An investment framework to create a society that works for all

Having just started as Chair of the Sustainability Committee of Re-Equity partners I have had the opportunity to get involved in the question of how to invest to drive the good things we want like sustainability, resilience and fulfil the aims of doughnut economics. This article shares my learning so far and explains the thinking (as I understand it) behind what Re Equity Partners are aiming to do. I hope you find it as exciting as I do.

Let’s start with the big perspective: we are a bunch of humans, on the same planet, with the same shared resources and we are stuck with one another. So we should find ways to make the best of it, to make it enjoyable, comfortable and next-generation ready.

Most businesses are extractive and not ready for a green, equitable future

Taking a look at how we live, we see that most products and services in the world are delivered by firms of one sort or another. These firms all have a basic set-up of a hierarchical management, a set of products and services offered to entities that pay for them, in one way or another. In turn, these firms pay employees and suppliers for inputs.  The total sum of all these transactions – from the services you get from your municipality, through health care to the corner shop to the giant corporations that provide our cars and energy – the total sum can not only be measured in money but also in degradation of the very natural resources, human resources and society we depend on. And serious degradation is happening.

It is more a system failure than lack of character of firm owners and managers

It’s hard to put the direct blame on any one of these firms (1). They are often trying hard to reduce their impact whilst ensuring all involved can make a living. It seems more like it is a problem of the system as a whole (2).

From the dire warnings about the loss of agricultural soil (3) to the possibilities of our energy system being unfit for purpose (climate destabilizing, energy unavailability) it looks like without a system change the consequences of this degradation are just going to get worse.

And it is not as if this system is fulfilling its own purpose: profitability and efficiency of these firms is either stagnant or getting worse whilst inequality grows (4) .

Should we panic or should we pursue our vision?

Herein lies a conundrum: 

The signs of degradation are enough to get anyone into panic mode. In panic mode, with the red danger sign lit, grabbing the nearest available solution is the obvious choice. That however may not be helpful for the long term when the causes are systemic. 

One thing all these firms have is tools, equipment and infrastructure  (built capital if you will) that is needed to deliver the things people need. Therein lies a major challenge. A good proportion – and I don’t have the figures but it is easy to guess at more than 75% – a good proportion of all built capital – is used by firms in operations that result in degradation.

I covered this challenge more in detail in my article about real capital. A systemic change will need money up front to reconfigure, convert or replace all those machines, tools and buildings and technical installations. From turning roofs into solar electricity generators, to toilets into nutrient recyclers and vehicles into non-polluting transporters, the task is huge.

We need investment in the right things

That, however, is what the investment industry does, and what it is for. Not just private investors, but insurance companies, pension funds, municipalities and governments all take their pools of money and put them into firms that use them to pay for things they need to have in place before they can deliver their services.

RE Equity rises to the challenge

That was the starting point for Re-Equity: the impact investors and the fiduciary investors who want a financial and societal return. What does society need to invest in in order to be able to deliver on basic human needs?

The answer gave ReEquity their focus: sustainable agriculture, sustainable housing and renewable energy.

The next question was how to invest in a way that ensured security of the basics for all. That gave the next focus: municipalities. Investments into municipalities need to be done in such a way that money circulates in the local community enough to create a demand for local jobs that can trigger mechanisms towards prosperity.

Our stance is clear: Security of the Basics. Peace, then Prosperity.

Stephen Hinton, Chairman of RE Equity’s Sustainability Committee

The logic goes like this: build one of the foundations of peace, security of the basics first. Then comes peace then prosperity. With prosperity, investments pay off.

The RE Equity Framework forms the basis of all investment

The Re Equity Investment Framework. With reservations for changes as development continues.

All investments are rooted in common goals, like the SDGs. Next follows a cold, hard look at the levels of suffering in the area under scrutiny. To be able to alleviate the suffering and start enough money circulating advanced data tools like those from Resilience IO help quantity and qualify what is needed. Once the gap is known it is possible to calculate the amount of money needed to install the real capital required to produce the goods and services that bridge that gap. It might be production capacity or the production might be there but the distribution is substandard. Here, we open up to the power of a blended capital approach. Combining all types of investment – from government, to NGO through to impact investors and institutional investors, this mosaic of investment gives greater possibilities for impact and investment success.

Having the real capital installed is not enough, however. Local people need the  enterprises that use this capital to actually produce essentials and supply them. That means enterprises that work.

Once these enterprises are up and running, an ongoing data collection and processing needs to be in place to give  feedback to all stakeholders. Re Equity packages the whole thing, real capital needs, the business case for the investment, the ongoing performance monitoring of both financial and impact performance into investment instruments and offered to different investors. Our data partner Akvo Foundation has a team of data collectors equipped with smartphones, survey software and testing devices that ensures Re Equity gets a reliable, verifiable picture of the situation in the area targeted for investment.

Levels of data

The diagram above shows the overall data approach RE Equity is working on. Capturing this data in the beginning will help those investment instruments carrying an impact potential to come with updated reports on changes in the area.

These impact reports form part of the regular reporting keeping investors and other stakeholders informed.

What can RE Equity achieve?

The Real Capital focus means that investment will be in tangible assets which have a market value during the investment period and therefore the investment carries a lower risk.

The Municipal Focus means that RE Equity will partner with local stakeholders and their networks, again reducing risks and raising the opportunity for money to circulate locally.

The issuing of a range of instruments for each investment attracts a wider range of investors and with this blended approach gives the opportunity for gifts and grants to work together with impact investment to ensure long term prosperity in the region rather than just alleviating suffering.

A bold step as yet untested?

Most of the things that make up the Re Equity Investment Framework have been tried in one way or another. The metrics that point to real capital gaps are well established.

Identifying real capital need has been trialled by our Partner Resilience.io in cities on the African continent with success.  Understanding the needs for viable businesses in the area is also part of the Resilience.io package.

Data gathering and processing is being spearheaded by our Partner Akvo, who provide this service for several African countries.

Municipal and regional approaches have been pioneered with good results in among other places Cleveland USA and Preston, UK (5). Finally, the formulation of investment instruments has been pioneered on several levels, including impact bonds that yield on goal fulfilment.  The test will be to see if the parts can form a functioning whole. Small scale pilots and other forms of trying out the framework are the next steps.

Find out more

To find out more about RE Equity visit their website and to be kept informed of their progress do follow them on Linked In.

If you are interested in investing in RE Equity or know someone who might be do visit the slidepack explaining their latest share subscription (.pdf).

If you are aware of investment opportunities for a municipality or similar regional area you are welcome to contact me via the contact pages.

References

(1) See my article on how the very structure of the firm drives extractive practices.
(2) See my article about how firms degrade real capital.
(3) The latest report from the UN FAO shows soil status
(4) See City of London Economist Micheal Roberts blog for latest profitability analysis.
(5) See the Cleveland Model and the Preston Model

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