The future of impact investing - Interview with Rochus Mommartz - Part 3

Rochus Mommartz, CEO of responsAbility Investments, shares his take on where the impact investing industry is headed, what innovations he hopes to see in order to mobilize more private capital, and what he hopes the industry will look like in 2050.

Transcript

0:00

Welcome to the responsAbility Investments podcast. Let's get the legal disclaimer out of the way first. The information provided in this podcast is given for informational purposes only and should be considered neither as investment advice nor as investment recommendation. No liability shall be accepted for the accuracy and completeness of the information. The views presented in this podcast are those of the individual participants and are not necessarily endorsed by responsAbility. Past performance is neither an indicator nor a guarantee for future results. Now find out how microfinance planted the seeds for the entire impact investing industry, which according to the IFC, is a $2.3 trillion industry with nothing but growth on the horizon. In this three-part series, Rochus Mommartz, CEO of impact investment house responsAbility, sits down for a personal discussion with David Diaz, one of responsAbility's leaders in climate finance, where Rochus reveals what it was like in the beginning, how a niche market was formed, how it expanded, and what the future looks like from his perspective as one of the original players on the journey since the beginning. This is part three of their conversation. We ended the last session discussing development finance institutions and the public sector more largely. You mentioned that they play still a very important role. Can you tell us a little bit about what role specifically they play when it comes to unleashing liquidity from retail investors? To really unleash the potential of retail investors, the public sector would have to play a role on providing liquidity, which is actually a very interesting thing. Normally, to my understanding, the public sector is not equipped to do so because if they would do so, it gets very indirect. Basically the story which somebody, let's say working in a DFI and they would have to present it then to the government as they kind of, yeah, we providing liquidity so that others can do the impact investment. That's probably for many ministries not a good enough story to say what are we actually doing here? Why don't we do it directly ourself? And so many players from the public sector just wouldn't have that funding available of doing that, Though I personally have the opinion the impact you could have via leveraging the retail and the private sector, very broad private sector could be huge. So I think it's actually a good idea to think in that direction. But does it happen today? No. On the topic of retail investors for who's looking to the future, what other ways could we could do you see for them to get involved? What pathways do you imagine for the retail investors? For retail investors, the regulator or you know, like the, the supervisors of the asset management houses and, and the products, of course we'll always require and say, OK, that a retail investor can invest. There's a minimum liquidity required. Because I cannot as a regulator assume that everybody fully understands what it means to lock in funds for and I'm just inventing five years. Imagine David, you know, you and I've invest funds are locked in for five years and suddenly something happens. I say, oh, now I would need the funding because I want to divest, but you cannot divest. And so that hurdle though, I, I, I find it a big restriction personally that this exists because one could argue, yeah, but let the people make up their minds themselves. That would be an argument. But there is of course a possibility of misuse of that. And so I think we, we only, we only will see more of this once you basically transform non liquid asset private assets into more liquid ones. It can be done. For example, you can list a private debt fund itself and then the private debt fund is traded and you get liquidity on that level. That's what the whole idea of capital markets is about. But as long as we we don't have their fundamental shifts, of course, technology plays a huge role. Imagine you just what happens these days, but it's tokenization of private assets. So you get tokens which represent a certain part of a private asset. The point is only as long as in the markets where these tokens are traded are not liquid, it doesn't help you a whole lot. So we have still to see and there I don't see any public sector player today which conceptually picks up this topic and say, OK, but we could do something. For example, I mean, just if you think very bold, you could say probably with 100 million, you could leverage a billion because you could provide sufficient liquidity, which allows basically a much larger fund to operate. I don't see currently any initiatives in that direction. Now let's shift a little bit to private capital Rojos and towards professional and institutional investors. How are they currently involved in the impact investing space? Tell our listeners a little bit and also look into the future. The Jinn says that we need to mobilize 5 to $7 trillion annually into this space to achieve the SDGS. What needs to happen to mobilize these professional investors into the space? I think there is a lot of dynamics on the institutional or the institutional investor side And and I mean it across the whole spectrum. You look at pension funds, you look at large insurance companies, you you look at all all these type of family offices. Why do we see such a dynamic? Because think about climate, the, the needs are there and I think there's more and more people. We talked about that in our first session and said the awareness has been created. So the awareness about that, that, that there is a need, but at the same time that needs represents also an investment opportunity. I, I think that's a given. We also mentioned the topic that regulation pushes also certain investments in that direction, which is another factor. So I, I think we see quite a dynamic development there, though the numbers is of course or of course far away from what probably is needed to fully get there. But let's see how the dynamic will play out over the