Adventures in Impact Investing

Impact investing is about three things.  First, it’s about aligning investments with personal values to create a sustainable future. Second, it’s about creating awareness that investing in sustainable investments can compete financially with traditional portfolios, to lure mainstream investors away from companies and products that do harm.  And third, it’s about identifying needs and deploying funds to help to create a beneficial new market category.

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ALIGNING

At Red Rocks Impact we look for game changing technologies that reduce our carbon footprint on a global scale without expecting humans to change their behaviour. For example, we believe people will continue to want and buy things, so our focus is on reducing packaging, recycling, emissions, components, etc.  We recognize the damage done by big agriculture but assume people will continue to want to eat meat, so we invest in regenerative agriculture and non-meat alternatives.  

In other words, we don’t put our faith in people changing their habits overnight or wait for government policy to catch up.  Instead, we invest in making it affordable, easy, and attractive for individuals to minimize their climate footprint.

Our favourite investment picks are therefore those that turn problems into solutions and create a ‘twofer’ effect.  An example of this approach is betteries, a solution that turns used electric vehicle batteries into renewable energy for individual and community use.  The problem?  A growing supply of eMobility batteries that still have productive life filling landfills while new ones are being produced.  The solution? Put them to work for the rest of their productive life and at the end recycle them.

Another solution we love, although it isn’t in ourportfolio, is Solein, which takes carbon out of the air and turns it into protein-based food.  Now, that’s what we call a threefer, targeting carbon emissions, removal, and world hunger in one swoop.

It’s inspiring to see how many innovative solutions turn a climate problem like waste into a resource like energy or food or materials.  Human ingenuity is what we love most about impact investing.

AWARENESS

Just a few years ago large investment houses and banks were sceptical about sustainable investments, but the category has proven itself, competing favourably with non-sustainable investment portfolios.  As a new generation of investors make their priorities known, banks and fund managers have charged into the gap and now it’s a ‘thing’.  

To be sure, there’s a certain amount of ‘greenwashing’ that goes on, but there are also significant step changes and better vehicles for conscientious investors than ever before.  And make no mistake, this is an important shift because the large banks and investment houses have the necessary swing mass to bring about real change.

At the end of the day, there’s no viable path to sustainability without financial returns. Thankfully, the data has shown that high-performance carbon-negative materials provide value in ways so far beyond the product itself.

According to Morgan Stanley, "88%of studies found that companies that adhered to social or environmental standards showed better operational performance, and 80% of studies showed apositive effect on stock price performance."

Branding is another important lever in changing mindsets and behaviours and creating movements people want to be part of. Our portfolio company Tesla is an example of how you can evangelize a generation of people that want to see a different future.

NEEDS

A wise investor once said: ‘People will always need air, water, housing, and energy.’

We’ve taken that advice to heart and diversified our portfolio to include regenerative forestry, fast-growing and resilient Kiri trees, energy efficient housing, solar and geothermal energy, and sustainable water treatment.

At the end of the day, it’s common sense that as non-renewable resources become more expensive and difficult to obtain, affordable and sustainable alternatives will be needed.  It’s also common sense that we shouldn’t destroy our planet and need innovative technology to build a viable future.  However, these alternatives don’t just appear out of thin air – they require bold thinking, careful due diligence, and a commitment to creating a better world for our children and everyone’s children.  

That’s what – for us - impact investing is all about.

HOW CAN I INVEST IN A MORE SUSTAINABLE FUTURE?

There are various options for private investors and family offices, including direct investment, funds, investment houses, and portfolio managers.  They have different investment theses and tax implications, so you need to do proper due diligence.

For example, direct and/or seed investments carry risk but proportionately high returns if they pan out.  Building and assessing deal flow – not to mention KYC processes - can be quite time-consuming so although we do direct investments, we also partner with investment communities like Toniic and Extantia to maximize our reach and swing mass.  Note here that if you are a US citizen, investing outside the US may trigger punitive tax reporting requirements that you will want to discuss with your tax advisor.

Impact Funds offer a diversified approach without the hassle of due diligence for each portfolio company, but again you need to be aware of tax implications.  For example, if you are a US citizen living outside the US you may need to do PFIC reporting for individual companies in your portfolio (unless the fund has a US ISIN), which means a certain percentage of your return will go to your tax accountant.  You should also be on the lookout for greenwashing and look for funds that really zero in on your sustainability goals.

Real assets – including solar and wind parks – are interesting as they provide a steady and predictable return, but they are vulnerable to damage and sabotage so make sure the assets are properly insured.

A relatively new model of impact investing that is emerging to provide easy access to capital for climate entrepreneurs is the good old-fashioned loan or promissory note.  Investors can either loan directly or work with a fund manager who aggregates loans and applies systematic deal flow acquisition and due diligence according to pre-defined sustainability targets.  This approach can be compared to an annuity that provides a pre-defined return based on the loan interest.  This may be an attractive approach for conservative individual investors, but you’ll want to vet your fund managers very closely.

The easiest solution may be to work with your bank, investment firm or fund manager to put together a portfolio of publicly traded stocks and/or bonds that aligns with your sustainable investment goals and adheres to ESG rules.  This streamlined approach will save you all sorts of tax reporting headaches and continue to nudge the big investment houses in the right direction.

The most important thing to remember is that whatever approach you take, your voice and investment decisions help shape the future.

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