The world of investing is constantly evolving. With each passing generation, we witness a profound transformation in investment strategies influenced by changing societal values.
In this month's episode, our host Matt Sutorius speaks with Josh Hile, CEO and co-founder of Citizen Mint, on the future of investing and the fascinating world of impact investing, where finance meets social and environmental responsibility.
The world of investing is constantly evolving. With each passing generation, we witness a profound transformation in investment strategies influenced by changing societal values.
In this month's episode, our host Matt Sutorius speaks with Josh Hile, CEO and co-founder of Citizen Mint, on the future of investing and the fascinating world of impact investing, where finance meets social and environmental responsibility.
Matt Sutorius 0:10
Welcome to Making Change, the CPA podcast that has nothing to do with accounting and everything to do with innovation. I'm your host, Matt Sutorius, and today we're speaking with Josh Hile, CEO and Co-founder of Citizen Mint.
Matt Sutorius 0:31
Josh, thanks for being on the podcast today!
Josh Hile 0:34
So excited to be here, thank you for having me!
Matt Sutorius 0:37
So I want to talk a little bit about this idea of impact investing because, honestly, it's something I had not heard of three years ago. Now, it seems to be everywhere. You've got presidential candidates talking about it, it's in the news all the time, so maybe give us an overview for our listeners. What's the difference between a traditional investment model and this idea of impact investing?
Josh Hile 0:59
Yeah, no, definitely. I think it is relatively new in the sense of just how people think about, like, what is impact and what does that actually mean? So like, a traditional investment model is, "Hey, I want to invest in something and I want profits off that particular investment." And then, you know, it kind of transitioned about 20 years ago to like, they have these things called Socially Responsible Investing. That was, "Hey, I don't want to invest in these particular parts of the market because of my certain beliefs." And then it transferred to ESG Investing, which is like environmental, social, and governance should be part of the like the thought and risk process of how I evaluate an investment. And then it really came back to impact investing, which is essentially saying, like, I want there to be profits, like a financial return from my investments, but I also want it to impact some particular global challenge. So whether that's around like affordable housing, or health care, or education, or climate change, or sustainability. I mean, there's a lot of different things that things can have an impact on, and it's really focused on a positive impact, because all investing has some sort of impact. Whatever you're investing in, it could be negative, it could be positive, but really focusing on those things that both have financial returns, and I think that's incredibly important, because people think impact investments and they might be like, "Oh, it's philanthropy." And it's like, no, it has to have a real financial return, and at the same time, you need to have like some sort of positive impact with that investment. Just a couple quick examples of that could be like affordable workforce housing. We have an affordability crisis in the US, Seattle's incredibly expensive. Teachers have to drive usually 40 miles to their job. So it's like, how do we impact the local environment where we can provide better housing for people so they can live closer to where they work?
Matt Sutorius 2:45
Right. Yeah, that makes sense. And is it a step beyond just ESG? You mentioned that is kind of part of the evolution of this. What's the difference between that sort of investing and impact investing? Is there some difference between those two concepts?
Josh Hile 3:00
Yeah, no, there's a huge difference, honestly, like ESG is really thinking about from a company perspective, the risk you have within like, environmental risk, you have social risk, you have governance risk. So, and each one of those it's like for environmental risk, where are your plants located? Is it going to be impacted by water shortages? Is it going to be impacted by pollution discussions around that local environment? For like a social perspective, what's your brand doing? So, if you're putting sweatshops somewhere and getting your clothing from sweatshops, that's going to be actually like a brand issue for you, and it's actually going to impact your financial perspective, even though it might not be like a financial measurement that normally come into play. Whereas impact investing is saying, "Hey, there's these actual big issues within the world that we should be putting money towards, and whether that's like, hey, there's climate change so maybe we should be putting money towards solar and wind power, which is renewable energy. And we can also affect climate change by not having as much like carbon output from that particular opportunity."
Matt Sutorius 4:14
Do you feel like for a lot of people, this type of investing will be an alternative to more traditional charitable endeavors, in addition to regular investing, because it kind of sounds like it could be.
Josh Hile 4:26
Yeah, 100%, and I think that's actually where the markets going, like Fidelity Charitable, they're the biggest donor advised fund in the world, does a lot of research around their particular investment base, and essentially they said that 56% of millennials believe impact investing has more of an impact in philanthropy. And that's like 43% for, I think Gen X, and then it's a lot smaller for baby boomers, because baby boomers usually have traditionally said, "Hey, my profit centers over here. I philanthropies over here." Whereas, millennials are saying, "Actually, what if I can invest in something that's ultimately doing what I want it to do, from a philanthropy perspective, but getting that return on my investment and being able to recycle that capital into other opportunities." Which, you know, from a millennial perspective, just more efficient use of capital.
