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The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.
Impact investor Jason Goins joins host Thomas Mucha to discuss social and geopolitical crosscurrents and the expanding opportunity set for impact investors.
2:00 – Education as an impact theme
4:40 – Systems effect, food security, and health care
7:25 – Geopolitical risk and the evolving impact universe
10:50 – Why impact investing is no longer a niche
12:00 – Risk management and a broadening opportunity set
13:45 – Long-term impact themes and widespread policy support
15:50 – Collaborating with traditional investors
COLD OPEN (Jason Goins): When I take a step back and think about the big global challenges that impact is seeking to address, the north star for me is not that there are silver bullets. There are no companies that solve all of the problems; no problem is 100 percent solved by any of these companies. But I view this as all sort of going a long way towards making the incremental changes that need to happen to address these big global challenges, and those challenges, the nature of those challenges change.
Thomas Mucha: Today's topic is impact investing, a fast-growing sector of the market that has gained significant momentum in the wake of COVID-19. Now, the global impact investing network estimates the current market for impact investing approaches almost US$1.2 trillion. Moreover, some researchers are projecting demand growth here of almost 20 percent a year through the end of the decade. Here to talk about the near- and longer-term drivers of impact investing in the expanding opportunity set is Jason Goins, a key member of Wellington's impact investing team, the right guy for the job today. Jason, welcome to WellSaid.
JG: Thanks Thomas, great to be here.
TM: So impact investing is a subset of sustainable investing, where investors aim for positive financial returns by investing in companies that help address big social and environmental challenges. That much I know, and I think is fairly clear to this podcast audience. So today we're going to dig deeper into aspects of impact investing that may be, let's say, less understood. But before we get into that, let's start with you, Jason, and what drew you to impact investing as a career.
JG: Thanks, so, I think as you just said, impact investing is really aligned with the double bottom line, and it's motivated by this mission to do both good and do well. And so for me, there's a great attraction to and affinity for our impact themes. So, looking for companies that seek to address these big global challenges, and seeking companies that seek to improve education access is one of the areas that resonates for me, and so it's my strong belief that these are problems that have to be addressed, that they're aligned with growth, and that they're aligned with a lot of spending. And so, when we think about this massive amount of spending that's already in motion around addressing climate change, around clean energy, around lowering carbon intensity and more use of renewables, et cetera. It’s my view that we have to wrestle with those solutions; but being one of the people who's sort of armed to seek those solutions, and put capital behind those solutions is incredibly motivating.
TM: What was it about education that drew you into this field?
JG: I was raised by my mother and my grandmother, and education was always something that was valued in my family, and something that we sacrificed for. As a high school senior, I was given a really large scholarship to go to Harvard, where I did my undergrad. And I recognized through that, just the power that higher education can have for different types of people, right? It can open doors to careers like this one, what I do at Wellington, which is tremendously fun and exciting to me. So, finding companies that are empowering people through education, and offering that first rung on the ladder to the middle class, and all of the downstream benefits that come, not just to that person, but to that family. And all of the improved outcomes that come from that, is one of the things that I find personally very motivating.
TM: So, Jason, you're talking to Wellington's geopolitical strategist, and the term "systems effect," that's one lens for how I see the world, meaning we're all part of a system, as the system changes, governments and markets which are made up of individual actors, they change their behavior which in turn changes the system, and on and on. And this happens at a deep, structural level, and where impacts can last a really long time, like we're seeing today in geopolitics, in climate, and a variety of domestic policies, in a lot of the areas that you just referenced. So, that brings us back to impact, and where we are today. I think the pandemic, the war in Ukraine, social justice movements, climate regulation, these major systemic changes have, I think, helped markets realize that their social costs are not zero. So, two questions for you. First, do you agree with that assumption? And, if so, what do you think these system effects mean for impact investing?