next decade, let's say. And, and I'm really not in a position to say I think, and here I think really very prominent is the topic of our climate crisis. The climate crisis, if it even more so emerge as a crisis it is already today, but but even more visible and tangible for everybody. Of course it will trigger certain developments on the regulatory side, but also developments, you know, just in the awareness of the private sector and that there's certain more investments are needed. The very fundamental discount you look for example at pension funds know in the US and like in of course the first and foremost as a fiduciary responsibility. And the way if I remember that correctly, it's formulated in the US is basically about the return. So they they have to make sure that that the return is maximized. Now the discussion I think will take place in the next one or two decades that one has to discuss whether beside the OR the maximization of the financial return has just beside it also the maximization of the environmental return. Because it doesn't help if it's only financially if, if we don't get the other part right. But that's a fundamental, you know, if, if you open that discussion and, and this get explicit, it, it's a fundamentally different view of looking at things compared to how we have been doing things for the last 100 years. Rokos I I appreciate that you brought up the topic of the climate crisis because earlier in the series we focused on microfinance. We spoke on different themes from an investment theme perspective. Talk a little bit about the evolution when it comes to investment theme awareness amongst the investor base in the bigger scheme of things, to my understanding, climate is the one outstanding topic which drives globally strongest the the whole development of linking investments with achieving a certain impact. Because that's the need out there. And it opens up all type of course of new investment opportunities. Because we see, as we speak, a lot of, you know, a lot of innovation happening in that space. Why do we see so much innovation? Because we see innovation because we all know it needs the innovation to, to, to get the crisis. If the word is or it's, it's a correct way of saying under control, I don't know whether it even can be achieved, but but all of that is needed. And that, of course, from an investor perspective is is super interesting and attractive. I again here it comes back to the strongest influence on whether we make it will mean again, the regulatory framework. Now, what does regulatory mean in the context of climate? Ultimately it I think it means many things, but the core of it is CO2 pricing of course. Imagine the the moment you know if you have to pay for your CO2 emissions at the level which is really needed to to get control of this. We are talking about pricing which is much higher than what we see in the market today. If we would have a global agreement on on such a pricing implemented it of course it of course tears of flow of money so strongly that of course, you know one would see so many more investments flowing into the sector, for example when it comes to CO2 capturing and storage. Yeah. So that these are huge topics. I think this is a critical point that, that, that from this perspective, when we talk about carbon pricing, maybe to, to tell our listeners concepts like carbon taxing, charging companies for emitting fossil fuels, current price of carbon is well below what if we're ever going to meet the Paris Agreement targets, we should be charging, right. If that were to change, if that regulatory change would come about, it would transform the industry overall. I think if one gets that pricing mechanism right and that's a political decision, it it, it makes a huge, it makes a huge difference and it could accelerate volumes of investment so fast. It's unprecedented if it happens. So I think therefore that part is a crucial part beside all the activity which already takes place and beside, you know, other activities when it comes to yeah, venture capital, which is, which is there to flow into certain tech. But ultimately it's related because there will be even more venture capital flowing into this. If one knows that later on the pricing, for example, if I do carbon capture, yeah, if the pricing is adequate for that. So that of course gives a strong intent incentive for all the people who do VC investments. Yeah. So it's it's related there. And I think the biggest leverage is that is that pricing. And from a personal perspective, I mean, right now you're talking about climate from a, from a need perspective, but maybe personally, what excites you the most in terms of investment themes? I, I really would like to see, but, but which is not a theme on our side right now. And I also don't see this really coming up so fast is of course education. I'm a strong believer that education has the biggest impact mid and long term. It's just of course, the, the, the educational sector and the education companies. We, we are talking to very large extent the public sector. It's not so investable and, and, and I don't go into that. But look, I, I'm, I'm really excited about to see that, you know, the awareness about the need that doing investments, combining this with the clear idea what do we want to achieve in the real economy that's very powerful. From your personal perspective, what more could we do? I think our role is very clear. It's we are globally operating asset management house. So for us, demonstration effect is super important, yeah, to show innovative approaches. For example, when we launched year back a social bond, a blanded finance approach where the public sector and the private sector come together and show that a capital market transactions, a bond structure can be done with very clear defined outcomes and impact measured also. That's a beautiful example of things which can be done. We as a company I think have to always have that ambition to on one side to dare to go into new directions and to demonstrate that these type of operations are feasible under the current environment already. And at the same time to really strive for that the topics which we have been developing already over the last two decades to continue to scale them up scale has then to do has these two sides are really to be more impactful. I