#akwwong

Scientific research has long followed a four-step process: funding, doing the research, publishing the results in a paper, and commercialization. I believe that we’re at a unique point in our history where a number of changes in technology and in the broader public mindset, will allow for each step of the process to be disrupted and changed for the better. 

Based on discussions, readings, and some of my own reflection. Here is my collated view on how each part of the process is changing, and some of the implications.

Everything about New York City fascinates me. Wander to any part of the city and you’ll find unique collections of structures and landscapes – each with their own story to tell. From the city’s central jungle to the surrounding concrete jungle, there’s always something new. Moving to New York City two years ago, I already knew that I’d like it, I just didn’t realize that I’d fall in love with it.

While it was a bit overwhelming at the beginning, I quickly learned to appreciate that living here meant taking everything that the city had to offer and boiling it down to a set of things that worked for me. While New York is big enough to have almost everything, the one thing it doesn’t give you is time. The fluid nature of the city and its people means that nothing ever stays static. For this reason, everyone’s New York story will be different.

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For me, my story started with a simple walk along the Hudson River on Thanksgiving in 2011 (when I was an intern in the city). Escaping from the crowd of the Macy’s parade, I managed to make it to the water, and for no particular reason, just started walking along it. Maybe it was the fact that it was a beautiful sunny day, or because it was one of those rare moments when you’ve got an entire piece of the city to yourself; whatever the case, that walk convinced me that I needed to be here.

Returning a year later to work full-time, I started to see different aspects of New York, and felt a sense of “being home”. Starting my new job, I met a ton new people who came to become my new family. Days were spent food hunting (for the best ramen, best burger, best pizza, the best “you-name-it”), seeing galleries/museums, and strolling through the city. Nights were spent bar hopping, hanging out on rooftops, or just simply hanging out.

The silliness of being young while also forming lifelong friendships was a big part of my story’s narrative. It was nice to know that you never had to really plan to find something interesting – rather, something interesting usually finds you. About a year in, I was surprised to find a sense of stability in such an inherently transient environment.

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Most of us who end up here,   

probably overachieved in school, 

probably have ambitions,

probably values the prestige of things, even if we don't admit that we do, 

probably cares about legacy,

probably trades upside for optionality,

probably overvalues ideas and undervalues execution,

probably a little too guided by what other people perceive as success, 

probably over thinks everything,

probably knows what they should do, but aren't doing it

One of my favourite courses from university was in my last semester of school and on the topic of Energy Engineering.  Different from typical engineering courses, the content was not all technical. It was a good balance between the science of different energy sources (i.e. Coal, Oil, NatGas, Wind, Solar, Nuclear, Geothermal etc.), along with insights into the political, societal and environmental implications that comes along with their implementation.

We were encouraged to think critically about how to address the issue of balancing energy supply and demand in light of the ever-growing body of evidence around climate change. The final question of the final exam asked us to outline what we thought the energy mix of the future was. There was no right or wrong answer to this question – as long as it was justified with supporting evidence.

Thinking about the answer of this question from an engineering point of view, I structured my answer around a common framework that many people typically think of energy in – baseload vs peakload demand.  Baseload demand energy was the ‘always on’, reliable, and non-volatile source of energy crucial for keeping the lights on. I argued the types of energy sources fitting this category should be either nuclear or enhanced geothermal.  Peakload energy was the opposite – energy that could be ramped up or down based on demand. The typical sources of energy in this case I argued should be the renewable energies of the world (and maybe natural gas for a bit).

I generally concluded, as most other engineers would, that there is no one energy source that will dominate in the future – an all the above strategy seemed sensible to providing what we would need.

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Fast forward a few years after leaving that classroom, one thing that I quickly learned in the ‘real world’, was that almost everything was dominated by finance, and with that, the concept of risks and returns. This version of the world placed a heavy emphasis on evaluating decisions by trying to maximize returns whilst minimizing risk.

I also learned very quickly that minimizing risk meant being well diversified and ensuring that you were not overly concentrated in any one asset class. Relatively uncorrelated or negatively correlated assets were the keys to limiting volatility. This formed the basis for the concept of a diversification benefit – the idea that on average you’ll realize more value from the sum of the parts, than any one individual component.

