Impact Alpha
By: Jessica Pothering
A team of MBA students from Northwestern University’s Kellogg School of Management that proposed a low-interest loan fund for India’s 400,000 low-fee private schools took first place in last week’s Kellogg Morgan Stanley Sustainable Investing Challenge.
Now in its seventh year, the tone at the finals in New York suggested the tide is shifting towards long-term, sustainable investing.
“Past teams in this competition have been walking against the wind,” Dave Chen, chairman of Equilibrium Capital and a founder of the Sustainable Investing Challenge, told the 10 finalists. “You guys get to walk with the wind. It’s always good to have the markets on your side.”
The Sustainable Investing Challenge cultivates teams of MBA students to create institutional financial products that tackle social and environmental problems. Nearly 200 students from 37 schools in 29 countries submitted proposals for the 2017 competition. The three-person EduIndia team was selected from 10 finalists representing nine graduate school programs in the U.S., France and South Korea. A team from Columbia University took second place for its idea to monetize carbon offsets from forestry companies.
EduIndia’s fund would offer its loans at 14 percent interest to low-fee schools, repayable based on the schools’ monthly incomes over three to seven years. It could offer a lower rate than other lenders because EduIndia would also partner with local microfinance institutions offering student tuition loans, securing schools’ income streams.
Similar loan structures, called a “demand dividend” or a “variable payment obligation” have been tested at a sustainable cacao business in Belize, women-owned businesses in Nicaragua and a waste management enterprise in India, among other applications.
EduIndia’s team argued that its low-cost debt fund would allow high-quality but financially strapped schools to boost their capacity, weather revenue fluctuations from low-income students’ ability to pay tuition, and ultimately improve long-term revenues by boosting enrollment and curbing dropout rates. The schools struggle to find affordable financing to effectively serve the 40 percent of Indian students who rely on them for an education [see the fund prospectus].
Environmentally-focused land and conservation projects have been the darlings of past Sustainable Investing Challenges. Last year’s top team, Terra Limpa, proposed a real estate fund for landmine removal and agricultural land restoration in Angola. In 2015, the winner was Blue Forest, which proposed conservation notes to restore U.S. forests. A year earlier, Fresh Coast, which proposed an investment vehicle for rehabilitating land contaminated from industrial use, took the top prize.
This year’s contest highlighted the social side of sustainable investing. Other 2017 finalists included a real estate fund to repurpose military containers into affordable housing for internally displaced people in Afghanistan and an exchange-traded fund (ETF) that encourages shareholder activism and proxy-voting to improve businesses’ positive environmental, social and governance (ESG) performance.
The ETF, proposed by students of Duke University’s Fuqua School of Business, was a first for the Challenge; it resonated with recent headlines about how asset management giants like State Street and BlackRock are using their shareholder influence to drive boardroom change and corporate responsibility.
Deborah Winshel, head of impact investing for BlackRock, joined Audrey Choi, Morgan Stanley’s head of sustainable investing for an on-stage conversation. She spoke of the need for action by asset manager to push ESG criteria into mainstream decision-making, but defended her firm’s behind-the-scenes approach.
“BlackRock takes a closed-door approach. We have to constantly negotiate. We can’t be publicly sensational,” Winshel said. “The more [ESG focused] we are, the more [our portfolio companies] will report and see how we make our investment decisions. That’ll increase the quality of their reporting.”
The first prize winner will receive $10,000 and the runner-up $5,000. The Rockefeller Foundation is sponsoring a one-year fellowship to give one of the finalist teams a boost.
