Episode #4: Evolution of Corporate Sustainability Efforts

Monarch Perspectives

Click here to listen and learn. Follow along with the transcript below.

Steve LeClere:
Greetings and welcome to another episode of Monarch Perspectives. I’m Steve LeClere, joined by my co-host, Rick Chukas. Today we’ll be diving into the ever evolving landscape of corporate sustainability, a topic which has been front of mind in a number of industries for the past several years.

Rick Chukas:
Absolutely, Steve. Hey, everyone. Thrilled to be a part of this conversation. Sustainability is a concern across the board, whether you’re a corporate or institutional investor, a developer, or an individual looking to make a positive impact. The interest in addressing environmental and social challenges is at an all time high.

Steve LeClere:
That’s right, Rick, and since neither of us is qualified, we’ve brought in Melanie Frontczak to shed light on the tremendous opportunities within the realm of corporate sustainability, the interplay with the various industries in which Monarch is a participant, and how it impacts our investors and developers. And how it impacts our investors and developers.

Melanie Frontczak:
Thank you, Steve. Delighted to be here with the both of you.

Steve LeClere:
Great. Well, I mean, first, Melanie, I think it might be helpful if you can give an overview of what has changed in corporate sustainability, maybe even what corporate sustainability means to you, and how it’s interpreted across our industry.

Melanie Frontczak:
Yeah, sure. I think the first thing I’d like to just point out, that makes it a little bit difficult as far as the terminology in this realm is concerned, is there’s a lack of standardization that creates a little bit of confusion over differentiating between utilizing, say, the term ESG, which is environmental, social and governance, versus sustainability, versus impact, versus sustainable investing. We also hear the terminology, social responsible investing, and also corporate social responsibility.


There’s a multitude of terms out there being utilized, but what I want to point out is, as far as ESG is concerned, that term being used, is more broadly used in the scope of evaluating the performance of companies based on their environmental, social, and governance standards and criteria that they have set forth within their action plan. Where I kind of grouped together the term sustainability, sustainable investing, social responsibility investing, impact investing, all into kind of one bucket. And those terms are typically used to evaluate the corporation’s investment decisions. So that’s looking at both the financial returns and moral values when they’re making their investment decisions. And I would say, more often than not, these days, more individuals and corporations are looking at their moral values in front of financial returns. I think that ESG has attributes of sustainable investing, and I do think that ESG investing is an evolution of the trend towards socially responsible investing.

Rick Chukas:
Melanie, so a lot of different terminology, and as you kindly highlight, this is an evolutionary process. What are we hearing from our clients, as to what matters most to them and to their particular boards or constituencies to whom they report?

Melanie Frontczak:
Yeah, I mean, from our client’s perspectives, financial returns are still a driver when they’re looking at different investment opportunities out there. But I will definitely say that there has been a fundamental shift in what drives the investments in the marketplace towards looking at the environmental and social aspects of their decisions. We’ve seen a rise in emergence of sustainability and ESG teams in corporate America over the last probably two to three years. And those teams have been tasked with designing an action plan across the company that incorporates different environmental, social, and governance goals. And a great example, I think that I want to highlight here, is that through Monarch Private Capital and our direct tax equity investments in renewable energy, affordable housing, historic rehabilitation projects, besides the economic benefits that are derived from these investments through the use of your tax dollar, there’s also these environmental and social aspects that may help satisfy internal sustainability initiatives.


So, we’re starting to see different departments across the entire corporation working together to achieve corporate-wide sustainability initiatives that also include positive financial return aspects. And that’s what I’m seeing and hearing from my clients. Steve, I know that you specialize in our low-income housing tax credit group, or affordable housing. Rick, I know that you specialize in our historic rehabilitation preservation group here at Monarch Private Capital. What are both of you hearing, or what are you hearing from our developers that we’re working with, and also clients, as far as what motivates them in their investment decisions in deciding to take on these projects in the communities that we’re living and working?