JG: To your first question, yes, absolutely, I agree with you. I think that these are all interconnected. I think that there is this system effect. System effect is one term for it, butterfly effect is another, the way in which we have to think about sort of one node, and then how that node impacts others, right? You know, it goes back to that example that I was just giving you about education, that one node affects other nodes. When we think about what's happening in the world, and you've made a good point about all of the sort macro forces, and we've benefited from your thinking there, Thomas, but many of those current macro forces, while they can be challenging to navigate from a market perspective in the near term, they're creating these opportunities. So, for example, supply chain disruptions have led to reworking supply chains. So companies that previously had said, we want to get it from the lowest-cost place, whatever it was that we needed, and we were going to assemble things in one location, and that would be the lowest-cost place, but we were going to assemble everything, name your country, and then we were going to be able to ship it. Well, that assumes that shipping is going to be easy and cheap. It's going to assume that the shipping lanes are perpetually open, right?And then, in the pandemic, people remember that the Suez Canal got blocked, right? And that has these downstream effects. When something changes in one node, and it's months of rework. You mentioned Ukraine, and I think that that is underscored in a new way, not just for that region, what energy independence means, what it looks like, and where it exists, and how do we meet that need. The downstream impacts of that crisis produced a new focus on food security, which has brought us to what you've described as sort of greater nationalism. And what that looks like has implications for what people like you and I consume, but also how it gets produced, and where the sources of those production come from, right? And so, to answer your second question, all of those are impact relevant. All of those are areas where impact companies are trying to address those challenges. All of those are aligned with incremental growth potentially, and all of those changes represent changes to the companies that we invest in or are able to invest in, or changes to the investment universe. So, it broadens the opportunity set, but it also in a very real sense, makes real the opportunity and the need. The pandemic, which touch wood, we're hopefully emerging from now, there was tremendous discoveries made, right? We discovered a vaccine far faster than ever was anticipated at time zero when we sort of realized that something was on the horizon.
JG: So there's tremendous power in that for sure. But as an impact investor you sort of sit back, when you're sitting in your home office, you're like, but that's not being evenly distributed, right? How do we think about how that vaccine discovery process was disseminated around the world? And what else can we learn from that? I spend a lot of time looking at health care companies and thinking about some of the technology that was brought to bear there will be brought to bear in other areas, right? So there's a flywheel, a network effect, a systems effect associated with all of those that make this a very rich opportunity set for impact investing.
TM: Interesting you point to those examples. Obviously, I come at this through the policy lens, the geopolitics, national security lens. And I would say there was massive changes in policymaker perceptions from COVID, from the war in Ukraine, and I think these are ongoing. And so I think we're having these sorts of impacts, onto your research, and there's clearly a lot of overlap between impact investing and this current complex and shifting geopolitical backdrop. I'm seeing a lot of onshoring, obviously, in the semiconductor industry, there's a lot of talk about energy independence, energy transition. You mentioned agricultural resilience, the national security implications of climate change, and on and on. So Jason, how do these trends, many of which have been triggered by this increasing geopolitical risk, how do you think that specifically impacts the opportunity set?
JG: I think it's growing the impact opportunity set. I think it's giving us more companies to look at who are innovating new products and services that are addressing these global challenges. It's giving us different geographies to pay attention to. And in some cases, it's changing the nature of the way some of these companies are going to market. What I like about it so much is that this is not a static opportunity set. The changes that you were pointing out, the changes that we are experiencing sort of globally are enlarging the opportunity set for impact investors.
TM: And lengthening your day.
JG: Yeah, it's not easy, absolutely it's not easy, and having all of the resources of Wellington brought to bear, the macro-analytic resources, the broad global resources of company researchers, and sector specialists, et cetera, all help us thinking about sort of prosecuting that opportunity set as it expands. But I come back to the fact that my love for this as an analyst is that this world is not static, right? All of these changes are creating opportunities for us to grow our impact universe, which is the range of companies that can be invested in, all with the aim of addressing these big global challenges.
TM: Yeah, yeah there's never dull moment. And change can be painful, but there's a lot of opportunity in change, right?
JG: It can be tricky; and I guess the way that I think about that is that when I take a step back and think about the big global challenges that impact is seeking to address, the north star for me is not that there are silver bullets. There are no companies that solve all of the problems; no problem is 100 percent solved by any of these companies. But I view this as all sort of, going a long way towards making the incremental changes that need to happen to address these big global challenges, and those challenges, the nature of those challenges change. We mentioned, for example, climate change, and some of the resources that Wellington has, has pointed to just the frequency and severity of climate disruptions, fires, floods, hurricanes. But the migration of people can change because of that. And obviously, climate change doesn't stop at a country's borders, right? So, solutions can't stop at a country's borders either. That again, forces us to think broadly about the opportunity set that is impact relevant.
TM: So, a lot of opportunities, a lot of challenges. The world is spending more on grid-hardening, energy independence. We're seeing a lot more in my space, in cybersecurity, obviously agriculture, water. So this impact universe is getting bigger and bigger, I think we can agree on that. But do you think the impact sector has broadened beyond being what has historically been seen as a niche investment style?
JG: Well I certainly hope so. I think that if impact investing is able to deliver non-concessionary returns, which it's my view that we can, and offer evidence that we're investing behind systematic trends, then I don't think this should be niche area at all. In fact quite the opposite, I think that if there's evidence that impact investing has a broad remit, right, that it is responsive to different market environments, different geopolitical environments, then I think it belies the notion that it's a niche area, and impact investing, broadly speaking, should be a tractable area for many.
