytime soon, of great distrust. People distrust institutions, they distrust the private sector and people are not confident that they’ll do the right thing. And you see this from activist pressure on companies. You see this from employee pressure. There’s investor pressure. And so I think what that really underscores for me is that, you know, promises and platitudes and pledges are not going to work anymore. What people are seeking is real performance. Actual results. And in a data-driven way. If you don’t have a tangible, measurable way of talking about your impact investments, people aren’t going to buy it. They urgency is high and so is the skepticism.

JL: So how many investors, according to your survey data, are targeting the sustainable development goals (SDG) related to climate action and clean energy?

(21:05) AB: Yeah, we see the vast majority of investors are focused on the sustainable development goals. And we see about 54%, from our latest annual survey, focused on targeting SDG 13 on climate action, and 57% are focused on clean and affordable energy, which is SDG 7. So it’s actually a pretty significant number that see themselves focused on this.

And I think one of the powerful things that’s happening now is that in our early days, there was very much an environmental crowd and there was very much a social crowd. And that was true on a global basis with some exceptions. We now see a lot of recognition of the relationship between the two. That, if we don’t address like human need and inequality, we can’t actually address the climate crisis and vice versa. You know, the impacts of climate will disproportionately affect the poor. And so we’re now actually seeing a lot of like cross-pollination.

JL: And those respondents to that survey, are those just GIIN members or is that a more extensive survey?

AB: So our global survey, we make it open to as many impact investors as we can find. And so we send it out, we have a pretty good yield. But the most recent version of it had respondents to the tune of 294 investment orders.

JL: Okay. Interesting. So according to an IEA Net Zero by 2050 report. To reach net zero emissions by 2050 annual clean energy investment worldwide we’ll need to more than triple by 2030 to around $4 trillion a year. I’m curious, you know, from your perspective, what needs to happen to reach that level of investment in clean energy technology?

(22:50) AB: Yeah, I think that it’s important for investors who are focused on climate to recognize that they not only need to reduce the footprints of the companies that they are already invested in, which is important, it’s critical, but they also need to pair that with investment in climate solutions. You can’t just say like, you know, kind of, for big companies that you own shares in you can’t just say we’re going to have a more fuel efficient fleet and cut down on packaging, and take other measures which help reduce the greenhouse gas emissions. But you also have to invest in the new technologies and solutions that will be part of our new economy. And I think clean energy is a huge category, and one that is often, you know, investors think of first when they think of climate solutions. But I also want to underscore there are a couple of other areas that are really critical. Another is technology-based solutions. So the technologies that will actually help build the industries and materials that are carbon neutral or even carbon negative in some cases, that will actually help us draw down the the carbon in the atmosphere, and help us actually move the needle on climate change.

And so that is another category. And then the third are nature-based solutions, and so this includes things like regenerative agriculture, sustainable forestry, and other approaches that actually help to invest in the health of nature, you know, of trees, of land, of plants and beyond, that effectively store carbon. And that is an absolutely critical area. And the reason I want to highlight all three: clean energy, tech-based solutions, and nature-based solutions is that investors need to be diversifying across all of these because they all need capital at scale because ultimately our new economy, if we are to achieve the Paris climate targets, will need to be defined by these technologies going mainstream.

JL: And I think there, you know, we’ve, at Climate Now we’ve done a lot of exploration of sort of the emissions benefits or negative emissions benefits of these different areas. And, you know, in particular the nature-based solutions and what actually that means and what kind of good you can derive from those solutions. And it’s important for, you know, investors to educate themselves on those topics so that you know what you’re paying for, because it’s not, not all of those things are created equal in terms of, you know, emissions benefit for one. Right?

AB: Absolutely. And that’s one of the reasons why we focus so much on impact measurement and management, is that it’s, you know, good intentions alone aren’t enough, we have to be quite rigorous. And we also think it’s important to connect, you know, these, strategies to science, right, and to really understand what are the different strategies and how do they actually interact with the broader global targets? We do know though that there are certain areas that are hot, right?

