Impact investing has boomed from only $25 billion in 2013 to more than $1.164 trillion in 2022, according to the Harvard Business Review and estimates from the Global Impact Investing Network (GIIN).
What is impact investing? The term refers to investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return, according to Amit Bouri, the CEO of GIIN. Impact investing is more than just “screening out” or avoiding certain categories that might be considered taboo, such as fossil fuels or weapons manufacturing, but instead proactively investing in business strategies that make the world a better place.
For example, consider the Eagle Venture Fund, the first-in-the-world for-profit venture capital fund that is fighting human trafficking. How is this possible? The fund invests in technology startups such as FRDM (pronounced “freedom”) that build AI-enabled supply-chain software that identifies vendors at high risk for human trafficking. Large companies such as Target or Boeing are happy to pay for such innovative software to help clean up their supply chains. Therefore, it is both for-profit and anti-human trafficking, generating solid venture capital returns. Wes Lyons, general partner of Eagle, credits the firm’s success largely to the purpose-fueled vigor of the ambitious entrepreneurs that the fund selects. This year, Eagle is opening a Singapore office as it expands into Asia Pacific investor circles.
The growth of impact investment
Is impact investing the same as environmental, social and governance (ESG) investing? While that term may be relatively well accepted in Europe or Asia Pacific, it is a lightning rod buzzword that has been highly politicized and quite controversial in the United States. However, Alan Murray, editor-in-chief of Fortune magazine, contends that even if corporations are avoiding the contentious ESG acronym, “the notion that large companies must pay more attention to the impact of their actions on people and planet has become embedded in the strategies of the best corporations, and is increasingly expected by employees, business partners, investors and a growing group of consumers.”
Even Charles Koch, chairman and CEO of Koch Industries and ranked by Bloomberg as the 20th richest person in the world — who has a reputation for disliking “ESG” left-wing terminology — still aligns with the underlying principles as exhibited in his 2015 book, Good Profits: “The only reason a business should exist (and the only way it can legitimately survive long term) is to create value in a responsible way. The best way to do that is to focus on creating value for others.”
In order to effectively implement an impactful strategy, key performance indicators (KPIs) and measurement are essential. Europe has taken the lead here, already publishing the European Sustainability Reporting Standards, which officially ingrains such measurements into legal and accounting reporting requirements for large corporations. Across the pond, Harvard is proposing a metric called the “impact multiple of money,” or IMM, perhaps comparable with the well-known IRR metric, but focused more on quantifying social impact. Such KPIs help portfolio managers evaluate deal flow and track success.
Why should we care about impact investing? Some may feel compelled by a deep sense of altruism, their personal religious beliefs, or a sense of stewardship of our planet. But pragmatically speaking, today’s employees demand purpose in their jobs. Not only are millennials desiring to work for companies that care, but Generation X and some older executives are looking to infuse meaning into their jobs during the final decades of their careers.
Ram Wheeler, the founder and CEO of Alpine Investors, set up his company as a “B Corp.” — an industry certification establishing that the company voluntarily emphasizes social and environmental concerns, not just profit. Why bother? Wheeler claims his fund is now the best place to work for America’s top business school graduates because they align with the mission. Furthermore, he has doubled his fund size to $4.5 billion because of strong performance and the B Corp. appeal. Corporate CEOs agree with Wheeler’s thought process: 77 percent of Fortune 500 CEOs say the number one reason they remain focused on climate issues is to better engage employees. Purpose fuels teamwork and thereby fuels success.
Impact investing in real estate
Cushman & Wakefield’s Matt Clifford, head of sustainability and ESG for Asia Pacific, lays out three broad categories of impact investing in real estate:
- Sustainable development: 38 percent of global greenhouse gas emissions come from the real estate sector. Huge opportunities exist for energy efficiency and utilizing renewable energy.
- Community revitalization: Certain communities and neighborhoods are underserved and get left behind in terms of real estate development. Legislative incentives, as well as proactive investments, can drive economic growth.
- Affordable housing: Providing high-quality affordable housing can address the most pressing issue for low-income families and generate positive returns for investment managers.
The following case studies dive into practical examples of how institutional investors are engaging in impactful strategies.
Case study: Resolute Renewable
A well-executed solar panel installation and renewable energy retrofit can deliver a boost to the net operating income (NOI) of a property through increased rents, utility savings and lower insurance premium costs, says Andy Strott, CEO of Resolute Renewable in Manhattan. This can then lead to other benefits such as tenants signing longer leases, increased property valuations and differentiated offerings in a very competitive marketplace.
CBRE points out only 5 percent of the market for solar installations has been developed in U.S. commercial properties, leaving a massive untapped market opportunity. Furthermore, U.S. government incentives recently enacted in 2022’s Inflation Reduction Act inject a potential $369 billion for climate change initiatives. This gives a tax credit of up to 30 percent or more for installing clean energy systems.
Strott’s strategy for a $100 million investment targets industrial properties of more than 100,000 square feet that could each generate 1 megawatt of rooftop solar energy installed across a portfolio of 20 to 25 properties. This would generate competitive market returns with very stable cash flows thanks to the best value in solar — the annuity of electric power sales agreements.