Steve LeClere:
Yeah, I think what I see in the affordable housing world, the financial return aspect, as you’ve indicated, is always a part of the decision process for any developer. It has to make economic sense for them to approach a project and develop it. But there are those that are the true affordable housing evangelists, who care almost exclusively about the community development and providing a safe, clean place to live for these low-income families.


But I think what we have seen in over the past five, 10 years as some of the ESG-focused things have come up, is not necessarily a focus on ESG from the affordable housing community, but really states and communities putting policy goals out there that find their way into QAPs and other documents with which these developers have to wrestle as they’re approaching a new development. And so I think that’s how some of these additional sustainability benefits have crept into affordable development. Not that it wasn’t always a social benefit from the inception of the program, but yeah, I think I don’t necessarily hear more from our affordable housing clients on this front. Other than that these additional requirements and initiatives to increase that community benefit have found their way into some of the governing documentation.

Rick Chukas:
And Melanie, I would say on the historic front, a lot of our projects are old former mills, former manufacturing facilities, and it is a rare historic rehab today, that we participate in, that does not have some environmental issues. And so, we always have a phase one environmental study done on our projects. Oftentimes, it is the case that there are environmental conditions or contaminants present in a project that require cleanup, and that is always a condition to our participation in a transaction.


So first out of the gate, we’re cleaning up old environmental issues that have been present for, in some cases, 20, 30, 40 years. Secondly, we’ve seen a lot of historic rehab, particularly on the East Coast in communities where a particular facility shut down and has been mothballed for decades, and had a significantly negative impact on a community, not only in terms of jobs, but in just keeping people together. Where the old facility, the old building is being re-imagined into a community center that may support development of entrepreneurship. We’ve got a facility that is now a large-scale kitchen to encourage new and enterprising participants to come in and learn how to develop restaurant skills, and open restaurants throughout the community. So there’s just a lot of different ways that our projects benefit communities. And then finally, in any of these rehabs, there is a significant amount of construction workers that are engaged to undertake the rehab and to complete a project. And once it’s open, a lot of inhabitants and service providers that participate in the ongoing operation of a project.

Melanie Frontczak:
Yeah. Thank you, Steve and Rick. Yeah, I absolutely do agree with you. And I think policy, Steve, as you mentioned, is being a driving force in the sustainability landscape as well.

Steve LeClere:
Well, getting back a bit to the impact on our investors who invest in the tax equity and the projects across the industries in which Monarch participates. Why are corporate boards facing pressure to either start focusing on these sustainability initiatives, or to double or redouble efforts that may have already been there on increasing their sustainable practices?

Melanie Frontczak:
Yeah, sure, Steve. These sustainability efforts aren’t going away, and regulatory agencies out there are getting more and more involved, and they’re taking a deeper dive into what’s out there and how they can help enhance guidance and support for these different initiatives out there. And I will also say, shareholders and stakeholders have been probably one of the top driving forces in demanding corporations out there to be held more accountable and to have more transparency. You just mentioned a little while ago, about moral values driving these investment decisions today, and more than sometimes financial returns.


Investors want to see corporations putting some type of plan in motion that addresses climate risk and environmental challenges, and they want to see these corporations investing in human capital and making good governance decisions. And we’ve seen that through the evolution of creating diversity, equity, and inclusion teams within corporate America. We’ve seen a driving force and more diversification in identities and expertise, and background and leadership styles within upper management and on corporate boards. And we’ve seen that this can drive growth and innovation within corporate America, and it’s something that corporations hope that will drive some workforce engagement, also will hopefully help improve tenure, as far as employees staying with the company.


You’re starting to see new employees when they’re starting to look for new opportunities out in the workforce. It’s very important for them to work for a company that cares about their employees and cares about their carbon footprint, and that have action plans in place that are addressing their climate risk challenges and social challenges that we haven’t seen in the past, but is at the forefront of all corporate decision making these days.

Rick Chukas:
I don’t want to spend a lot of time on this issue, but ESG being relatively new and without a lot of rules and regulations out there with which to guide organizations, I know this concept of greenwashing has been one of the negatives that has kind of hit the industry. Can you spend just a few minutes touching on that issue?