Thinking about this in the context of energy, it wasn’t that much of a stretch to think of financial assets as energy sources, and financial returns as the actual energy produced. Different energy sources (like assets) can be more or less volatile than others with their production (like cashflows or returns) driven by different external factors. Going back to that course in school, I started to see that the ‘all the above’ energy concept was really just the idea of ‘diversification’ explained in a slightly different way.

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This got me thinking. If a diversification benefit can be calculated for a portfolio of assets, why can’t the same thing be calculated for a portfolio of different types of energy? I believe that we should think of different energy portfolios (that supply a particular population of people) in the same way that we think of financial portfolios.

Only in this way can we avoid making decisions based purely on overly simplistic economics. The case and point here in the US is the recent discovery of shale which, on the surface, makes any cost/benefit analysis based on current day gas prices conclude that other energy sources are not viable. This type of short-term thinking has the potential introduce substantial concentration risk into our energy system and substantially weaken its resilience to shocks.

One of the defining features of an Impact Investment is the differentiated mission statement(s) found within the organization or groups of organizations you invest in. Where traditional investments maximize financial outcomes, impact investments maximize social and environmental impact alongside financial returns. This is baked into the governance structure and values of the organizations – legally binding them to minimize mission drift as the organizations mature and take on additional investors.

A key certification program that has become the standard ensuring this new form of governance is the ‘B-Corporation’ certification program (or B-Corp for short). The program evaluates any given business on a standardized set of impact metrics, all the way from environmental sustainability to evaluating the strength of the organization’s governance structure. For-profits and non-profits have been accredited under the designation and include famous names like: Patagonia, Etsy, and Warby Parker (to name a few!).

Given that a number of these B-corps are growing to a point where the next logical stage of growth is to take on public equity, interesting questions are arising around:

1) the ability for these organizations to minimize mission drift and 2) the ability for investors to adapt financial theory to take environmental and social impacts into consideration in valuation and credit analysis.

My view on question 1) is that it will be impossible to have zero mission drift when you open the company up to public investors. Even if your investor-base is 100% mission-aligned, they still expect risk-adjusted returns comparable to the market. All investors have some expectation for their investments to appreciate in value, or return dividends in the long run. The balancing act here is for organizations to transparently articulate to its investors the options available for re-balancing social, environmental, and financial levers – such that net-net, the organization continues to meet profitability expectations (both from the revenue and expense side!).

On question 2), I believe that a new set of impact investment focused data and analytics will need to be created in order to characterize these new risk/return profiles.  These tools will differ widely across the different types of impact investments (the four categories were introduced in my previous articles). Systems that track and standardize social and environmental metrics (and the ability to translate these metrics into costs) will be imperative for capital decision making for investors, governments, and donors.

Below-market rate investments

Unintuitive at first, one might wonder why anyone would ever consider making a below-market rate investment. When I started looking into examples of below-market rate investments in the context of social impact investing, I found it easier to think of it as two further sub-categorizations – “emerging” or “catalytic”. Both of these categorizations have very different ‘investors’ with very different outcome expectations.

Emerging: Investments in developing countries and/or investments that are targeted towards bottom of the pyramid (BoP) populations around the world. The component of these investments that makes them ‘below-market’ is on the denominator side – i.e., the ‘risk’ piece of the equation.

Examples here would be investments in areas like water sanitation, low-income housing, and microfinance (to name a few). Investments in these developing / BoP markets have inherent frictions that can significantly increase the risk of doing business. For the typical mainstream investor, information asymmetry is rampant, political risks could be high, and liquidity is basically non-existent.

That being said, this piece of the market boasts the most popularly quoted statistic in the impact investment space today – the potential market size of $400bn to $1 trillion of invested capital over the next 10 years. However, getting to that point won’t happen overnight. As suggested by the initial classification as a below-market rate investment, you can expect significant risks. There’s a reason why the players for "emerging” investments are mostly occupied by private funds that have significant capital (to diversify) and deep expertise in managing and mitigating the risks mentioned above. For mainstream investors, investments into the ‘emerging’ segment will always carry significant risk until the market infrastructure matures.

Catalytic: Investments in markets/communities that spurs additional investment. This is typically done through investment in market infrastructure (which otherwise would not exist / be built) or by providing early risk-capital.

Examples here can be drawn from a number of innovative philanthropic funds – the most famous of which is Acumen Fund. Acumen Fund is a philanthropic fund that deploys its donation capital in investment-like circumstances in order to create the right conditions for further investment.