Matt Sutorius 4:48
And, you mentioned millennials, the generational shifts of wealth is going to be pretty massive from what I've read over the next couple of years to a decade or so. Is that going to really grow this idea of impact investing? And is this the shift culturally that's going to make this the thing that everybody does?
Josh Hile 5:37
Yeah, I think so, and I think people underestimate how big that shift is. I mean, the numbers are there, it's real. I still have people say that's not real, but I'm like, "That's literally the numbers, like it's $84 trillion is transferring from Baby Boomers to Millennial and Gen X over the next two decades." It's the largest transfer of wealth in history. It's going to have massive implications across so many different parts of the market. These investors just want to invest completely differently than their parents. I mean, you know, Bank of America did a private wealth survey where it's essentially like, younger investors want three times the amount of alternatives in their portfolio and half the number of stocks. They also want more values alignment in their portfolio, and so you know, Morgan Stanley did a study that like 99% of millennials are interested in impact and sustainable investing. So it's really a huge mindset shift. There's a lot of millennials who just don't believe the same way in the stock market as their parents did, and the volatility of the stock market and that they're actually doing good by investing in the stock market. So there's just a lot of things that will change within an industry as a result of that.
Matt Sutorius 6:52
It seems to me that the impact of this is going to be incredible, because there's only so much the government can do and charitable organizations can do, but if you get the power of the market, and people's actual money behind some of these ideas, it should generate a lot of movement in the next decade or so.
Josh Hile 7:09
Exactly. And I mean, it is less so from a individual client level that it's been in the past, because you know, institutions have been investing in these opportunities for a very long time. It's pretty common for an endowment or a pension fund to invest in infrastructure, even more so in Europe, like they're investing in impact investments is a big part of their portfolio. But it's kind of slowly moving its way down to the retail channel, where they're like, individuals have the opportunity now to invest in these opportunities, and it's becoming more prevalent.
Matt Sutorius 7:42
Are there any studies out there? Has anyone looked at whether or not this style of investing produces higher, lower, the same level of return as just dumping your money into some kind of mutual fund?
Josh Hile 7:54
Yeah, so one, you have to differentiate between like a mutual fund, which is a traditional stock asset versus like private markets, which you know, your money is locked up, you can a little bit more of what's called a "illiquidity premium", where you should expect more return because you don't have liquidity to your money. Now, in cases like a private's versus public's, privates have outperformed over time by a few percentage points. You know, if you look at like the traditional S&P 500 stock market, you're probably expecting 7 to 8% over a long period of time. And then if you're looking at the private market, you're probably expecting closer to like 10 or 11% over a long period of time, depending on how you're allocated within that marketplace.
Matt Sutorius 8:38
Right.
Josh Hile 8:38
Then on top of that, is the question around impact. Has impact outperformed or done just as well? And it's, the data's still a little bit hazy, just because it's like "What was an Impact Fund 20 years ago? And what is one now?" From the more recent data that we have, like probably the last five to seven years, it's been on par with kind of the private markets in general. And in some cases, has outperformed the private markets, depending on the specific asset class. There can be a lot of volatility in that because it's like, so you can be invested in solar and wind, or you could be invested in, like, oil pipeline. And oil pipelines are incredibly volatile over time. So, at one point in time when oil is going crazy, like last year, yeah, those outperform like the solar and wind projects, but like solar winds just like steady Eddy a long time.
Matt Sutorius 9:30
Right. So there's really no trade off, actually. You're not accepting a lower return.
Josh Hile 9:34
There is no trade off, it's been proven that that's not a trade off, and they've just come out with a couple more studies that have shown that.
Matt Sutorius 9:42
Is there any kind of government regulation in the works that will either limit or encourage people to invest in things like this?
Josh Hile 9:51
I mean, there's always government regulation that's going to come into play in almost every part of the market. If you think about affordable housing, there's a ton of subsidies. If you invest in a property that has 25% of its units are highly affordable. So say in Seattle, you get 12 years of tax abatement, so you don't pay taxes on property for 12 years. For low income housing, the government subsidizes the rents of building low income housing, and you get tax credits for that. For renewable energy, the Inflation Reduction Act was the largest act of all time, that's going to encourage trillions of dollars to be unlocked within the renewable energy space. So the government is encouraging these investments, because they need to. I mean, like energy security is the number one issue in the world. It is one of the biggest issues, like if you think about people getting re-elected to Congress, they're worried about their constituents getting frustrated just by how unaffordable what their particular areas they want to live are.
Matt Sutorius 11:01
How do you get educated about this stuff? How do you become a more sophisticated investor?