mean, when you do something at a billion of a fund size or you do something at ten billion, that's a different, it's a different impact. Yeah. And the second is that allows again also them to be more efficient and demonstrate thing that certain approaches can really be done also in a super efficient manner is also very important in the industry. And I think so we as a global player, I think these are certainly our duties and to continue to fight with regulators, to continue to fight with also the public sectors and to Co operate, find solutions, productive solutions. But for that, it needs also to stand for what we stand for, what we believe in, because that's also a contribution to a sector development. Thinking of another impact investment theme that we haven't focused too much on, but which is becoming, which is extremely important and gaining more and more traction is the topic of gender finance and women. Now I know it's a bit odd to have two men discussing women and gender finance, but I think it's an incredibly important topic and we'd love to have your views on this. I'd begin with the point that there's a lot of research that shows women who are wealthy are more likely to invest in impact investing than men. Why do you think that is? If this is a finding in studies, you know that women are more open of doing this. If, if this is a finding, I, I completely from my personal experience, I agree with that. In a way, it's, it's because when you were speaking before about how you conceptualize impact investing, beginning with a theme, right, A lens. It seems more complicated when it comes to gender as a lens, right. Tell us a little bit about how do you perceive that complication? One has just to be also transparent there with the investors. For example, if we talk to investors and investors say, yeah, but you know, I like really your theme and let's say it is on food, but but I also would like to have a layer on gender, you know, like that there should be a clear gender focus in these investments. I I think that's fine. You know, if, if there's a group of investors and say, look, we, we want to have that beyond what we normally do. I mean, we will look into these topics anyway. But even if I want to go the extra mile kind of there might be people say actually it would be good. For example, we are, we are, we have even stricter criteria. For example, we only want to invest when at the board of directors as at least 50% women or we only want to invest if at the executive management level there is at least or there has to be a majority, for example, women. For just as an idea. I, I think it's fine. This is fine if the investors can formulate that very strictly and we can pull a group of investors and say, OK, but the investors have to be aware then that of course via doing so, the investment universe which you target is influenced by that decision. I like that's in, in any lens you, you put on a certain topic and, and sometimes I think it's important or sometimes it's just important to be very clear about this and say, OK, this can, this can be done. But it might mean out of the 200 companies which are investable or the 500 which are investable, it's now reduced to 200 and we pick out of the 200 and and not out of the 500. I like very much when when you are talking to a group of investors in the fund and they are very aligned in this top because that makes our life much easier. The reality is that in larger funds where you have different type of investor, things get a bit more complicated, a bit messy because some people would like to have a very strong lender gender lens on, on the product. But they're at the same time other investors say, yeah, but but I don't want to cut down my investment universe so much. And so I'm a bit more flexible there. And of course that's an our task to combine this in a way so that neither of the two groups. Is basically are completely disappointed with a certain product. Of course, all of these discussions happened X Hunter because you launch a before you launch a product, this happens and with investors where where the direct dialogue with investors takes place in. In your reply, I hear a bit kind of a tension between exclusion, which is inherent to having a lens and not wanting that exclusion to go too far when it comes to addressing otherwise viable and important micro entrepreneurs in these markets or other business models. There's not no micro, It's really broad. And then having a multiple of products, various products that can address these different themes. I feel also it is our duty to do 2 things, to explain exactly to each investor what are the consequences. I think that's a duty which we have as asset management house anyway. And the second thing is also to explain like, but that there can be between different lenses, that there can be conflicts and, and it needs a clear decision of what one wants to achieve with the fund. What role can technology play? When we look at the investor side, technology lowers cost and that gives new opportunity to a broader range of people like take Rochus or David. They take Rochus. Rochus says I have $20,000 to invest and I want, as we said earlier, either I want gender diversity, I want climate, I want, you know, I can, you know, according for example to the SDGS or that's what I want. Ten years ago people said no, it's impossible, nobody will build a portfolio for you if you have one to invest $20,000 with that it's impossible to do because it's too costly that we cannot do this today. Of course, technology allows doing that, so if you want. So the word, I don't like to use the word, but it is used very often. The democratisation of that excess, we used it 30 years ago for the democratisation, the credit of the because, you know, it was just, you know, but they have people uses these words kind of because it's kind of a picture which people can understand. What it means is yes, it means basically there are offerings or possibilities for a broader range of people to have this type of access to a service and this that this can be now done for individuals even with smaller amounts. Wonderful. That's a wonderful thing. And I think the same is true, you know, if when technology allows the investee company, you know, like to reach out to more borrowers or to more people providing for some healthcare, think