A new approach of regenerative finance provides a channel to create visible impact for investors’ portfolios, previously hampered by shortcomings of ESG screening.
Increasing numbers of high net worth individuals and their advisers are seeking investment opportunities that balance risk and return with impact, particularly as the sustainability minded millennial generation builds and inherits wealth.
“We just want our money to do something meaningful,” the heir to an iconic American brand recently told me. They want to achieve impact not just with philanthropy but also with their portfolio, and they’re willing to consider a spectrum of risk and returns. Like many like-minded peers, they’re concerned about greenwashing risks and lack of transparency in ESG data. And they’re looking for new options that will activate a portion of their portfolio to visibly improve the world.
Healing and regeneration
A new approach we are calling ‘regenerative finance’ provides a path forward, sitting at the leading edge of values-driven investing. ESG is largely a risk mitigation screen, designed to determine how a company’s performance on social, environmental and governance factors might create vulnerabilities related to its supply chain, workforce or brand that will negatively affect its market performance. Impact investing as commonly practiced aims to create positive effects on one or more dimensions while earning a meaningful return. Regenerative finance’s goal is bigger: to heal and regenerate communities and natural environments.
Key features of the regenerative approach include integrated capital (combining investments, loans, grants and social capital to fill gaps and remove barriers for social and environmental innovators), attention to interlocking causes and effects that characterise complex challenges, and commitment to involving core stakeholders in decision-making.
Regenerative finance uses money as a tool to address systemic problems like climate change, unsustainable food systems, and under-resourced communities. Investors can find regenerative alternatives across asset classes, with varied levels of risk and returns.
Principles in action
Regenerative finance seems ambitious, but it’s also accessible. Its principles are at work in both issue-area funds and broad impact funds, open to a range of investors.
Issue-area funds that take a regenerative approach include Boston Impact Initiative (BII), investing in enterprises majority-owned by people of colour, that create living wage jobs, and empower workers and community members to make decisions. BII also invests in community owned or community controlled real estate to prevent displacement in the US north-east.
Another example is New Majority Capital, which helps diverse entrepreneurs acquire existing businesses from retiring baby boomers using capital from foundations, impact funds, donor-advised funds, and individual accredited investors. A third, Mad Capital, is working to drive a regenerative agriculture revolution with flexible loans allowing farmers to transition from conventional to regenerative organic cultivation, invest in soil health, develop new markets, and diversify their enterprise. The benefits of this transition include improved biodiversity, carbon drawdown, rural economic development, and better water quality.
It is also important for funds to support loans to social enterprises creating long-term positive change. For example, Lotus Foods, a fair trade importer of heirloom and organic rice and rice ramen, incentivises farmers to use an innovative approach to rice farming that consumes 50 per cent less water and 90 per cent less seed, while producing two to three times more rice.
Solar developer Sunwealth addresses climate change with an approach protecting the most vulnerable communities, while giving them a real share in the clean economy. And Boldr, an ethical outsourcing company, aims to interrupt cycles of human exploitation and economic disparity by boosting access to digital training in underserved communities and creating career opportunities within global teams.
Challenges ahead
While regenerative finance by its nature produces more direct and transparent results than other forms of values-driven investing, the general lack of widely accepted impact measurement standards still presents a challenge.
This lack can make it difficult to identify cases of ‘impact washing’. Solutions are emerging, however: the EU’s recently adopted Corporate Sustainability Reporting Directive introduces standardised social and environmental reporting requirements for a set of large companies and listed SMEs, and could lead to standards for a wider range of enterprises.
Financially, regenerative investments — most of which are direct, private investments rather than public market offerings — are no more or less risky than traditional private investments. Returns, though, are typically lower. The concept of regenerative finance works only when investors are open to moving away from maximising shareholder returns and toward optimising returns for all stakeholders, including nature.
Portfolio diversification
For those reasons, regenerative finance makes sense for most investors as one element of a diversified portfolio. As part of a fixed income strategy, regenerative notes provide deep and sustained impact combined with relatively low risk. As part of a private equity strategy, regenerative investments deliver catalytic funding to potentially system-changing enterprises. And investments in nature-based assets like sustainable forestry and agriculture support an essential corrective to purely extractive industries.
Especially compelling for many is the opportunity to drive social and environmental innovation. Investors in regenerative finance funds can play a central role in seeding enterprises that demonstrate the effectiveness of experimental approaches and initiate positive changes in global markets. And because of its holistic nature, regenerative finance opens opportunities for investors to coordinate their investing and giving to maximise their personal impact.
For a growing number of high net worth investors, the relatively low financial returns of regenerative finance are more than balanced by the opportunity to do something meaningful with their money.
Jasper van Brakel is CEO of RSF Social Finance
