Making the World a Better Place While Also Making Money
Earlier this month, 10 teams from business and other graduate schools from around the globe convened at Morgan Stanley’s New York offices for the Kellogg-Morgan Stanley Sustainable Investing Challenge. At the end of the day, low-income primary and secondary students in India may just end up being the biggest winners.
The annual competition, now in its seventh year, brings together bright teams of graduate students from leading business schools and other institutions to apply financial know-how and ingenuity to tackle some of the world’s thorniest problems. Known as sustainable investing, it’s an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns while also having a positive social impact—and it’s quickly gaining traction. In 2016, $8.72 trillion—or more than one of every five dollars under professional management in the United States alone—was devoted to sustainable, responsible or impact investing strategies, according to US SIF: The Forum for Sustainable and Responsible Investment. That’s up 33 percent since 2014 and represents a 14-fold increase since 1995. Because not only is it the right thing to do, it’s also profitable.
And business school students are paying attention and getting involved. EduIndia—a team comprised of three MBA students from Northwestern’s Kellogg School of Management—took top honors at Friday’s finals for its novel idea to help meet growing demand in India for higher-quality, affordable K-12 private education. Poor conditions in cash-strapped Indian government schools have led parents to increasingly seek out private education for their children, so much so that low-fee private schools, which charge roughly $8 a month per student, simply can’t keep pace with the demand and are in desperate need of growth capital. But existing loan options that would be required to fund expansion for these schools come with extremely high interest rates, placing them out of reach for more than half of those that need them.
Enter EduIndia and its creative solution: a private growth debt fund that can provide schools with the growth capital they need to expand at terms much more attractive than existing options, including allowing schools to repay based on a percentage of revenue. Addressing another problem faced by the schools, EduIndia’s proposal also promises to help retain students who are struggling to pay tuition by offering parents low-cost student tuition loans from partner microfinance institutions that in turn are guaranteed by the fund.
“Unlike a loan that has a fixed interest rate, the private debt fund we proposed allows schools to repay in a more flexible manner that is better for them,” explains EduIndia team member Erica Hoeveler. She and Kellogg classmates Ashwin Halgeri and Chris Shaw started with a proposal that was closer to a standard loan and then began the process of refining it. “In the beginning, we thought about more traditional mechanisms, but by talking to the schools were realized it was not the best structure,” Hoeveler says. “We adjusted our proposal to match the schools’ needs, plugging other features in to make it make more sense to them.”
Inspiring students to innovate conventional financing vehicles or devise new ones in ways that can help address global social and environmental challenges was exactly the goal of the Sustainable Investment Challenge when Kellogg launched it in 2011. Morgan Stanley came on board as a co-host four years ago.
SUSTAINABLE INVESTING GOES MAINSTREAM
“When this challenge began, the concept of using market-based financial tools and expectations of returns to address social challenges was viewed with some skepticism,” says Megan Kashner, Kellogg clinical assistant professor and director of social impact. “What we have seen in the marketplace in recent years is a shift of this type of investment from early edge to more mainstream.”
For Morgan Stanley, getting involved in 2013 made complete sense. “We saw the Sustainable Investing Challenge as incredibly well aligned for our Institute for Sustainable Investing,” says Cynthia Wong, vice president of sustainable finance. The firm’s sustainable investing institute was established that same year “to build on Morgan Stanley’s ongoing work to advance market-based solutions to economic, social and environmental challenges, operating from the foundational principle that sustainable investment can only achieve significant scale by attracting a broad range of private sector capital,” according to its website.
“Getting involved with the Kellogg competition provided an opportunity for us to engage, harness and inspire the next leaders in the space,” Wong continues. “The sustainable investing field is one that is still growing quite quickly, and we want to be part of driving that growth.”
Kellogg’s Kashner praises Morgan Stanley for its early involvement and celebrates the fact that more large-scale financial institutions are following suit. “Where this competition used to be a little bit novel and leading edge, it is now squarely in a trend,” she says. The competition has drawn attendees and sponsors from foundations and impact investors such as the MacArthur Foundation, the Milken Institute and Equilibrium Capital since its debut, but today there are hedge funds and large global integrated financial service firms coming in as judges, mentors and sponsors, she adds. “This is squarely within who they are and what they do in a way that it might not have been several years ago.”
That financial services firms increasingly see the value in sustainable investing makes perfect sense to Kashner. Sustainability is the strategic long-term management of resources, she says. “Financial markets have incredible power to move outcomes and to reflect and capitalize on trends, risks and opportunities. And so much of what we see in the realm of social investing is investing that leverages these capital markets to take into account long-term risks and returns for people on the planet,” she says. “That is central for all of us and for all of the companies. Why wouldn’t financial institutions be interested in this? Especially now that we have access to vast amounts of global data on how these environmental, social and governmental issues can have impact.”
Morgan Stanley’s Wong, for her part, credits millennials for some of this shift. “This competition is more important than ever now because we are seeing sustainable investing become a mainstream investing force,” she says. “Millennials really are the leading force behind this. We see it from both our millennial employees and our millennial clients—a growing desire to address social challenges through financial vehicles that achieve positive financial returns.”
