29 Mar 2019

ESG and Impact Investors Meet in the Opportunity Zones

ESG and Impact Investors Meet in the Opportunity Zones

Socially Responsible Investment

Profits were once the sole motivator for private businesses and publicly-traded companies. How and where they invested were all about the bottom line. To a large extent, that may still hold true. However, companies are now realizing that it’s possible to make a profit and simultaneously make an impact with their investment dollars. Opportunity Zones, created on a bipartisan basis as part of the 2017 tax legislation was built with that intent in mind; private investment used for public good based upon the premise of socially responsible investment.

Socially responsible investment may have its roots in millennia past, but its scale in the 21st century are unprecedented. “Sustainable, responsible and impact investing (SRI) assets have expanded to $12.0 trillion in the United States.”1 More investors demand that their investments not only yield a profit but also do so in a way that is not counter to their values. And while there was initial reluctance to place a high premium on impact investment, the tide has turned. Moreover, much evidence suggests that investments made with environmental, social and corporate governance (ESG) criteria fare as well as—and sometimes better—than those that only consider profits. Asset managers, therefore, must consider ESG when they choose where to invest. “From 2016 through the first half of 2018, 165 institutional investors and 54 investment managers controlling $1.8 trillion in assets under management (AUM) filed or co-filed shareholder resolutions on ESG issues.”1 While investors still intend to make money, they now strive to achieve profits alongside purpose.

Socially Responsible Investing: Some Background

Ethical investing can trace its origins to thousands of years ago and biblical mandates. Most religions required its practitioners to invest ethically. In the United States, religion still played an important role in socially responsible investing in the 18th and 19th centuries. When Methodists refused to invest in the slave trade and when Quakers said no to war with their hearts and their dollars, they were following the principles of ethical investment. In the 20th century, Vietnam War protestors demanded that the universities they attended divest from defense contractors, and divestment again proved an important tool to help end apartheid in South Africa. As bold a statement as divestment makes by choosing where not to invest, deciding where to invest has the potential for even more powerful impact.

Impact investors, following the principles of socially responsible investing, choose investments based on a range of criteria that go beyond profits, including environmental, social, and governance factors. ESG-minded fund managers now use algorithms to evaluate companies within their portfolios based on:

  • Environmental

    • How companies perform as stewards of the planet
  • Social

    • How companies treat its employees, customers, suppliers, and the community in which it operates
  • Governance

    • How ethically and transparently companies perform executive/fiduciary functions

For investors considering ESG and the impact their money can have, where they invest matters.


Opportunity Zones as Impact and ESG Investment

As investments in Opportunity Zones outpace growth in other areas,2 OZ funds are increasingly the focus of speculation for a wide range of investors, from large-scale land developers to nonprofits looking to ensure the longevity of worthwhile initiatives. The tax reform bill of 2017 that created Opportunity Zones was purposefully vague about the types of investment that would qualify and how success would be measured. Large mixed-use development projects, multifamily homes, even single entrepreneurs, could all be supported with capital reinvestment if they resided in qualified opportunity zones. The original legislation neither required that Opportunity Zone investment yield positive social impact nor did it lay out a means to measure it. However, future iterations of Opportunity Zone regulations likely will; the White House has already created the Opportunity and Revitalization Council to assess what kind of “data, metrics, and methodologies can be used to measure the effectiveness of public and private investments in urban and economically distressed communities, including qualified opportunity zones.”3

Many private entities are leading the way to ensure that Opportunity Zones yield the kind of financial and social returns that were intended by the original legislation. Shorewood Real Estate Group is proud to be at the forefront of Opportunity Zone investing and we embrace the full spirit of the initiative. Our investment partner in the Jamaica, Queens project, Bridge Investment Group, uses ESG criteria to evaluate its real estate investments. Bridge has already established metrics by which to measure the social impact of its projects, including: the number of jobs created, the number of housing units built and occupied and the sustainability and energy savings realized in the development of its buildings.

As Opportunity Zones evolve, other measurements are likely to be considered. In an effort to ensure that investors achieve the financial and social results they aspire to, the U.S. Impact Investing Alliance and Beeck Center for Social Impact + Innovation at Georgetown University recently developed a framework to measure Opportunity Zone impact. The framework offers the following guiding principles:

  • “Community Engagement: Opportunity Fund investors should request that fund managers integrate the needs of local communities into the formation and implementation of the funds, reaching low‐income and underinvested communities with attention to diversity.
  • Equity: Opportunity Fund investments should seek to generate equitable community benefits, leverage other incentives and aim for responsible exits.
  • Transparency: Opportunity Fund investors should be transparent and hold themselves accountable, with processes and practices that remain fair and clear.
  • Measurement: Opportunity Fund investors should voluntarily monitor, measure and track progress against specific impact objectives, identifying key outcome measures and allowing for continuous improvement.
  • Outcomes: Opportunity Fund metrics should track real change, with an understanding that both quantitative and qualitative measures are valuable indicators of progress.”4

At Shorewood Real Estate Group, we understand that Opportunity Zones truly have the power to impact the country’s most underserved communities in the short term and for decades to come. That is why
as we proceed with new projects, we will consider not only economic returns, but also how these Opportunity Zone projects will align with ESG investors’ goals.

If you would like to learn more about Shorewood’s Opportunity Zone fund investments please contact Shorewood today to request information.

S. Lawrence Davis


1 https://www.ussif.org/files/US%20SIF%20Trends%20Report%202018%20Release.pdf

2 https://www.investmentnews.com/article/20190115/FREE/190119959/fervor-over-opportunity-zones-heats-up 

3 https://www.whitehouse.gov/presidential-actions/executive-order-establishing-white-house-opportunity-revitalization-council/

4 https://www.forbes.com/sites/devinthorpe/2019/02/11/opportunity-zones-investors-receive-needed-guidance-for-measurable-impact/#689917bd7cc1