Like electric mobility. You know, that everyone, Tesla is, you know, is obviously attracting a ton of attention and a ton of followers, including followers of other companies. Rivian just went public. And there’s a whole host of other auto manufacturers. But that’s just one category. In many emerging markets, you know, electric scooters and other types of strategies for mobility will be quite different. Busing technologies and others in public transport are really critical, but so are things like concrete, steel, you know, building materials, stuff that’s less glamorous than a really cool high-tech car, but really are drivers of industrial emissions that we need to completely transform.

JL: Yeah. What makes for a good impact investment in the US versus, you know, in China or in India or Russia or other countries? Just, I wonder if you’d have any perspectives on how to think about the investment landscape internationally.

(26:44) AB: Well we have investors that are active across six continents, and one thing that’s important is that, you know, portfolios tend to be diversified globally. And so we want investors to be thinking about impact globally, but context really matters, and in different markets, you know, the needs and dynamics are quite different. One basic big difference is what’s provided by the government.

So what’s, you know, the United States provides a certain level of services and social safety net and activities from the US government. It’s very different from the government of Sweden and very different from the government Brazil. And so I think what’s absolutely critical is to recognize that what are the needs of the market that you’re investing in, whether it’s from a climate perspective or from a social perspective, and how do you incorporate those needs into shaping your strategy.

So to take some concrete examples, you mentioned India and China. In many of those countries that are developing, even ones that have accumulated a fair bit of wealth in certain pockets like China and India have, there’s a huge portion of the population that lacks access to basic services, things like housing, health, education, financial services and energy. And so the way in which, as those societies have, as people are moving into the middle class, the way in which they move into the middle class and the way they tap into those services and the environmental footprint and the carbon footprint of those services will have profound impacts on our trajectory. And so that’s a very different type of focus than what you’ll see in the US which is much more about conversion of existing infrastructure and existing products and services. I don’t mean to paint too much of a caricature about the two, but that, those are some of the ways in which, you know, you actually need to think about the local context and it drives a lot of issues around access to basic services with a very heavy climate overlay, will be really critical in emerging markets. And you actually see that playing out in global negotiations at COP around countries that are still developing, and feel a right to develop, to have the type of socioeconomic equity that they see in wealthier countries. But you know, wrestling with what is the emissions potential of that and how can they be held to a different standard than when the US and Europe developed years before. That context plays out for investors as well.

JL: Let’s say that I’m a more traditional, you know, asset manager. Maybe I operate across a range of businesses and I’m just starting to think about climate and impact because everyone else is thinking about it. It hasn’t been top of mind for me. What is my first step?

AB: Well, in an ideal world, what would be set is an intentional decision at a strategy level to focus on impact, you know, kind of at the highest level of investment strategy, because then you develop a strategy that kind of cascades into all the investment decisions you make around which investments you select, how you manage them, how you think about their performance. And so that is something that, we would like to kind of start at the top and then be built into the entire operations of the investor’s portfolio. But a much more tactical way to start this, to start getting smart about things. And we have a knowledge center on our website, which is thegin.org, that has lots of research, it’s all freely available. How do you actually assess things in your investment committee when you’re looking at a live example? Not just a conceptual approach. How do you think about the actual reporting and how do you use data once you start getting the data, not just in an upfront kind of a approach to thinking about it. But I think ultimately what’s important to recognize is that investment capital has a very powerful role to play, you know, in the world’s progress on addressing the climate crisis. And so it’s important to recognize that your portfolio, if you’re not doing anything, it’s probably working against progress, not necessarily intentionally, but by default because it’s investing in the entrenched system and the entrenched energy infrastructure.

And so to actually be part of the solution, it does take a very intentional focus on how do you see your role in helping to invest in a way that helps to address the climate crisis. In regards to what you’re focused on, there’s opportunities. You can be a real estate investor. You can be a venture capitalist. You can be kind of a fairly conservative, slow and steady type investor that’s looking for more developed opportunities, but everybody has a role to play.

KG NEW: That was Amit Bouri, co-founder and CEO of the Global Impact Investing Network, GIIN. That is it for this episode of the podcast. If you’d like to listen to our other podcasts, check out our events, watch videos, or sign up for the newsletter, visit climatenow.com. If you want to get in touch, email us contact@climatenow.com or tweet us @weareclimatenow. We hope you can join us for our next conversation!