ESG Sourcing And Due Diligence

ESG Sourcing And Due Diligence
<a href="">geralt</a> / Pixabay

Gabriel Thoumi’s interview with John Stroud discussing sourcing and diligence.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Check out our H2 hedge fund letters here.

Gabriel Thoumi: You were a traditional investment banker before your career switch to impact right?  Tell me a bit about your previous work.

Sohn Investment Conference 2021 Coverage: Octahedron Capital, Glenernie Capital

2021 Sohn Investment ConferenceThe following is our rough coverage of the 2021 Sohn Investment Conference, which is being held virtually and features Brad Gerstner, Bill Gurley, Octahedron's Ram Parameswaran, Glenernie's Andrew Nunneley, and Lux's Josh Wolfe. Q1 2021 hedge fund letters, conferences and more Keep checking back as we will be updating this post as the conference goes Read More

John Stroud: That’s right.  I worked with some of the largest, traditional investment banks, including the Bank of New York Mellon, Lehman Brothers and US Trust.  Essentially, I helped structure investment policy statements for family offices and private clients and improve their balance sheets.  Pretty standard stuff out of business school.

Gabriel Thoumi: You made a pretty big move into impact though, right?  Can you tell us about that pivot?

John Stroud: Sure.  I was focused on the quantitative and analytical side of the capital markets and was unconcerned with any benefit or harm the investments that we made were causing.  Coincident with this professional focus, I was raised to help others whenever and wherever I could.  This resulted in a dichotomy for me at first and eventually became a sort of cognitive dissonance.  I was funneling money into companies that were unconcerned with the welfare of their workers, the environment or the health of the local community.  I would then spend entire weekends sometimes advocating for clean oceans and natural parks and the plight of homeless folks on the streets of Washington, DC.  I had a blind spot and just didn’t see how my work in sourcing and allocating capital could benefit these causes I felt so strongly about.

Gabriel Thoumi: That all changed for you though?

John Stroud: Yes.  In 2010-2011, I was very involved with Miriam’s Kitchen and the amazing work they were (and are) doing around the reduction in homelessness in DC.  As part of my work on the board, we had discussions with a number of non-profits that wanted to find ways to more sustainably fund our efforts.  At the same time, I became aware of something called a social impact bond.  They are created as structurally similar to a municipal bond.  However, they are unique in that private investors, non-profits and local government work together.  Private investors fund a program that benefits a certain population of the community and are repaid by the government only if the program is successful.  We learned about the first such bond issued in the UK to help reduce the occurrence of released prisoners becoming reincarcerated.

Gabriel Thoumi: And you began discussing the prospect of employing such a bond to help with Miriam’s mission of reducing homelessness?

John Stroud: Exactly.  DC Government spends a ton of money in assisting the homeless population.  We worked with knowledgeable not-for-profit groups to generate an expense/homeless individual metric due to hospital visits, ambulance rides, etc.  Coincident with that, we arrived at two additional data points: the total cost of providing homeless citizens with proper medicine, food and shelter and the total reduction in DC government outflows to put such a system in place.  We found that the cost/per year/homeless was $35,000.  Additionally, we found that employing a program to completely take care of these folks amounted to a cost of $13,000/per year/per homeless citizen.  The final number showed the reduction in total cost (from hospital visits, law enforcement efforts, etc) was over $15,000.  Basically, this program could pay to take care of these folks, treat them with compassion and give them dignity, and still generate revenue in the form of less government outflows.  We didn’t get a social impact bond in place, but I was hooked on the potential of private capital to help solve the myriad of social and environmental woes we’re faced with.

Gabriel Thoumi: So why have you focused this article on deal sourcing and due diligence?

John Stroud: The impact investment industry engenders a certain romance and excitement around finding new technologies to help the world.  And these are crucially important.  Also important, however, and sometimes overshadowed, is the discipline necessary to first find a manageable group of appropriate deals for capital providers and then to overlay a common language and standards to properly assess and ultimately commit capital to deals.

Gabriel Thoumi: Are you optimistic about the industry?

John Stroud: Very.  The industry is maturing with more than $22B of capital committed in 2016 into impact funds or directly into social/environmental enterprises.  However, there is no room for error.  In my discussions with advisors, family offices and private clients, there still exists the sentiment that you should make money first, then give away a percentage.  Any efforts around impact only dilute the benefits of money-making and philanthropy.  To ensure that the industry continues to grow and remains resilient, companies that drive impact and perform financially need to be rewarded with additional capital and the fund managers that recognize these entities should flourish.  Staying focused on proper sourcing and granular diligence is an important aspect of this aggregate goal.

No posts to display