Globes Panel – Impact Investment: Climate Change, Sustainable Development and Institutional Investors
The following article was published in Hebrew on December 14, 2016 at the Globes Newspaper after the YK Center & Milken Innovation panel at the Globes Israeli Business Conference, Dec 12, 2016.
Here is the English translation:
“The Treasure chests for Long Term Investments are Pension Funds. The Question is How to Channel Some of these 80 Trillion Dollars to Impact Investments.”
14.12.2016, by Ido Keinan
During the Israel Business Conference, the panel on impact investments which integrate social objectives (Impact Investment: Climate Change, Sustainable Development and Institutional Investors), sought to examine how to leverage global pension fund and insurance assets to meet sustainable development objectives and contend with climate change in a way that will finance and accelerate economic growth and rise above intergenerational challenges. How can environmental and sustainable development exist side by side with the need for financial security at retirement; and what is pushing the world towards the integration between investments and sustainability?
Pension is not only a young person’s problem and is not exclusive to Israel: the risks in global retirement plans stem from the increase in life expectancy, the unstable job market, income inequity, waves of immigration, rapid demographic changes, urbanization and low interest rates. Some pin their hopes on impact investments – financial investments that integrate potential profit with a significant social contribution.
The Panel on Impact Investment: Climate Change, Sustainable Development and Institutional Investors at the Israel Business Conference sought to examine how to leverage global pension fund and insurance assets to meet sustainable development objectives and contend with climate change, in a way that would finance and accelerate economic growth and rise above intergenerational challenges, and how environmental and sustainable development can exist side by side with the need for financial security at retirement.
What is pushing the world towards integrating investments and sustainability? The panel moderator, Prof. Glenn Yago, Senior Director at the Milken Innovation Center, Jerusalem Institute for Israel Studies, names a number of reasons: “the demography between key and developing economies, climate change, the idea of protecting the planet as expressed at the Paris Convention, and the question of how sustainable development is financed.”
“The short term is the problem”
“Since the 2008 crisis, those born in the eighties and the nineties do not save because of low interest rates. This constitutes a great threat to our security,” says Prof. Yehuda Kahane, Founder and Chairman of YK Center, which seeks to accelerate the transition to the New Economy. “The Historian Arnold Toynbee said: ‘great civilizations are not murdered. They commit suicide by not meeting their challenges.’ I hope that we are not committing suicide here. Recently, the UN estimated that, in order to bridge the gap, we need to invest 9% of global GDP over the next 15 years. This is an immense amount of money.
“The problem is that most leaders and many executives ignore these risks or are unaware of them, and focus on the short-term. The short term is the problem. We have to make a call to action, which will allow us to solve the problems we’re talking about. For trillions of dollars to be invested in preventing these risks, we must take drastic actions. People think in a scope of millions or billions, but the problem is in trillions – which is a thousand times more than a billion.
“Changing the paradigm calls for a change in the matrix. All the economists are talking about maximizing values; however, we are measuring past phenomena rather future ones. We should be talking instead about the need for a new, multi-dimensional control panel.
“Several years ago, the OCED announced their Well Being Index, and the UN set sustainable development as one of its goals; so the question is ‘where are the necessary funds going to come from?’ When I was a child, I was interested in adventure stories and finding pirate treasures and so on. Currently the only treasures available for long-term investments are pension funds. The pension and insurance industries deal with these risks and manage an $80 trillion portfolio for us. The next question is then ‘how do we channel part of the money towards impact investments?'”
According to Kahane, “there is a difference between the way the private and public sectors perceive of investments. Things like improving health and reducing pollution are important but do not capitalize and, from the private investors’ perspective, do not count. We need to find a way to count these effects, whether directly or indirectly, in order to change the investments. Some of the solutions are old, and have been used for various purposes, such as the Marshall Plan and other plans used during the first decades in Israel, or alternatively, we channeled pension funds into Israel’s development budget. By the way, the public itself is currently pushing in that direction, which is evident in people’s outcry of ‘we are pensioners or saving for pension—please invest in green investments and impact investments.’
“My call for action is to hit two birds with the same stone: solve the retirement problem to make sure people are saving and that they get a return on their investment; and, at the same time, find the trillions of dollars required for impact investments. The clergyman Ed Cole once said that ‘you don’t drown by falling in the water; you drown by staying there.’ Let’s not stay underwater for too long. That is where we are and it puts us in great peril.”
Old-fashioned institutions, divine technology
“The biggest problems humanity has are our paleolithic feelings, medieval institutions and divine technology,” said Aniket Shah, Director of the Financing Program for Sustainable Development Initiatives in New York and the UN’s Sustainable Solutions Development Network. “If a Martian landed here, he would see both the amazing technology humanity has and people living on wages of less than a dollar a day. We know how to help and how to finance, but cannot solve the problem.
“I worked on this in the private sector – where do we invest this money? The conclusion is that there is a huge amount of confusion, and that we need better mediators between savings and consumption, and that we need to rebuild those institutions, the entities that create a correspondence between capital and consumers, and then the reality we desire will be attainable.
“My five messages are:
- We need to think about the UN’s seventeen objectives, the SDG, as more than just something that can be marketed as long-term programs.
- We all know that there is no problem in finding global financing to realize those objectives. That does not pose a restriction. If anybody thinks that we do not have enough money, I would be happy to argue my point.
- We need investment institutions that work well. I am talking about financing institutions, of course, but that is also true to pension funds and insurance companies – the whole industry. We need to focus the activity of those institutions. If we do that, we could make very good progress.