TM: Yeah, because these problems are so central to society, to economics, to politics, to business.
TM: All right, so, I do have a question about impact investing, and I hear this sometimes out there in the world, is this idea of risk management inside this sector. And given all these changes that we've been discussing hear today, do you think the universe is large enough for impact investors to diversify sufficiently to manage risk? I mean how should we be thinking about that?
JG: So, impact investing is a pretty diverse opportunity set. We think about it in three big buckets: life essentials, human empowerment, and the environment. But the breadth of the opportunity set really touches all market caps, all life cycles of companies, all geographies, and across themes in a way that risk can be managed prudently in this space.
TM: Now in this market environment, Jason, obviously, markets have struggled a bit in 2023. They appear to have turned a corner, we hope. At the same though, inflation and interest rates remain elevated. So, there's still some lingering headwinds out there for investors. So how responsive are impact approaches to these kinds of changing market dynamics?
JG: I go back to the last question, quite frankly, Thomas, and think about the breadth of the opportunity set. It's a big pool that impact investors writ large are swimming in, and I think that there's an ability for impact investors to be tactical within that opportunity set. Certainly, we can pivot between higher-multiple growth names and lower-multiple, more value names within this broad opportunity set. We can think about capital intensity and leverage, and I think the breadth of the opportunity set, again, across market caps and across geographies and across market sectors allows one to have a portfolio that can be responsive to what, to your point, has been a very dynamic, challenging market environment.
TM: That's putting it nicely, too. So, over the long term then, Jason, what are to your mind some of the biggest and most exciting structural trends, and themes, that you're watching from this impact perspective?
JG: So, I think about where we're seeing the spending go, you know, where are the dollars flowing as a sign of where the growth is, and I think we're seeing the spending come through in the area of grid resilience and grid hardening, which is directly responsive to climate change. When we take a step back, we have to think about how power is distributed, and how that needs to change over time as we transition to a world that is more dominated by EVs, and where we sort of are changing the way power gets distributed. There are more signs that alternative forms of energy are not alternative, but increasingly those are becoming the majority of the power makeup. Infrastructure spend, we're seeing that touch lots of different geographies, sort of to your point, you know, the IIJA, the IRA here, the CHIPS Act here, the European Green New Deal, et cetera.
TM: A lot of policy support behind this.
JG: Lots of policy support, and that policy support to your point isn't just in developed markets, it's not just in the United States, it's not just in Europe, it's taking different shape and different forms, and the power of impact is that impact can follow where those opportunities are happening. When I think about what we've learned from the pandemic, one of the things that we've learned is the power of preventative care, and so I see diabetes care changing significantly. Lots of players, lots of implications, but when we think about outcomes, when we think about improving access, when we think about lowering costs, the ability to treat what I sometimes call one of the four horsemen of disease in a better, more compelling way, I mean that's a tremendous change that again is aligned with where investment dollars and growth are going.
TM: So Jason, I'm going to wrap up the discussion here, but throw you the million-dollar question, which is, Wellington's research process involves obviously lots of close collaboration. There's a lot of respectful debate of different ideas and worldviews. So, I'm curious, what does that process look like from your perspective, and more importantly, what do you think non-impact investors around the firm, can learn from people who think like you do?
JG: So, the collaboration on a day-to-day basis has to do with just a lot of vigorous dialogue and debate that we have. It starts in our morning meeting. It starts from hearing the voices of people with different interests. Everyone from our macro analytics team, to our private climate team, to our partnership with Woodwell Climate Research Center, all of those are inputs to the impact conversation, which I think is really rich and valuable. I think what impact is able to contribute to that debate is a long-term perspective about sort of what I'd describe as the way of travel. And so if you have a perspective on what needs to happen in the world, right, what's going to happen in terms of EV transition or changes in medical care, or the future of cybersecurity, think about all of those themes, then getting in front of those tailwinds and our ability to think long-term, describe what that future state could look like, and be identifying companies that have plays on that ball in a sense, and bringing that to the investment dialogue is a rich way of creating a two-way street, which, you know, is tremendously important and valuable. It is one way in which I think we're helping shape that investment dialogue here.
TM: All right, Jason, we're certainly glad that you have that lens on these issues, and you are helping to shape that dialogue. So, thanks for everything you do here, thanks for being with us on WellSaid. Once again, Jason Goins, impact investor at Wellington Management. Thanks for being with us.
JG: Awesome. Thank you, Thomas.
Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast produced July 2023.
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