Naryan comments on Open Thread #40 - Effective Altruism Forum

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Comment author: Naryan 09 July 2018 10:19:58PM *  5 points [-]

Impact Investing from an EA Perspective

This is just a teaser, since I don't have enough karma for a full post yet!

Picture a scale that has charity one one side (good social utility, -100% financial return) and Investing on the other (zero social utility, 7% financial return). Impact investing is a space that can give similar risk-adjusted market returns as traditional investments, but also provides social utility.

In my research, I've found several factors that make me excited about this area:

  • Impact investing is about 5% the size of charitable donations (22B vs 410B in 2016), and is growing much faster (17% vs 4% annually)

  • Impact investing makes up only 0.16% of the total capital markets - huge room for growth

  • Philanthropic enterprises with sustainable business models can use existing capital markets to get funded on a large scale

  • Due to the market's current inability to accurately value the 'social utility' provided, there are many greatly under-valued investment opportunities, providing similar social utility as comparable charities

I've got more detail, logic and sources in the full post, but in the mean time, I'll tell you about one example opportunity that I've zoomed-in on.

WorldTree is a company that lets you buy an acre of fast-growing Empress Splendor trees. It's goal is to generate income from the harvest of the trees, and offset the carbon footprint of investors: * $2500 CAD minimum investment, enough to plant 1 acre of trees * One acre is enough to offset your lifetime carbon footprint * The timber is sold after 10 years, conservative return to the investor is $20k

From an EA perspective, I compared the stated carbon cost of World Tree ($1.72/tonne) to Cool Earth ($1.34/tonne) and traditional carbon offset programs ($10/tonne). This investment could return a 23% annual return, while the Cool Earth 'investment' would be a loss of 100%. At it's surface, this example does look quite promising when counting both the social utility generated, and the future utility my $20k could do in 10 years time.

Looking forward to posting a more detailed write-up on the space once I'm able, and to hearing your feedback on these ideas!

Comment author: Peter_Hurford  (EA Profile) 10 July 2018 05:50:58AM 5 points [-]

This investment could return a 23% annual return

That's insanely high... social arguments would be irrelevant if you could safely get that kind of return. Every investor would want in.

Comment author: Naryan 10 July 2018 10:51:19AM 0 points [-]

The key word is "safely". This kind of investment would be considered high risk - this company only started this program three years ago, and the first trees haven't yet produced profit. Additionally, the 10 year duration is unattractive for many investors, and there isn't really a market for this type of wood in North America yet. They need to offer a big reward in order to entice investors to fund their venture at this early stage.

I suspect other early stage ventures would have a similar high-risk, high potential return profile, which is why they are typically limited to accredited investors.

Comment author: Heteric 10 July 2018 01:53:37AM 0 points [-]

I'm a huge fan of this concept. Have you done a lot of research on this? Do you like WorldTree specifically, or are there other Impact Investing orgs you're aware of?

Comment author: Naryan 10 July 2018 11:01:10AM 0 points [-]

This field is really interesting, and there is a lot of research out there on it. The Global Impact Investing Network (GIIN) is a good starting place, but I've spent about a week pulling together stats from several sources to build my view on this space, and the Canadian options in particular.

I do like World Tree in particular, because it both produces high-impact social utility, has a high expected financial return, and I can actually buy-in without being accredited. Unfortunately for people with less than $1M, the options for impact investing are very slim at the moment.

Typical options include Green Bonds with a 4-5% return over 5 years, or investments in smaller community funds with a fairly small impact.

Check out a few Canadian options at OpenImpact