Impact investing 2.0: revenue sharing with charities to directly improve the environment
TT International issues a rallying cry to the wider industry calling for Impact Investing 2.0, where sustainable funds give one-third of their management fees to carefully selected environmental charities, as the TT Environmental Solutions strategy does.
"Do you know that feeling of enchantment on seeing a rare bird or on having a close encounter with an animal, seeing an eagle over the water, a whale spouting in the sea? Can you quantify how much poorer you would be without those beings? Come on, give me a number. Then we will know whether these are worth protecting.”
Climate: A New Story
As the existential threats of climate change and ecosystem destruction continue to capture the global zeitgeist, clients increasingly expect their investments to make an effective and measurable impact on the environment. While many impact investment strategies channel capital towards companies that are enabling the green transition, few go a step further and share their revenues with charities that make a direct impact on the environment. The TT Environmental Solutions strategy aims to take the lead in this regard as one-third of all its management fees are given to carefully selected environmental charities that help to tackle the twin problems of climate change and biodiversity loss. It is our hope that other investment managers will follow suit, with this ultimately becoming the standard approach for environmental funds and impact investment more broadly.
While primary market investors, who have either given a company equity or lent it money, can clearly point to how those funds have been used to improve the environment, ‘impact’ is a harder concept to define and quantify for a secondary market investor that is simply buying shares from someone else. It is certainly true to say that by driving capital towards those companies helping to solve environmental problems and away from companies that are complicit in them, secondary market investors can help to lower the cost of capital for certain companies and increase it for others. It is also true to say that these investors can help to persuade companies to mitigate the problems of climate change and biodiversity loss through regular engagement with management teams.
However, both of these forms of impact are difficult to accurately quantify. Revenue sharing with environmental charities helps to solve the issue of how to effectively and measurably create impact when investing in secondary markets. It provides a clear and tangible dollar contribution to charities that clients can ultimately report back to their stakeholders.
If this idea was adopted by the wider industry, it would result in tens of millions of dollars flowing to environmental charities to help fund projects that otherwise may simply not have happened. At the very least these projects would be accelerated, which is perhaps equally as important, given that we are racing against the clock with regard to the environment. Of course, charitable giving itself is difficult to argue against, but why do we believe that this concept is superior to simply lowering fees in the investment management industry in order to allow clients to donate the money saved to charitable causes of their choosing?
Firstly, we believe that relationships between investment managers and environmental charities should go beyond simple donations. We look to form holistic and meaningful partnerships with our chosen charities, sharing expertise wherever possible. For example, one of the Analysts on the Environmental Solutions strategy, Ross Sterling, sits on a committee created by ‘rewilding’ charity Heal to advise them on their capital structure. Meanwhile, Co-Portfolio Manager Harry Thomas is in regular dialogue with various representatives of our chosen charities to exchange advice and connect them to influential people that may help their cause. We are happy to give time as well as money, leveraging our expertise and connections to foster more valuable relationships with these charities than donations alone ever could.
Secondly, by acting as a focal point for a large and disparate group of clients, we hope to work with our charities for a far longer period of time than any single client might. For example, if a client decided to redeem and rotate to another asset class, their relationship with a charity may end and their donations would cease. We believe that the longevity and relative visibility of future donations offered by such a partnership are vitally important to charities, particularly smaller ones that are making decisions about whether to go ahead with long-term projects.
Thirdly, as much as we’d hope that all clients who invested in a discounted product would give all the savings to charity, it may not always be the case. This arrangement prevents any such leakage, ensuring that a set proportion of management fees is always donated to relevant charitable causes.
Finally, this model would not prevent clients from having an influence over which causes are supported. We are certainly open to working with charities proposed by our clients, so long as they are aligned with our goals of tackling climate change and biodiversity loss, and that they pass our due diligence process.
It is important to say at this point that we recognise what a significant commitment this new approach would represent for the industry. Unlike many sustainable investment products, our Environmental Solutions strategy is not priced at a premium; its management fees are broadly line with TT’s other long-only products. Because of large fixed costs, the investment management industry is highly operationally leveraged, meaning that a reduction in fees has a disproportionate effect on profitability. While other managers may be reluctant to adopt the model for this reason, we would hope that those who take the lead on this would be seen as innovators and therefore benefit from first-mover advantage, recuperating some of the lost fee income by capturing a larger market share. If this model is ultimately adopted by the wider industry, game theory would suggest that the worst strategy for a manager would be to delay adoption, potentially be seen as a laggard and lose out on asset inflows, then be forced to implement the model at some point in the future and accept lower fee income on a smaller asset base.
So which charities have we chosen to support and why?
Clearly the choice of charities to support is up to other investment managers and potentially their clients, but we have decided to partner with a leading forestry charity and Heal Rewilding as research suggests that planting trees and ‘rewilding’ habitats are the most effective ways to tackle climate change and biodiversity loss. Sadly, earth has half as many trees as at the start of human civilisation, while ecosystems across the globe are being destroyed, wiping out plant and animal species. This is an unmitigated disaster for many reasons, not least the fact that trees sequester and lock up carbon. Despite deforestation on an almost unimaginable scale, trees still absorb around 40% of global anthropogenic emissions. They also support ecosystem diversity, absorb pollution, prevent floods, and aid the formation of carbon-rich soil, which is an important and often underappreciated point; there is more carbon locked up in soil than there is in all living plants and the atmosphere combined.
Our chosen forestry charity is a major planter of trees and a protector of woodlands, not only for the purpose of capturing carbon, but also to promote the plethora of other benefits that trees provide, including recreation. Heal is looking to establish 500-acre sites in the English lowlands, which will be ‘rewilded’ with the help of indigenous grazers such as ponies and boars. This will create a myriad of ecosystems within the sites, including woodlands, meadows and floodplains, ultimately promoting biodiversity and sequestering carbon as these ecosystems will be far more carbon-rich than farms or managed lands. Broadly speaking, the forestry charity is more closely aligned with our aim of reducing carbon emissions, while Heal is more focused on promoting biodiversity, but both charities address each goal as they tend to go hand-in-hand.
When selecting these charities, we were looking to identify organisations that are aligned with our sustainability goals, that we can develop long-lasting, symbiotic relationships with, and that can scale up as we do, being able to find uses for the proceeds as our support increases over time. That both are UK-based charities reflects the fact that our initial client base for the Environmental Solutions strategy is largely in the UK, although the location of the charities is arguably less meaningful than for many other causes as environmental problems are globalised. If you’re tackling climate change in the UK, by extension you’re tackling it everywhere. That said, as the strategy and its client base grow, our goal is to give to a greater number of charities, and potentially to those with a more global presence. In order to review our existing charities and consider new ones, we have established a Charity Committee consisting of Co-Portfolio Manager Harry Thomas, CFO Luke Poulter, Head of ESG Basak Yeltekin, and a senior member of the Client Relationship Management team, David Woolfenden.
Although we are extremely proud to be in the vanguard of what could be called Impact Investing 2.0, we sincerely hope that others will soon follow and that this eventually becomes a new paradigm within the investment management industry, enabling a wide range of environmental charities – and by extension wider society – to benefit greatly.
TT International will be speaking at the Sustainable Investment Forum Europe in April, bringing together asset owners and managers, ratings agencies, banks, UN and Government policymakers, investors, development banks, think tanks, and NGOs committed to driving forward the sustainable finance agenda. Register your place for free here.