Regenerative finance for values-driven investors

The environmental, social and governance field is undergoing a reckoning on both its identity (“What is an ESG fund? I literally have no idea myself,” one industry insider told Bloomberg) and its credibility, with critics including the Securities and Exchange Commission calling out greenwashing and unproven sustainability claims. That doesn’t mean sustainable investing is going away: In a Morgan Stanley study, 79% of individual investors expressed interest in sustainable investing, and millennial investor interest rose 4 percentage points to a new high of 99%. But while ESG proponents work toward a new, more rigorous equilibrium, values-driven investors are seeking more direct and transparent ways to diversify their portfolios while prioritizing impact.

One solution is regenerative finance, an emerging asset class that uses financial and social capital as a tool to regenerate communities and natural environments. This approach encourages wealth holders to coordinate their investing and giving to maximize progress toward their impact goals.

Regenerative finance in action

Funds built on a regenerative finance framework invest in community-led development and private enterprises that aim to address challenges such as climate change mitigation and adaptation, healthy food and agriculture, and racial and gender equity. The framework comprises four interrelated strategies: holistic analysis, integrated capital, equitable deployment and trust relationships.

Holistic analysis: Investments and giving are based on a whole-system analysis that accounts for interlocking causes and effects. Holistic analysis undergirds all regenerative finance strategies, but regenerative agriculture financing illustrates the holistic approach particularly well.

Rather than focusing solely on, say, reducing water usage, eliminating pesticides or improving soil health, regenerative agriculture seeks to get all elements of farms and the food system to work in harmony and continually replenish natural resources. The challenge is that agriculture is a capital-intensive sector with intense price pressures and often poor labor conditions. Converting to a regenerative approach typically requires a mix of philanthropic, public and private funding, also known as integrated capital.

Integrated capital: Regenerative agriculture and other systems-focused enterprises often need various types of capital — loans, grants, loan guarantees, recoverable loans and private equity — along with network connections and other forms of social capital.

For example, integrated capital has been essential to the success of Viva Farms, a Skagit County, Washington, farm incubator that has trained more than 1,000 farmers in sustainable agriculture since 2009 — many of them immigrants from Mexico or Central America, young urbanites and women. To keep up with demand for starter plots from its incubator cohorts, Viva Farms used a combination of grants, loans and loan guarantees to acquire and preserve a significant amount of farmland.

Equitable deployment: Regenerative financing deploys capital more equitably by eliminating repayment terms and collateral requirements that extract resources from communities, revising exclusionary credit standards, involving core stakeholders in decision-making, and otherwise rebalancing the scales of economic control.

New Majority Capital, for instance, aims to close the wealth and gender gap by increasing business ownership within underrepresented groups. A core strategy is to help entrepreneurs acquire existing businesses from retiring baby boomers using capital from foundations, impact funds, donor-advised funds and individual accredited investors.

Trust relationships: Regenerative finance transcends the transactional. It is based on relationships of trust and shared values, an attribute that may sound limited or fanciful, but actually is what makes execution of the other strategies practical.

This could mean lending to a fair-trade portfolio company so it can finance infrastructure in its supply chain communities — without an expensive international underwriting process that would make the funding unaffordable. On the philanthropy side, it could mean handing over grant-making decisions to community leaders with lived experience in the field, trusting that they know how and where the money can have the most impact.

Powerful solutions often start with smaller initiatives. That is the appeal of regenerative finance for clients who like the idea of playing a central role in seeding enterprises that demonstrate new approaches: They may be sparking positive market changes that one day show up their ESG holdings.

This article was originally published in Professional Wealth Management.