about healthcare. Healthcare is to me, probably the single topic where I would say technology will be a big change, making game changer, game changer because because that's imagine, you know what? I'm, I'm not using any watches, but you know, imagine already what the single simple, I don't know, whoever provider of of the smart watches can do already. And, and now if you could just think a little bit. So that means wow, of course here that's really beneficial that there there can be, you know, really from for example, from a diagnostic point of view. And I'm not an expert to talk about this, but I can imagine that's a very big impact which can be achieved and so on, on both side. But it all it all, it always means OK technology and it starts at a high cost. Now, of course, it, the cost point comes down as it is with asset management, building portfolio, as it with, with diagnostic in a, in a healthcare service, the cost point comes down and gets more affordable and so we can reach out to more people. And out of curiosity, why don't you like the word democratisation? I don't know. It's a personal thing. La Democrat is assume del Credito. This was the wording which when I came into the sector 19191 or 9, you know, in, in the early 90s that that was very often in conferences. I don't know. I'm, I'm more a guy of I like look down to us and your focus is really concrete step by step. Where can we effect change across the investment themes that we, that we operate in. We dare to do also certain things, which sometimes are not easy, but I, I think we have as a global community, we, we, we have to push the frontier. And that's, I think what also I think what still excites me after many years. You've been CEO of responsAbility since 2016 and with responsAbility since 2003. That's some time, that's 20 years. What excites you today and what does the future hold for you personally? I picture again the people I met on the ground. You know, I have seen how life can be. And sometimes it's very difficult for somebody who never has been there, never have seen this, to really see what does it really mean concretely day in, day out. And I don't claim I know, but I got probably a bit of a sense of flavour, something there feeling. And I know it makes a big difference for the people us even trying explaining investors regulations and what we do and what we fail and what goes wrong and what works and all of that, all of that effort. But I think it's that's because ultimately it's it, it there's still there is money which flows and and which will contribute to changing life of people on the ground. That's AI think that's really what keeps me even after now doing this for 30 years, really excited about it. I'm really also a strong believer of we always have to also improve, you know, to make things more efficient. Yeah, because ultimately, of course, we have. We, we, we are working with money from people who yes, they invest with us. And I mean not only us as an asset management hub as, as, as an industry for the impact, but also for the return. Yeah. I mean, when you invest money from a pension fund, it's, it's pension is money. So therefore we are obliged to do this as efficient as possible to also from a financial side to deliver really the best what we can. I think we are currently at a very and you know, not only as a company, as an industry and, and in general the financial industry at a very exciting point, point in time where the financial industry, which is not always seen only positive. In all fairness, they say where you know, one can also demonstrate, you know, the the power and and impact the industry has. To wrap up, looking back the early days of your experience, the early days of impact investing, a lot of focus on microfinance. The focus now, as you mentioned, has shifted to the climate crisis, climate finance. Let's say it's 2050 and we had the best possible outcome. Climate crisis is resolved under control, no more problems. What's next? What's next for impact investing? Hopefully nothing. Let me put it like this and a bit provocative and, and what would it mean? Look, and that's something sometimes you know, I'm probably me as ACEO of an impact asset may I shouldn't say. So it always should continue and grow. No, but we want and that's important. And thank you for the question at the end of this conversation. Because ultimately, I mean, the, the real sustainability aspect of what we do is that we are not needed anymore. Ultimately now are we there? No, we are not there. Is there still a long way to go? There is a long way to go. But what we don't want is when we invest the proper or the better term for development, we want, of course not a development which, which creates dependency. That's not what we want. So we want a development so then people can stand on their own feet and they are not dependent on on something which now under impact investment we summarizes or we put this together and, and there's a special effort. So ultimately, you know, it would be nice on certain topics which we they're seeing today. If we say, wow, we have been successful. Let's take climate for example. I mean, if, if I can only hope we are successful that you know, in 30 years we say we, we don't talk about this because this planet is clean. So we might talk other topics then, which we can't even imagine today, but we hopefully are not talking that topic and there won't be any reports about, OK, what do we have to do to achieve and to get to that because it already has been done and and we are already operating fully net zero. And and we made it in time for example, that that that's the thing. Now there will be always other topics, but I think, I think there might very well be topics which we probably cannot even imagine today. Yeah, So today I think, I think here and we talked long time about those topic. I think, yes, there's healthcare, there's food, there's climate, there's inclusion. We have all all of these topic today, which will keep many people busy, but I really hope that we are successful globally and and so that yes, fine, one can then come to the conclusion and see it's actually a better plan at a better place. Probably naive to say, but all problems disappeared. I don't think so, and I think one should not think, but still, of course our duty is to walk into the right direction.