Recent Opportunity Zone industry trends are showing that making money and doing the right thing aren’t necessarily in conflict.
Research and industry insiders say ESG criteria — or judging an investment’s merits based on environmental, social and corporate governance — is often helping sway where dollars go and where they don’t.
For environmental, investors examine how their actions affect the planet. For social, they look into employee well-being, as well as how suppliers and the community at large are treated. For governance, it’s about ethics, transparency and performing fiduciary functions.
A report sponsored by the US SIF Foundation, a Washington, D.C.-based nonprofit that advances sustainable investment, found that investment deemed sustainable, responsible and impactful expanded to $12 trillion in the U.S. in 2018, a 38% jump from 2016. The foundation attributed the growth to conscious asset managers, who now consider ESG criteria across $11.6 trillion in assets. Issues of concern for them were often related to climate change and carbon emissions, connections to tobacco and conflict risk.
The Opportunity Zone trend of investing in environmental, social and corporate governance
The mindset behind ESG does, at least partially, fall in line with some of the intentions behind the Opportunity Zone legislation, which first emerged in 2017 as part of then-President Trump’s signature Tax Cuts and Jobs Act. The law created Opportunity Zones designated for their low-income populations that could use private investment to spur communitywide growth — a win-win for all sides involved.
While some critics would argue that hasn’t always happened, it has occurred enough to make a difference in some areas of the United States, where the mantra of private investment doing public good in a socially responsible way rings true.
Craig Bernstein, chief investment officer of OPZ Capital, based in Washington, D.C., said he sees family offices and institutional investment managers driving the conversation around ESG-focused investment.
“Within the family office space, we have recently seen younger family members take a more active role, serving on family investment committees,” he said. “Many of these millennial investors have made it a priority that their family no longer make investment decisions based solely on generating ‘absolute returns,’ but take into consideration the environmental, social and governance impact of a particular investment.”
Bernstein added that institutional investment managers often now require incorporation of ESG strategy into their asset allocation models.
“This has led to an increased flow of capital into Opportunity Zone funds as these managers seek to gain exposure to investments that are located within economically distressed communities across the nation,” Bernstein said.
Opportunity Zone investors turn to social impact investing in sustainable development products
Ryan Thornton, co-founder and CEO of Las Vegas-based BRE International Advisors, said he has witnessed this socially conscious trend happening for years in his region, even before Opportunity Zones were created.
“I began to see investors make decisions fundamentally from socials, i.e., job creation, more sustainable development products and materials, a focus on longevity and quality of life for the tenants,” he said. “In the past, the conventional approach was only a focus on profits.”
Thornton added that he even sees landlords offering more concessions — flexible leases, for instance — and even helping the homeless.
ESG investing will increase as millennial Opportunity Zone investors become wealthier
Renewable energy — fitting in with that environmentalism consideration — is also popular, Thornton added.
“As a representing broker, I have personally experienced a more socially conscious and aware investor,” Thornton said. “Every being deserves safety and quality of life … [which resonates] in the markets realizing profits but also accomplishing balanced economic development through more socially responsible investing.”
Matthew E. Rappaport, a taxation attorney who helps Opportunity Zone clients at New York-based Falcon Rappaport & Berkman PLLC, said he doesn’t always see the ESG conversations happening, but those ideals do factor in, and clients consider them a bonus.
Still, he added, ESG trends are likely to only get bigger and more prevalent as a new generation of investors take over.
“I believe this idea will pick up popularity tremendously when the millennial and Gen Z populations become wealthier, either through earned income or inheritance,” Rappaport said.
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