Matthieu VITEAU: Impact investing and the age of disruption

Matthieu VITEAU: Impact investing and the age of disruption

The 21st century is the world of complex and dynamic change. Investing in the age of disruption is obviously a challenge judging by how often the topic is addressed. John Mauldin and his network of analyst hold an annual conference (the Strategic Investor Conference) entirely dedicated to that issue.

I hold the view that short term asset management, the search for constant high yield and leveraged return on investment have had a destabilising factor for decades on the real economy. My conviction is that it is high time finance and the economy got reconnected, and I believe impact investing is one way to reconcile both.  To make it short, impact investment seeks to generate social and environmental impact as well as financial returns. This is taking place all over the world, and across all asset classes. What I especially appreciate about impact investing is the structuring effects of invesment on businesses, communities and nature.

When considering long term value and investment risk in a rapidly changing world, one needs to look at trends – societal trends – which pave the way to tomorrow’s economic landscape.

Macrotrends underpinning economic realities

  • Demographics: the world population will continue to grow, but with significant differences according to the regions considered[1]. Migratory flows toward cities have been growing and will likely continue to grow over the medium and long term. Migration is driven by economic, social, political, demographic and environmental factors[2]. These factors do not uniformly affect migratory flows, especially when they have an international outreach: some factors can be relatively less important compared to others. Migration has the potential to deeply destabilize societies – both sending and receiving societies – as those who leave do not contribute directly to local empowerment and to the development of the local capacities in their country of origin. They may however indirectly contribute to these endeavours by sending remittances back home [3]. The bottom line of demographics is that they shape economic and broader societal trends.

 

 

  • Sustainable development: a critical mass of humankind seems to have become conscious that it lives in a finite world with finite resources. If the legally-binding objectives of the 2015 COP21 agreement are abided by the 195 signatory parties, 4/5 of fossil fuels should remain in their reservoirs. There is a growing awareness – made manifest by societal demands and the advent of new businesses – that humankind’s footprint on the Earth should lean towards the minimal. This shift in perceptions is yet to be translated into behavioural changes: sustainable development is overwhelmingly seen through the technological lens. The blending of societal wishes, behavioural changes, regulatory frameworks and business practices is necessary to make sustainable development tangible.

 

  • Technology: the 3rd industrial revolution[4] is said not to have reached full maturation yet and still it has profoundly changed societies over the past two decades. That revolution is based on the use of the renewable energies which themselves rely on information society. Looming ahead are artificial “intelligence” and the Internet of Things and all the technologies stemming from these. There is a common element to all these high technologies: they all rely on finite raw components (rare earths) to function. There is a problem though: these rare earths are 1) limited in supply[5], 2) are not renewable[6], 3) restricted in availability[7].

Suggestions of assets for an impact investing portfolio

Investors who seek to create long term sustained value may wish to organize their portfolios according to the macrotrends described above. Here are some proposals for the tangible applications for investments.

1. Local business endeavours: the point about investing in local business endeavours is that they create sense to their local communities. Their resilience is likely to be higher than multinationals whose interests are not necessarily in line with the environments they extract value from. Local businesses – starting with small and medium businesses – form the backbone of an economy. The shorter the supply and value chain, the more resilient a company is – and together with it, the societal fabric it is anchored in. Local employment means a higher likelihood for migrations for economic reasons would decrease. Not only would individuals feel empowered but dynamics would be triggered that local value creation would occur.

2. Low technology businesses: for all the potential bestowed upon artificial “intelligence” and digital technology, they carry the risk of increasing the dependency of communities and businesses toward external suppliers whose interests may not be common to their customers’. For high technology to work (and these are indispensable for renewable energy technologies, smart cities, the digital economy, etc.), energy needs to be constantly supplied to machines. This entails efficient, resilient and redundant infrastructures that are usually fragile and quite sensitive to local climate conditions. Finally, high technology needs robust[8] computer software to ensure confidentiality, integrity and availability of the transmitted data. Low technology ought probably not to be discarded right away as it is often more suitable to some physical environments than high technology. Low technology businesses are likely to be less vulnerable to systemic risks, less energy intensive and require less specialised workforce to maintain[9].

3. Circular economy[10] businesses: this is where technology may meet behavioural change. Because so little raw material are reused globally, these businesses are likely to yield the most unexpected return on investment – including on the short term. As high technology increasingly needs finite materials, the shift of paradigm in production processes, consumption and reuse underpinning the circular economy may make these businesses pivotal for sustainable development.

4. Education businesses: people, however much qualified they are, need to constantly train and retrain to adapt to societal changes – these include the employability skills and job qualifications. As societies progress into the era of sustainable development, new business needs arise, new ways to conceptualizing challenges and complexity are needed. If societies and businesses are becoming more lateral than vertical in their organisations and processes, individuals need to shift their world views in order to find appropriate solutions to the quandaries they face. Education – both academic and vocational – will always be relevant as the need to adapt is continuous.

5. Artistic endeavours, tourism and empathy-based businesses: this last proposal for investors may appear somewhat outlandish as what they produce is very often very arduous to assess. Because they are mostly based on personal experience, attributing an objectively measurable accounting unit to the value they create. Yet, what is increasingly sought by consumers is experience to live rather than products to hoard. The more exotic and unique the experience, the more sought after and valuable it is. The said experience need not be costly to be unique and highly sought after. By the same token, people spending most of their waking hours in front of a screen – either a computer or a smart phone – feel the increasing need to “disconnect” and “reconnect” to real life, emotions, whatever triggers an empathic stimulations that dematerialized processes and relationships cannot bring.

 

Notes:

[1] See the United Nations population division’s website on the world’s population prospects 2017. As a very rough illustration of these differences in population growth, see the two graphs for the “more developed regions” and the “less developed regions”.

[2] For an overview of these factors, see “Migration and Global Environmental Change”, final report, the Government Office for Science, published by the United Nations, pp. 44-45.

[3] See “Migration and Remittances”, World Bank group, 2016

[4] See “the third industrial revolution”, Jeremy Rifkin, Palgrave Macmillan, 2011

[5] For instance, the ground holds 1,200 times fewer neodyme and 2,650 times fewer gallium than iron ore.

[6] Almost none of these rare earths see any recycling as the quantities used in batteries, smart phones, computers, turbines, magnets, etc. are so little that processes to reuse these materials are not considered cost-efficient.

[7] Less than 10 states hold the total known supply of rare earths on the planet. Of these 10, China holds the lion’s share. For a map of rare earths deposit locations, see: https://ec.europa.eu/growth/sites/growth/files/global_suppliers_of_crms.jpg

[8] Robust here means: resistant to cyberattacks, adaptable to systems upgrade and protective of privacy.

[9] As an illustration, Europe is undergoing a dramatic shortage of information technology qualified labour.

[10] For a brief overview of the circular economy, see Ellen Mac Arthur Foundation: https://www.ellenmacarthurfoundation.org/circular-economy/overview/concept

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