Shhh! Don’t Tell Institutional Investors, but Sustainability Drives Returns in Real Assets
Wednesday, April 15, 2015
ImpactAlpha.com – Dave Chen and his team at Equilibrium Capital in Portland, Ore., don’t generally pitch pension funds and other institutional investors on the firm’s thesis that environmentally and socially beneficial practices can drive operational efficiencies, reduced risk and above-market, or ’alpha,’ returns.
Instead, they talk about real assets, such as real estate, farmland, timber and infrastructure, as a hedge against inflation and market volatility that can combine immediate yields with long-term appreciation. Equilibrium combines this appeal with practices that further boost returns and reduce risk. The fact that those practices are environmentally sustainable is an added plus.
The Portland, Ore., firm, with more than $1 billion on its platform, is not only an investor in but an operator of blueberry and citrus farms, agricultural bio-digesters, energy efficiency generation and other “sustainable” real assets.
“Sustainability is becoming just the way business is done,” says Chen, a former venture capitalist and tech executive. Increasingly, companies are internalizing the true costs of their operations, and the pricing of risks is becoming well-understood. In earlier decades “quality” in manufacturing went from being an added cost to a competitive advantage, Chen notes. “Sustainability is on this very same path.”
Chen formed Equilibrium Capital in 2007 around what he saw as powerful trends, from the rising consumption of the global middle class to a new focus on water use to the reshaping of major commodity sectors. For Equilibrium, natural resource constraints and increasing demand create a value-shift and market opportunities. To realize those opportunities and tap the sustainability value, Equilibrium has built investor-operator teams and asset-management strategies that combine on-the-ground experience with the financial discipline required by institutional investors.
Financial engineering, which got a bad rap in the global financial crisis, is a potentially huge force for social good, he says. A teacher at the Kellogg School of Management and Stanford’s Graduate School of Business, he tells his students: If you want to change the world, you better know your way around a spreadsheet. He is a co-founder of what is now the Morgan Stanley Sustainable Investment Challenge, in which teams of MBA students compete to develop workable structures for financing solutions to social and environmental challenges.