Impact Investing in a Rapidly Changing World
At DCA, we constantly assess emerging business verticals that we believe have the potential to deliver true industry disruption and therefore broad-scale, long-term growth. In short, we’re looking for company founders with businesses that seek to redefine a category or leverage a rapidly emerging market trend.
One of the most important trends to emerge over the past few years is centered around the notion of “impact investing,” a strategy rooted in investing in companies with the potential for delivering both financial gains and positive social or environmental benefits. Impact investing is about allocating investment dollars into companies that meet the demands of a class of investors (typically young) who want to attach their personal values to their investment decisions.
The trend toward companies considering how they can generate social and/or environmental benefits that affect all stakeholders is spreading rapidly and impacting all industries. The reason for that is simple: investors are asking for it and in some verticals, governments are demanding it. In an era where big social and environmental issues face us all, there are both financial and brand valuation benefits for organizations that address these investor concerns head-on.
So, where can you find companies that can deliver impact investing? Today we’ll focus on a few key areas we are watching closely and investing in.
One area that allows investors to align their money with their values around environmentalism is investing in companies that trade carbon credits. We’ve all heard about carbon credits in the media over the past decade, but what exactly is a carbon credit?
A carbon credit is a permit that allows the owner to emit a certain amount of carbon dioxide or other greenhouse gasses. One credit permits the emission of one ton of carbon dioxide or the equivalent in other greenhouse gasses.
The carbon credit is half of a so-called "cap-and-trade" program. Companies in high-polluting industries are awarded credits that allow them to continue to pollute up to a certain limit. That limit is reduced periodically. Meanwhile, the company may sell any unneeded credits to another company that needs them.
Companies are thus doubly incentivized to reduce greenhouse emissions. First, they must spend money on extra credits if their emissions exceed the cap. Second, they can make money by reducing their emissions and selling their excess allowances.1
Furthermore, even companies outside of cap-and-trade programs, such as large technology companies, are voluntarily creating their own carbon credits (for example, by investing in projects using carbon capture technology) in addition to purchasing credits in the open market to offset their own emissions.
The management of carbon emissions and carbon credits is something we pay very close attention to in assessing all our portfolio companies, particularly those within the ESG space, where the practice of generating positive returns by effectively managing carbon credits is critical.
Short for Environmental, Social, and (corporate) Governance, ESG is a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.2 This vertical represents the most direct form of impact investing.
ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing. In this case, we believe, many companies in the EdTech vertical could also become part of the broader ESG strategy though right now they fit in the broader impact category. Examples of ESG related verticals include sustainable packaging, electric vehicles, carbon and sustainability reporting, clean energy/climate tech, agriculture tech.
Agriculture tech, for example, refers to the use of technology—especially software, machine learning and data analytics—to optimize food production. This can take the form of automation, precision agriculture tools, robotics, satellites, and autonomous drones. Using technology can help improve the quality and quantity of farmer yields while making more efficient use of limited resources.
The climate tech industry is focused on reducing greenhouse gasses (GHG) and addressing the impacts of global warming. Many companies fall under this umbrella spanning energy supply (enabling wind, solar, and nuclear energy solutions), transportation, and buildings. All companies have a shared focus on reducing reliance on nonrenewable energy sources that contribute to global warming.
Global ESG assets under management are projected to grow from $37.8 trillion in 2021 to $53 trillion in 2025, representing a 4-year CAGR of 9% and making up more than a third of the projected $140.5 trillion global AUM in 2025.3
Examples of Public Companies in the ESG vertical:
- Beyond Meat (BYND) – Plant-based Meat Products
- Tesla (TSLA) – Electric Vehicles, Batteries
- NextEra Energy (NEE) – Renewable Energy[AI1]
Examples of Mutual Funds & ETFs in the ESG vertical:
- SPDR S&P 500 ESG ETF (EFIV) - Tracks S&P 500 firms that are meeting certain sustainability criteria
- iShares Global Clean Energy ETF (ICLN) – Tracks global equities in the clean energy sector.
- Human Kind US Stock ETF (HKND) - Composed of the common stocks of domestic (US) companies chosen based on their positive Humankind Values.
Examples of Private Companies in the ESG vertical:
- Patagonia – Outdoor Clothing
- Seventh Generation – Household Supplies
- A Good Company – eCommerce for Sustainable Products
Short for Education Technology, EdTech incorporates technology across the spectrum of Education. The EdTech market is composed of various companies that typically offer solutions to PreK-12, Higher Education, and Continuing/Workforce Education stakeholders. There are several use cases that EdTech companies aim to enhance, including personalized learning, learning analytics for use by teachers and professors, enrollment solutions, massive online open courses (MOOCs), digital learning communities, workplace skills assessments, advertising, and workforce training.
The current market size for Education Technology is $160B, representing 2.3% of the greater education market. Before the pandemic, the U.S. EdTech market was expected to reach $440B, representing 4.5% of the greater Education Market, by 2026. Now, the EdTech market is expected to grow at a 30% CAGR, reaching ~$870B (11% of the Education Market) by 2026.4
Examples of Public Companies in the EdTech vertical:
- Coursera (COUR) – Continuing Education MOOCs
- Chegg (CHGG) – Higher Education Q&A Platform
- Duolingo Inc (DUOL) – Language Learning
- 2U (TWOU) – Online Degree Programs for Higher Education Institutions
- Instructure (INST) – Learning Management Systems – K-12 + Higher Education
Examples of Private Companies in the EdTech vertical:
- ByJu’s – Indian Online Learning/Tutoring Platform for K-12 students
- Articulate – Workforce Training
- Masterclass – Upskilling MOOCs
- Course Hero – Study Notes
- Handshake – Career Planning
We believe that impact investing is an important long-term trend
The traditional notion that seeking financial gain lies diametrically opposed to the desire to do good is no longer valid. As we turn to face major societal and environmental challenges today and over the coming decades, a large segment of investors has come to realize that governments can’t solve every problem–we must seek fundamental changes in how we conduct ourselves as consumers and investors. That market insight alone has the potential to give mission-driven organizations with strong ESG practices a distinctive leg up on their competition…and do a lot of good in the process.