What is impact investing?
Impact investing is an investing strategy that seeks to generate financial returns whilst also creating a positive outcome such as an environmental or social benefit. Just as venture capitalists were the response to the needs of tech entrepreneurs, impact investing is the response to the needs of climate entrepreneurs who want to save the planet.
The term “impact” as of yet is not standardized in the finance world. There are still no uniform standards for sustainable investing, which leads to greenwashing as companies decide on their own accord if they’re green. Not being transparent however can lead to repercussions, for example, the impact equity fund Dekabank was sued for not being transparent on what they mean by “impact”.
On the face of it, impact investing may seem subjective, the official definition by GIIN (Global Impact Investing Network) sees impact investing as “investments made into companies, organizations and funds with the intention to generate measurable social and environmental impact alongside a financial return.
Why should I become an impact investor?
At Weclimate we are interested in companies that tackle climate change. Over the past number of years, the world has woken up to the realities of climate change. Without urgent action, by 2100 the world will be warmer than at any other point in human history. Current trends would result in warming of between 3.4- 3.9 degrees Celsius by the end of the century.
With each passing summer getting hotter and drier, we face a worsening wildfire season that threatens to break the balance of our electricity and agriculture systems, particularly in regions such as Texas, California and New York. Our water systems are being put under increasing pressure, in regions such as California some farmers are already opting to sell water over crops for higher margins. This is sending a clear signal that we’re past the point of pure mitigation and innovation is needed that focuses on climate resilience and adaption.
The IPCC has set out the stark differences in outcomes for people in the event of a 2-degree change versus say a 1.5-degree change. As a young startup, we want to tackle the biggest problem, and without a doubt, that is our climate emergency.
In the investment world, we seek startups that can be profitable whilst tackling global warming. We want to help close the climate finance gap by developing products that allow individuals to channel their capital towards a carbon smart future.
Decarbonizing your portfolio won’t be enough and waiting for impact reporting to be perfected or emissions to taxed only prolongs the delay. Investors need to be able to act today and thats our role as an enabler. The climate solutions market is expected to be a $2 trillion market by 2025, this presents an incredible opportunity for impact and profit. The private sector will play a huge role in the development and deployment of climate technology.
Companies such as Tesla and Beyond Meat have emerged to showcase that disruptive startups have emerged that are both impactful and financially lucrative. We will see many more disruptive companies emerging over the coming years and at Weclimate we want you to be a part of this nascent sector.
Is it possible to have a climate impact whilst also making a profit?
Milton Friedman argued that the “social responsibility of a business was to increase its profits”. This has long been the traditional train of thought with investors of the opinion that you can’t ride two horses at the same time i.e make money and create impact. The idea that investing away from risk and return is suboptimal has no empirical basis. Harvard University has found that applying impact investing principles has no correlation with the risk-return ratio. Put simply, your impact investments, are very likely to stay future-proof for the simple reason that those companies are more likely to stay future-proof.
Impact entrepreneurs are already matching the success and ambition of tech entrepreneurs, but surpassing them in terms of impact. Elon Musk is a great example of this. To date Tesla has sold over 550k electric vehicles and saved over 4 million metric tons of carbon emissions versus combustible engines. Using the generally accepted cost to the environment of $300 per metric ton, this equates to $1.2 billion in avoided environmental damage. The first trillionaire will be a climate entrepreneur, of that we are convinced. Here’s hoping they come to Weclimate for funding!
What are retail investors?
Retail investors are individuals like you as opposed to institutional investors who run things like pension funds. Individuals such as retail investors are the fuel of capitalism. The reality is that the majority of retail investors have a limited choice of where their money goes, for most people their main investment is their pension. If you don’t say which fund you want to invest in you’re put into a default fund which most certainly won’t be a climate or ethical one. Over time retail investors that wish to invest directly into climate or impact funds will be able to do so via Weclimate.
How is impact investing different from ESG investing?
ESG screens investments for bad outcomes in order to exclude bad actors such as tobacco and coal companies. ESG investing unfortunately is a lot of lip service and we would advise retail investors to be careful of ESG investments if their main goal is outcome and impact creation. Impact Investors are concerned about impact washing and therefore you must measure the impact. It goes further than ESG investing in 2 ways. Firstly, it aims not to just avoid a negative impact but create a positive impact. Secondly, it insists on measuring the impact it creates.
