Save The Blue Frog

Tag: investing

  • The Emergence Of Catalytic Capital

    Are you a general impact investor or a catalytic capital investor?

    Have you noticed the new labels that are being attached to established sectors of the sustainability field? Resilience, for instance, now refers to risk management operations in the environmental sustainability sector. And Inclusion and Diversity (ID) is now a streamlined term for what was previously a major portion of Diversity, Equity, and Inclusion (DEI) programs.

    In the capital investment space, many are now utilizing the phrase catalytic capital to refer to a branch of the market. The word catalytic refers to the goal of employing investment capital to “catalyze” (or initiate) meaningful change. 

    But isn’t meaningful change the goal of all impact investments? Yes, and to a certain extent, catalytic capital simply refers to a rebranding of a longstanding branch of impact capital. While relatively risk-cautious impact investors tend to seek market-level returns that are commensurate with market-level risks, catalytic capital investors tend to accept below-market returns and greater levels of risk.

    Why would any one be attracted to lower returns and higher risk? It’s because catalytic capital investors tend to be more interested in jump-starting significant improvements in our environment, our society, and our economy. For instance, whereas a general impact investor may be content to allocate funds to a well-established utility company that offers generic renewable energy contracts, a catalytic capital investor may be more willing to invest in new transportation technologies that rely on miniaturized solar panels.

    Investors who require technical information about the catalytic capital market may wish to begin their research activities by perusing the general guidance of the Catalytic Capital Consortium (CCC). Interestingly, the CCC defines the mission of catalytic capital investors as the achievement of the United Nations Sustainable Development Goals (SDGs). Many traditional impact investors, of course, adopt precisely the same mission.

    For more advanced technical information, investors may need to review white papers and other specialized guidance. The Impact Finance Research Consortium of The Wharton School of the University of Pennsylvania, Harvard Business School, and the Booth School of Business of the University of Chicago, for example, has published a concise set of guidance titled Catalytic Capital in Impact Investing: Forms, Features, and Functions.

    Investors who fit the profile of today’s catalytic capital community have always existed within the impact investment market. Now that a new label is being attached to this community, financial professionals must become familiar with its evolving terms, definitions, standards, and other professional guidance.

  • Playing With FIRE: The New Complexities Of Developing A Personal Retirement Investment Plan

    What aspirational message would you expect to see in the marketing material of a major retirement investment firm? Something, perhaps, that encourages investors to save aggressively, retire early, and live a long life of luxurious wealth?

    That type of message has long been featured in such campaigns. The expression Financial Independence, Retire Early (FIRE), for instance, has referred to individuals who hope to leave the work force well before reaching the traditional retirement age of 65. And Fat FIRE, a colorful elaboration of FIRE, has referred to those who aspire to extremely luxurious retirement lifestyles.

    More recent slogans, however, now refer to much more modest financial goals. UBS Wealth Management, for example, currently markets its services to “every day millionaires” who assemble portfolios with values as small as $1 million. And phrases like Coast FIRE and Barista FIRE now refer to individuals with even more limited retirement goals.

    Coast FIRE goals apply to individuals who will not fully retire before age 65, but who plan to gradually reduce their working hours as they approach that traditional full retirement age. And Barista FIRE goals apply to individuals who will never fully retire at all, and who expect to work in relatively low paying jobs on a part-time basis well after 65.

    Why are wealth management firms now marketing to investors with relatively modest retirement goals? Some may assume that the trend is a sign that the market is healthy and growing. Others, though, may suspect that the firms are “looking downstream” for new (and less wealthy) clients to replace the loss of traditional (and wealthier) clients. Those who ascribe to this worrisome explanation may believe that the increasing aggregation of capital in the hands of our society’s wealthiest citizens may be reducing the number of individuals who can look forward to luxurious retirement lifestyles.

    How do these trends impact mainstream personal investors? Financial advisors are increasingly asking them to define their retirement goals and lifestyles in accordance with these elaborately defined FIRE categories. To a significant extent, many of these categories apply to individuals who will not be able to achieve financial independence and retire early.

    In the past, many financial advisors would simply work with clients to define their personal Retirement Numbers, i.e. the target values that their investment portfolios must reach to trigger decisions to leave the work force. Investment strategies would then be developed to help clients reach their personal Numbers by the end of their working years.

    Today, though, investors and financial advisors are holding far more complex planning conversations. Thus, investors may need to engage in much deeper levels of self-reflection to prepare themselves for these advisory discussions.