Melanie Frontczak:
Sure, Rick. In 2023, we definitely saw an intensified scrutiny and investigation and focus on by regulators on greenwashing. I mean, ultimately what could happen is corporations could be penalized monetarily by regulators for making false or exaggerated claims about their ESG investing practices. In addition, you could see some bad press and public scrutiny that could also end up hurting their bottom line.

Steve LeClere:
I guess to that end, Melanie, are there third-parties out there that can validate some of these sustainability investments to avoid the problems you just mentioned? And how does that work in a given investment, and how has Monarch been able to incorporate some of that third-party validation?

Melanie Frontczak:
Yeah, I mean, as again, from stakeholders and shareholders out there, as they are requesting and requiring further support and transparency, and more regulation around disclosures, we are seeing more corporations and businesses out there utilize third-party certification groups. For example, here at Monarch, we do a ESG impact assessment on each of our federal funds. We created a framework with a company by the name of Verisk Maplecroft, who is a global ESG risk analytics and consulting firm over in Europe. And we, along with them, created the framework for assessing our federal funds, looking at the environmental, social, and governance aspects of these investments. And after we had created the framework, we also used another third-party expert, global expert in this space that specialized in independent verification, to look at the framework, the scoring, and the impact metrics that we had put together with Verisk Maplecroft as just an added layer of review, which hopefully then provides our investors with just additional support over what they’re investing in here at Monarch Private Capital.

Rick Chukas:
I know in 2022, Melanie, that we saw a pretty significant push, regulatory-wide, for an expanded focus on climate related disclosures. From an ESG standpoint and from a standards standpoint, do you see this continuing to evolve over time?

Melanie Frontczak:
Yes, Rick, definitely. I feel like we’re just getting started. We did see a huge push in 2022, both by the SEC and the ISSB, the ISSB is the International Sustainability Standards Board. They both came out with proposed updates to climate related disclosures, both of them did. And we’ve had standards on environmental and social and financial aspects for decades, but they were pretty generic in form. In 2022, we really saw a big push from the SEC and the ISSB regarding, specifically, climate related disclosures. And specifically, they put together disclosures essentially encompassing 77 different industries.


So they’re honing in specifically on industries out there. This was just the tip of the iceberg. I mean, we are going to see the evolution of guidance that will continue from year-to-year, as the industry evolves, because this is still new. I mean, the ESG and the sustainability landscape here, specifically in the United States, is still fairly new. And so, as we see everybody across the globe starting to hone in more and pay more attention to climate-related risk and social importance, I think that each year we’ll start seeing different regulatory bodies out there, get more specific into the different disclosures and the different regulatory requirements that are currently out there.

Steve LeClere:
So Melanie, hearing all this, I don’t envy the role of the corporate executive charged with trying to navigate all of these regulatory concerns combined with what has been very public criticism of ESG standards, and political criticism of ESG standards. What is the solution here? How do these corporate executives still demonstrate a commitment to sustainability and manage to navigate all of those issues?

Melanie Frontczak:
Yeah, I mean, I don’t envy them. So I think that the best way to look at this, and again, we’re going to continue to see corporate sustainability action plans evolve as well. And so they’re going to have short-term, medium-term and long-term goals within there, and you’re going to start seeing those change and evolve as they work through them. I think that here at Monarch Private Capital, we specialize in these direct tax equity investments in these projects that have positive ESG attributes. And I think one thing to look at is, especially from a corporate executive standpoint, is that what opportunities are out there that can help us achieve multiple goals across the organization, not just our environmental goals or initiatives, not just our social goals and initiatives, not just our financial goals initiatives, right. And I think these direct tax equity investments are really a compliment to your sustainability plan, to that corporate sustainability plan.