Investment managers can also partner with Resolute Renewable to implement this exact strategy on existing warehouse, multifamily and single-family rental portfolios. As a specific example, consider Sharp Development Co.’s industrial building in California, where the firm spent $1.96 million in 2017 on energy upgrades to achieve net-zero energy consumption. This reduced annual energy spend by $403,543, a healthy 20.6 percent return on cost. As such, the tenant is enjoying energy savings of $0.51 per square foot per month, effectively locking them in as a very sticky long-term occupant. Therefore, the cap rate at exit was compressed from 6.25 percent to 5.15 percent, yielding a massive profit realization at the time of sale. Sharp’s president asserts that, “if you’ve got a class A building, it’s going to become an A-minus or B-plus if it’s not carbon neutral.” Investment committees are becoming more environmentally conscious.
Strott insists such a strategy can potentially add significant value to the bottom line for not only industrial portfolios, but also garden-style multifamily, office, single-family residential, retail and other asset types. “Our environmental retrofit strategy can reap huge financial benefits, and it is becoming more imperative every day for portfolio managers to consider renewable strategies as part of their investment allocation,” says Strott.
Case study: Launch Capital Partners
U.S.-based asset manager Launch Capital Partners has identified a multifamily niche clientele that most investors overlook: international refugees. Because of conflict or disaster, 68 million people have fled their homes; in 2021 alone, 1.4 million people around the globe claimed refugee status, according to projections from the United Nations High Commissioner for Refugees.
Launch Capital has built a $100 million portfolio of grade C multifamily properties in the central United States and is now expanding into Texas’ growing economy. The results: the properties’ turnover rate is half of the industry standard, vacancies are half the industry standard and on-time payments are 99.78 percent. They typically generate first-year NOI growth of 35 percent over the previous ownership. Current yield and overall return are at or above market standards. How does Launch Capital do it? The firm works directly with government agencies to receive the new arrivals into the United States, and partners with local charities to help with each family’s transition, including schooling, employment, cell phones, furniture, English lessons and more. By building a strong sense of community and vibrant relationships in each apartment complex, Launch Capital’s immigrant tenants not only stay put, but bring their family and friends into the neighborhood as well, creating an upward spiral.
Core to the firm’s investment thesis is the discovery that refugees are actually excellent tenants. Refugees are typically well-educated, hard-working newcomers that are highly motivated to earn a living to provide a home for their family, so they have an inherently strong credit profile. Workforce housing is known to be particularly resilient even in a downturn.
In addition to the business case of generating strong profits and a unique niche market, Launch Capital enjoys seeing the positive impact it is having on its corner of the world. Co-founder Jimmy Wright expounds, “The icing on the cake is the vibrant sense of community that we see developed.” Employees are invigorated, and investors’ passions are aligned and engaged for years to come.
Case study: Freedom Place
Freedom Place is a project to build the first-in-the-world billion-dollar office building designed to fight human trafficking. The black-market business of human trafficking generates $150 billion of profit every year, yet only $350 million is donated annually to fight this massive predicament. As such, less than 0.1 percent of the victims receive assistance, according to Matt Friedman, who serves on the board of directors of Freedom Place and is a global expert on modern slavery and human trafficking. Such large sums may seem astronomical to some but are commonplace for institutional investors.
But far from ordinary is Freedom Place, where 100 percent of the developer’s profits on this grade A live/work/play office building will go toward fighting human trafficking (editor’s note: author Ben Briggs is spearheading this development). Of course, limited partners and other investors aim to receive market returns. Freedom Place’s prime location will make it an optimal home to Fortune 500 corporate headquarters and leading companies that require modern, flexible and open workspaces.
Corporate tenants and institutional investors backing the project will garner good PR for their leading role in the global fight against human trafficking and modern slavery. Their employees will be inspired and invigorated each day at work. Furthermore, the educational gallery on the ground floor, as well as a constant program of artistic exhibits and events, will raise awareness and build momentum in the gut-wrenching fight against human trafficking.
Director of design Michael Roark points out even the architectural elements will tie into the cause in an inspiring way, although details have yet to be released. “The project will have a heartfelt language that will speak to millions,” adds Roark.
Similar to how luxury brands such as Porsche, Armani and Bentley are adding value to today’s high-end luxury condos, Freedom Place is branding this office property with a social cause that infuses purpose and meaning into brick and mortar. Innovative real estate concepts can have massive impact even on the social ills of today’s world.
Implementing with excellence
Given all these practical examples of professional impact investing in real estate, how does today’s CIO truly do it right? Let’s examine the leadership and vision of Ed Bastian, CEO of Delta Air Lines, who is often in the media spotlight and sometimes accused of being too “woke” or too controversial. However, as the largest employer of Black Americans in the state of Georgia where Delta is based, Bastian wanted to stand by his employees in 2021 when he felt they were being unfairly targeted by proposed voter rules in the state widely viewed as an effort to depress Black voter turnout.
“Our goal is to keep ourselves out of the headlines. We don’t want to be seen as politicians. We want our customers to love us. ... But there are times where the values you stand for, particularly for your employees, matter. And you need to be their voice. ... And what I’ve learned is if you are always clear about who you are, and what your company stands for, when those times come, it’s appropriate to speak up in the right way.”
Like Bastian, today’s CIO needs to be levelheaded, steadfast in their convictions and take leadership in guiding the entire organization, millennials and all, toward an investment strategy fueled by purpose. Employee engagement soars, and consumers are captivated. The day is soon approaching when real estate investment committees will require net-zero climate targets and positive social impact for approval. So, today we must lead ahead with courage and dedication.
Ben Briggs is managing director of Briggs Capital Investments and lead author of the book Chinese Institutions’ Definitive Guide to USA Commercial Real Estate. He is based in Boerne, Texas.