What are the benefits of impact investing?
The main benefit is obviously the reduction in emissions. Embedding impact goes beyond the bottom line, it reduces the risk of new regulations and taxation penalising carbon emitting activities such as the use of plastics. It also leads to increased productivity, improved talent acquisition and cost savings from waste. 75% of employees are willing to take a pay cut for a responsible company.
Investments are being viewed through a climate lens and the question that is beginning to be asked is “how hot is your portfolio of investments?”. We want investors to target “cool” investments as we believe that 1.5 degree portfolios will outperform say 3 degree portfolios. Any investor who is not investing with climate change in mind could be exposing themselves to risk. Financial markets have not as of yet worked out how to price climate transition risk. The main reason for this is there is still not one agreed way to measure impact and climate risk. Governments and regulators are working on it but it’s a complex topic.
We expect policies to not just accelerate but it will be sudden and forceful as governments realise they should have acted sooner. What if governments ban internal combustion engines altogether or subsidies for oil and gas suddenly stop? We believe that we are very close to the dawn of “impact capitalism” as defined by Sir Ronald Cohen. Companies will be viewed according to the impacts and profits they generate. This double bottom line approach, whereby impact weighted accounts must be published alongside traditional GAAP accounts is within reach. This will create more equality and importantly threaten our environment less.
Investors can be more discriminating on companies that they want to invest in based on their impact. Impact companies in the future will attract the best talent, pay the least taxes and have the most loyal consumers. The Carbon Tracker Initiative is a useful framework; it introduced the concept of stranded assets. This train of thought encourages investors to think about the implications of not adjusting their investments to be in line with emissions trajectories to avert the impact of climate change. The idea of a stranded asset refers to investments that were once valuable but over time became worthless as their “value” became endangered through shifting government regulations, environmental factors or simply investor preferences.
Carbon Tracker Initiative introduced the concept of “stranded” assets to get people thinking about the implications of not adjusting their investments to be in line with the emissions trajectories required to limit global warming. The term refers to investments that used to be valuable before but became worthless over time because their “value” is threatened by changing legislative regulations, environmental factors, or investment preferences.
There are three types of stranding
- Economic stranding: due to a change in relative costs/prices.
- Physical stranding: due to distance/flood / drought.
- Regulatory stranding: due to a change in the policy of legislation.
The oil and gas industry is a great example here. In the three examples of stranding, economic, physical or regulatory the value of the asset is reduced significantly or wiped out completely. The likelihood in our opinion is that these assets will become worthless in the future. In 2021, it’s unlikely you have met someone who wants to invest in a fossil fuel company.
What is Weclimate’s impact process?
We use the Theory of Change framework to translate our intentions and to map out strategically the changes we want to see in the world: money and business as forces for good. This framework has 3 main building blocks:
(1) Inputs (2) Outputs (3) Outcomes
Put simply, we map the inputs of companies fundraising on the platform such as products and services and then look at what outputs they wish to deliver and what kind of additionality or changes these outputs will generate (outcomes).
Companies that we assess to be outcome focused are the most “impactful” and our assessment matrix reflects this.
For those looking to understanding our theory of change, the challenge we are addressing is : climate change will require massive flows of capital towards sustainable and impactful investments. There is no exact consensus on the amount required, however, it is safe to say that several trillion dollars a year are required to prevent us from exceeding the 2 degree Celsius temperature laid out in the Paris Agreement.
With 1/3 of the world’s supply of capital belonging to individuals, Weclimate aims to mobilise this capital for a common goal: Climate change. Impact investing considers the amount of a good a company does or could potentially do, alongside the companies profits.
The entrepreneurs and their teams are creating the impact. They are actively building technologies to lessen the impact of climate change. We are facilitating and enabling impact creation.
Sustainable Development Goals (SDG’s)
The companies you will see raising capital on Weclimate are actively seeking to remove or reduce CO2 emissions from the atmosphere. Like many other impact investors, we benchmark companies that are actively raising against the Sustainable Development Goals (SDGs)such as the ones below.