Josh Hile 11:05
Yeah, I mean, first you subscribe to the Citizen Mint newsletter. You can do that on our website.
Matt Sutorius 11:10
Excellent plug!
Josh Hile 11:12
No, I mean, there's a lot of education pieces out there around like impact investing and kind of understanding what the marketplace is. There's a lot of pieces coming off of like, just like big investment managers. I mean, that's the big change that I saw within the industry over the last five years is almost every major big investment manager is moving into the space, because of the opportunity set. Beyond just like the do good story, it's saying, "Hey, these are just really good opportunities for us to make returns for our clients." So that's why you see KKR there, Carlyle there, Bain there, TPG, Wellington, Apollo, all moving into the space in a big way. I mean, multibillion dollar funds every single time. So you can get information from there. There's other different resources within the space, whether it's like some of the big universities have impact or social entrepreneurship programs, like Stanford just put out. They have like probably the biggest endowment for one, I think it was like a $1.2 billion endowment that they just announced for their Social Entrepreneurship and Impact Program.
Matt Sutorius 12:16
Wow!
Josh Hile 12:17
USC has a huge impact program, Duke, Berkeley, I mean, across the board, there's a lot of information that's being produced at the current point in time.
Matt Sutorius 12:27
How much money do you need to be an investor in things like this? Are there minimums? Is it something that everybody can hop in to?
Josh Hile 12:35
So it just depends on the opportunity. So what we're doing at the particular point in time, is really providing access for accredited investors. So that's investors who have some income qualification or some total asset qualification, or they could be like have certain knowledge base, so they work in a financial firm of some kind. Now, usually, the minimums are, say, $25,000 for these particular investments specific to us, and that's why we came into the space is really to lower those minimums, because in most cases they're $250,000 or $500,000. So we're trying to really lower that barrier to entry. And, you know, there is talk like, or there is certain opportunities that will probably be coming in the future that go to non accredited investors too, it just can be in the private market space, it just takes a little bit more work. And you have to go through some more SEC compliance to get those opportunities to ultimate retail investors.
Matt Sutorius 13:39
If the majority of your investing happens through your company sponsored 401k, what should you do? Should you go and look at the fund options and try to pick ones that that have more impact investing strategies, is there a mechanism to do that?
Josh Hile 13:54
So 401ks are tough. For IRAs, you do have some more flexibility of utilizing specialized IRA Trust to self direct your IRA to particular opportunities. But 401k's are one place in the market where private funds haven't really been allowed in a broad case, it's really been focused on traditional stock and bond funds. So that's the one thing where we haven't seen a breakthrough on that market to provide access to these opportunities. There is more ESG oriented options within that marketplace or if you have like a specific want or desire with your portfolio but really it's been on the IRA side.
Matt Sutorius 14:36
Okay. And this, you know, ESG funds, they always make me nervous. One of my friends likes to talk about how Philip Morris has this crazy high ESG score, higher than Tesla's, because boxes which I wouldn't personally choose to invest in. So it seems like you can game that system a little bit but you can't really game impact investing this type of way.
Josh Hile 14:58
Yeah, that's the thing with the ESG scoring. It's so bespoke. It has mechanisms in it that you can game if you have Head of Sustainability, you have an ESG. Doing all these other programs, then it's like you can offset the negative impacts that you're doing to the world. I mean, there's no correlation among ESG scores at the major providers, they're actually uncorrelated to a very significant extent. So it's really tough to know on that if you're actually doing good or not. We focus on the impact where it's very specific impact that you can measure on the way out, and we do have measurements of how many people are you housing? How much carbon is taking out the environment? Are you abaiting with this particular opportunity?
Matt Sutorius 15:40
Anything else, Josh, that you can think of that, you know, a listener should be thinking about today as they plan retirement, as they wonder what they're going to do in their middle age with their money? You know, what's a good first step?
Josh Hile 15:53
Yeah, no, definitely. I think it's just, you know, if you're working with an advisor or talking to them about different opportunities they have on their platform to be allocated in this way, it's like really thinking about how you want to allocate your money beyond traditional stocks and bonds. I think there's a lot of people who need the education around "What is it take to put money in the private markets?" We provide even a lot of white papers around that. And I think, you know, just becoming educated about the opportunity set, because sometimes I just like, I'll say infrastructure and people's eyes will glaze over, but if I say "the largest capital investment cycle of all time", then they're like, "Yeah, of course. I want to be invested in that." Right. So yeah, we try to provide a lot of education about that, but there's a lot of other resources out there.
Matt Sutorius 16:40
Excellent. Well, Josh, thanks for coming on the podcast today! It was as a pleasure talking with you.
Josh Hile 16:44
Yeah, so good to talk to you. Thank you so much.