- Investment banks have proven that they are capable of leveraging public capital in favor of these objectives. The scope of capital we need is not unreasonable, between 1-2 billion dollars. We need to budget each of these objectives, find out what the investment gap is and how to realize them.
- I really think that more focus needs to be put on the development and financing of national development institutions. This would really help us to advance the objectives, because the set objectives were approved by governments. A vast number of businesses also agreed to the objectives; however, they were not the ones to sign the convention. This is a government agenda that can only be executed in the private sector. We need an upgrade of the investment institutions and investment infrastructures, which will allow a flow of capital to balance the chances of creating the correct structure for the projects.”
Bridging the “Valley of Death”
Angela Homsi, Director at Generation Investment Management, an international venture capital fund and global expert in the field of impact investments, introduced herself as “an Israeli-Lebanese-Egyptian woman, which in itself is an interesting combination.” She said: “SDGs have been part of my life for the past decade. There was a real need to deal with critical issues around the world. People wanted to allocate part of their money, not just to charity, but rather to financing projects which would solve part of the problems and which would induce further capital to maintain the project in a sustainable manner. That was a wonderful first step, because it created a foundation and led to a deeper understanding of the challenges and the ways to solve them, which allowed the development of really bold ideas, because the financial matter was no longer an issue. The problem was that they did not yield financial returns in a sufficiently consistent manner and the social effect was mediocre, because there was no measurement and all the business people in the world could not cope with the problem by themselves. We know that the money has to be institutional and come from pension funds, the government, insurance parties and parties in industry that have to work together.
“This is why we have witnessed the development of a new investment industry which needs to add private capital to the field in the manner it copes with part of the challenges, with more professionalism in solving social issues, with investments in research and development.
“A uniform standard was established by the industry regarding ways to balance the risks, bring in private and public capital and incorporate this into a successful model. This increased the level of awareness regarding the way in which capital could finance the resolution of problems in a sustainable manner – environmental issues, education, infrastructure in developing countries and in developing economies This was a medium risk, which led to medium returns and did not attract the big investors – those with the big capital. We need a properly structured investment model, which provides an investment opportunity and risk-adjusted returns, along with something that actually solves a real problem in the world.”
Dr. Roger Stein, a senior lecturer in financing at MIT’s Laboratory of Financial Engineering, presents a model which turns the funding of cancer medicine research into an attractive investment. “The research takes many years to complete, and the investments look very bad. There are big investors and pharmaceutical companies interested in investing, but are not interested in taking on the risks of the research during its early stages when chances of success are 1:20. But if it does succeed, it will yield billions.
The gap between a company with early-stage research and the people with the money is called “The Valley of Death”. Our technique was mathematical modelling and creating a portfolio of a number of experimental medicines. You raise money, purchase an entire portfolio of medicines, and—while they are being developed—you sell the successful ones and raise more money. Ultimately, these are highly rated investments, and have the capacity to generate shares with very high rates of return, and I haven’t even mentioned that fact that while we’re at it, we’re also curing cancer.”
Ronald Borod, a senior consultant at DLA Piper asked, “how can we use bonds to generate the funding we need?” And answered, “my theory is that there is one key factor needed in order to obtain the required capital – a large part of these institutional investors will demand an investment grade rating. As a lawyer who puts together asset-backed bond transactions, the key question for evaluating capital is how we get past the gatekeepers – the credit rating companies.”
He discussed using this method in solar energy projects for homes and businesses and summarized as follows: “when you mix shares and bonds, there are numerous points of friction that need to be solved and these problems have not been resolved yet. This is the primary challenge facing anyone wanting to get into the graded investment market: a large scope is needed. Investments need to be combined so that they are of sufficient size so that the headache involved in getting into this field would be appropriate — and this is the most difficult challenge of all those facing us.”
The State’s representative, who closed the panel, did not come bearing good tidings. “The institutional investors manage 1,500 billion shekels; their main objective is to maximize returns while withstanding the various risks to allow people at retirement age to retire with enough money to live in dignity,” said Anat Fire from the Capital Market Division in the Ministry of Finance.
She said: “Of course, if it’s in keeping with realizing the objectives of social investments, we are all for it. However, we do not have a binding regulatory statement requiring these investments. We are favorably considering whether these bodies should be required to publish whether this kind of social, environmental investment is considered part of their policies or not.”
In regard to any government incentives for impact investments, she said: “It is also necessary for the government to be involved, being more involved with securities for this kind of investment that will serve as incentives”.
Impact Investment Panel
Panelists
- Butch Bacani, leader of the initiative to develop Principles for Sustainable Insurance for the UN’s Environmental Program (UNEP)
- Ronald Borod, Senior Consultant, DLA Piper
- Anat Fire, Director of Investment, Department in Capital Market Division, Ministry of Finance
- Angela Homsi, Director at Generation Investment Management, an international venture capital fund and global expert in the field of impact investments
- Prof. Yehuda Kahane, Founder and Chairman of the YK Center, a private charitable foundation accelerating the transition to the New Economy
- Aniket Shah, Director of the Financing Program for Sustainable Development Initiatives in New York, and the UN’s Sustainable Solutions Development Network.
- Dr. Roger Stein, a senior lecturer in financing at MIT’s Laboratory of Financial Engineering
Moderator
- Prof. Glenn Yago, Senior Director, Milken Innovation Center, Jerusalem Institute for Israel Studies