And you can make these direct tax equity investments in a multitude of different projects that are out there. And they can go, we’re looking at the investment tax credit program, the production tax credit program. Those are both in the renewable energy sector. We have opportunities in the low-income housing tax credit, affordable housing sector, and also in the historic tax credit, or the historic rehabilitation, historic preservation space as well. And I think that there are different opportunities out there. It’s just finding the ones that, I think, again, compliment your internal goals from the corporate lens. But the thing, I think, to note is that you don’t just have to have one or the other. I think that these direct tax equity investments provide the environmental and the social qualities that can align with your sustainability goals while also providing that financial return.

Rick Chukas:
Okay, Melanie, time to pull out your crystal ball. Given the ever-changing market conditions, as well as policy shifts across the board, what do you see happening with respect to tax equity impact investing, and how do you think this overall industry in the future might evolve and change in response to everything going on?

Melanie Frontczak:
Yeah, Rick, I wish I had a crystal ball, but I think I would say the anticipated trends include, we’ll continue to see an increased focus on impact metrics. Right now, out there, there is hundreds of different rating agencies out there, and I think one of the challenges that we see with that is there’s no standardization. So again, as this industry evolves, we’ll see more standardization and I think that will help the industry in general. Also we’ll see, and we’ve already seen, a rise of innovative financial instruments out there that are kind of associated with these environmental and social aspects. And we will continue, as we’ve all mentioned multiple times throughout this podcast already, we will continue to see policy changes. And we’ll see those policy changes through different regulatory standards, and the different organizations out there that we’ve also seen consolidate over the last couple of years as well. That will continue to evolve and grow.

Rick Chukas:
Okay. Now you’ve got my attention. You speak to the rise in innovative financial instruments. Is this kind of back to the future, or what specifically might you be referring to here, Melanie?

Melanie Frontczak:
Sure, Rick. Yeah, happy to elaborate on this just a little bit more. These different financial instruments, some of them have been out there, some of them are newer. Some of them have just evolved a little bit, again, as the industry continues to evolve. But I think we’re going to continue to see a surge in the use of these different instruments as we’re starting to see a surge in the use of direct tax equity investments out there for corporations, and for helping to achieve their financial, environmental, and social goals and initiatives.


Some of these different financial instruments, we have RECs, you’ll hear that out there, which are renewable energy certificates. Synthetic PPAs, or power purchase agreements. Different carbon offset credits, transfer credits, those are all different financial instruments that we’ve seen out there. In the industry, I will say this, with a lot of those different financial instruments, you kind of get one or the other. You’ll either get financial returns or you’ll get some environmental or social aspects, which is different than what we see with these direct tax equity investments that Monarch specializes in.


Really, with those direct tax equity investments, you get to recognize healthy financial returns while also having the opportunity to utilize environmental and social aspects of these investments. So it’s a win-win. And just knowing from a corporation’s perspective, just knowing that there’s all these different opportunities out there, I think is important, and then educating yourself on that. And Monarch’s always here as a resource to help navigate through those decisions and what are the best opportunities and fit for corporations out there, and how that can compliment their sustainability goals and action plans, because we look at it from a multi-pronged strategy to achieving and supplementing and enhancing those sustainability goals through these type of direct tax equity investments. So, Rick and Steve, this is ever evolving landscape.

Steve LeClere:
I’m just glad you managed to get Rick’s attention on the last question, but did want to give you an opportunity if there’s something we haven’t touched on, as this is kind of an ever evolving space. Is there anything else you feel we didn’t cover, that we ought to at least mention before we wrap up?

Melanie Frontczak:
I just want to kind of mention and hone in on that there are very promising trends and opportunities for societal and environmental impact fueled by the increased emphasis on environmental and social metrics, and innovative financial instruments out there. All of the offerings here at Monarch Private Capital are unique, they’re measurable, they’re mission-oriented and community-minded. And I think here at Monarch, we look forward to what the future holds, and it’s exciting.

Steve LeClere:
Great. Well, thank you so much for joining Rick and me today, and we look forward to having you review our sustainability plan for this podcast.

Melanie Frontczak:
Thanks, Steve. Thanks, Rick.

Steve LeClere:

Thanks for joining us on this episode of Monarch Perspectives. We hope you will follow and subscribe so you never miss an episode.

Rick Chukas:

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