As momentum builds around the movement to divest from fossil fuels, it is likely investors will soon to be talking about carbon bubbles and investment strategies to come out on the right side of climate change, especially in new growth markets. Whether these investors are a foundation, a newly-minted billionaire, or a major financial institution, no one is too big to fail at investing to address climate change. In fact, most will fail — several times before they get their models right and find consistent successes abroad.
As the Executive Director of Accelerating Market-Driven Partnership (AMP), an international impact investing initiative launched by the United States State Department and the Rockefeller Foundation, I receive lots of questions about investing with impact. In the hopes of minimizing failures and maximizing successes, below are five answers to some of the most common questions we see about investing in climate adaptation and low-carbon initiatives internationally.
1.If an investment involves agriculture, venture capital returns are probably a fantasy: Simply put, when a product grows out of the earth, the barriers to entry are rarely significant. If returns of 12 to 15 times do seem realistic, odds are that the local community will not receive a fair shake. That said, impact lending — while not nearly as glamorous as venture capital — can be very effective. Witness Root Capital’s successes lending to established cooperatives. And, if an impact loan to support a carbon-conscious agricultural initiative is being evaluated, it is worth studying climate models before cutting a check. Today’s organic, fair-trade, shade grown cacao forest may be tomorrow’s savannah.
2.Cash is still king, but the queen – cultural awareness – runs the show: This does not mean buying a copy of Kiss, Bow or Shake Hands, a Lonely Planet phrase book, and calling it a day. A climate-minded investor looking at deals abroad will likely experience more relevant cultural differences across socioeconomic strata within a country than between highly-educated international elites. On that note, and as Esther Duflo and Abhijit Banerjee’s research at the Abdul Latif Jameel Poverty Action Lab (J-PAL) teaches us, when you are poor and living in an underdeveloped nation, being an entrepreneur is usually the last occupation you want. The investment that creates the most value for the poor is one that provides reliable employment. A competitive low-carbon concrete factory in Juba is going to deliver more impact than another microfinance fund in Bangalore. Not as trendy, but the relative impact is incommensurable.
3.Systems thinking is important at home, but critical abroad. Development economists and aid agencies have been investing resources to generate impact since the end of World War II. And they have made terrific mistakes that teach us about the value of systems thinking. Consider this story, as told by Amory Lovins: “In the early 1950s, the Dayak people in Borneo had malaria. The World Health Organization had a solution: spray DDT. They did; mosquitoes died; malaria declined.... But there were side-effects. House roofs started falling down on people’s heads, because the DDT also killed tiny parasitic wasps that had previously controlled thatch-eating caterpillars... Meanwhile, the DDT-poisoned bugs were eaten by geckoes, which were eaten by cats. The DDT built up in the food chain and killed the cats. Without the cats, the rats flourished and multiplied. Soon the World Health Organization was threatened with potential outbreaks of typhus and plague, and had to call in RAF Singapore to conduct Operation Cat Drop—parachuting a great many live cats into Borneo.” The critiques of economists Bill Easterly and Dambisa Moyo highlight that the less sensational, but perhaps more insidious, system failures are created by donor-driven market distortions. Their perspectives are important to study because when an investor rolls up in a slightly-dusted SUV saying she is there to invest in a low-carbon enterprise or a climate adaptation initiative, the locals will see her with the same eyes they have seen aid workers for decades before.
4.Partner with experts: Just as Goldman Sachs found a partner in Bloomberg Philanthropies to augment their systems knowledge and mitigate risk when they invested in reducing the recidivism rate for offenders in a New York jail, it makes sense for international climate investors to find partners abroad. Whether the investor intends to invest in a low-carbon enterprise in a far-flung corner of the Amazon or a climate adaptation initiative on an isolated coastal village of Sulawesi, there is probably someone who has been studying and working in the community for at least a decade. This expert’s knowledge will help predict unintended consequences and reduce the likelihood of failure, which often chalks up to be more than just a learning experience. Imagine a farmer's opportunity cost of a failed investment. That loss will not return her to square one; the failure will likely entrench her in deeper poverty than before the investor signed the term sheet.
5.Start with anything but housing: While addressing inefficiencies of the built environment, which consumes three-quarters of our electricity, is tempting because of the significant impacts on energy consumption, consider starting someplace other than housing. Checkered enforcement of local regulations, community politics, correlations between interest rate shifts and election cycles in many developing countries, etc. make housing an extraordinarily challenging sector for international climate investors. Never say never – our team even coordinated financial technical assistance on a US$2.1 billion energy-efficient urban infill deal in São Paulo that we are still waiting on – but consider Acumen, one of the smartest, most charismatic and important leaders in international impact investing. Acumen has been working on housing for over a decade and has executed only a handful of housing deals. If they have yet to knock it out of the park, chances are the unseasoned impact investor will have better luck elsewhere.
These five ideas illustrate but a handful of the complexities of investing to address climate change. In an era of diminishing support from governments worldwide, developing sound investment approaches to achieve development outcomes is a critically important pursuit. Good luck and remember: tread lightly and carry a (very) big wallet.