A loan fund to increase financial inclusion and alternative employment opportunities for women engaged in prostitution in India, or bonds seeking to increase access to daily credit at favourable interest rates for casual workers are not products you usually associate with the capital markets.
When US banking giant Morgan Stanley joined with US’ Kellogg School of Management five years ago to re-launch a competition for students to design a financial product with social impact, the first thing it did was make sure the criteria reflected a product that was scalable, capital markets-orientated and provided a market-rate returns.
Since then, the student entries to the Kellogg-Morgan Stanley Sustainable Investing Challenge have included increasingly more sophisticated financial analysis methods, says Audrey Choi, Morgan Stanley’s Chief Sustainability Officer and the CEO of the Institute for Sustainable Investing, who is a judge for the Challenge.
This year’s Challenge judges include Morgan Stanley’s Choi, Edward Mason, Head of Responsible Investment at the Church Commissioners for England and Monika Beck, Director at KfW
“What is really exciting from our position as a financial services firm is that these students are really combining a high level of financial sophistication with social impact,” says Choi. “In some cases they are devising a whole new structure of their own and thinking about the engineering – how do you align incentives, how do you draw in more capital, how do you create flows of funds to some of the things that go beyond return.”
Success stories are starting to emerge. 2015’s winners, the Blue Forest Conservation Team from the Haas School of Business at UC Berkeley, have been profiled by the LA Times and the Huffington Post for their financial product addressing forest fires and drought in California. The issues are interconnected and, at their most extreme, have led to deaths of Californian firefighters.
Broadly, Blue Forest Conservation seeks to monetise the shared benefits of forest management in the US through ‘Forest Resilience Bonds’ that function in a similar way to environmental impact bonds.
Since winning the Challenge, Blue Forest Conservation has garnered the support of the Rockefeller and Packard Foundations and the World Resources Institute.
Choi says when the Blue Forest Conservation Team presented at the Milken Global Conference in California – which happens annually for Challenge winners – a couple of large institutional investors approached them.“Zach Knight, who is one of the team members, was laughing as his father, who is an asset owner, said ‘I’ve been trying for ten years to get an interview with this CIO of a large asset manager who just came up to you on the back of winning this contest and gives you a card saying I’m interested in investing when you want to launch’.”
This year’s winner was the ASEAN Storm Resilience Fund designed by three students from the Lee Kong Chian School of Business at the Singapore Management University.
The Fund is seeking to help communities in Southeast Asia prepare for extreme weather events in the region. It hopes to enable the reinforcement of 40,000 homes in starter projects in the most vulnerable areas of the Philippines and Myanmar through microfinance loans.
Choi says: “We felt that ASEAN did a very good job at showing feasibility, scalable economies and how you could actually fund these structural improvements to houses in this zone massively impacted by storms.
“They did a really good job of showing the economics and with a very clear impact. The model was very robust in terms of delivering impact immediately on a small scale, with the capability of delivering on a large scale as well. It wasn’t something that has a big cliff or a break point. If one thing didn’t fall into place, the model could make really interesting adaptions.”
Choi said the students had thought robustly about the social impacts delivered: “These houses are where subsistence farmers store their food reserves and seeds. So it’s not just about making it through one season. It’s about having seeds for the next season too. They really thought about the holistic impact on a family’s life and livelihood.”
This year’s Challenge judges, who included Edward Mason, Head of Responsible Investment at the Church Commissioners for England and Monika Beck, Director at KfW, considered it to be one of the most competitive so far in its eight-year history.
A total of 307 students from 65 countries submitted investment prospectuses targeting solutions in 34 countries.
Judges heard investment pitches from students and picked the winner on the same day on the strength of their presentation in an elevator pitch format.
“A really interesting trend I have noticed over the years is more students approaching the challenge with a deep understanding of the financials,” says Choi. “This year, there was one team from a school of engineering – we are really seeing some multi-sector collaboration at the brainstorming level.
“It’s not just finding someone who understands the benefits to society and combining that with a business mindset. It’s finding an engineer; or a scientist and a public health expert; or an education expert – and together delivering that multiple bottom line of social, environmental and financial impacts.”
Winners of the Challenge receive $10,000, while runners up are awarded a $5,000 prize.