For those interested in taking a more active role in aligning their businesses and or money with their values, these are exciting times. There are not only more opportunities than ever before but there is an increasing sophistication to the deal structure allowing for better and easier access to these investments. This is particularly so for perpetual travelers and the likely readers of this magazine.
The opportunities to help people in less developed or frontier markets to rise out of poverty and lead healthier, more connected lives are truly massive. What’s more the capital market infrastructure is being developed to encourage and finance these kinds of enterprises.
There have been many terms used to describe “Impact Investing” (II) including: social entrepreneurship, triple bottom line, environmental social and governance (ESG), sustainable, corporate citizenship, socially responsible investing (SRI) and green investing.
In order for us to all be on the same page I want be very clear what I mean by impact investing. My definition comes from the idea of blended value returns as developed by Jed Emerson. This refers to using capital to maximize total, combined value in relation to multiple aspects of performance (financial, social and environmental).
Simply put, what I am talking about is for- profit investment with a social mission. It is the intersection of profit and purpose.
The modern financial world is comprised of three sectors; private for-profit, public (government), and non-profit organizations (NGOs). For the most part the lines of each sector were strictly demarcated.
Funds and opportunities did not flow across them with the exception of philanthropic giving. This is beginning to change.
Today there is a blurring of the lines between these sectors brought on by the burgeoning global movement known as Impact Investing. Beliefs and Investments Go Hand in Hand
The idea behind it is not new. In the Western world it goes back at least to the 17th century Quakers who aligned their investments withtheir principles. More recently in the late 1970s we experienced the rise of “Socially Responsible Investing” (SRI) in which investors used a variety of social screens to help them invest in accordance with their values.
The rapid growth of SRI and its use of negative social screens to assist in weeding out publicly traded companies with values or products not aligned with the investor was a surprise to many. It was also challenge to MiltonFriedman’s perspective that“the social responsibility of business is to increase its profits.” By 2007, one out of every nine dollars under professional management in the U.S. was invested using social screens and clearly showed that people wanted to invest in accordance with their values.
During this same period of time — the 1980s to 2005 — the number of non-profit organizations and NGOs exploded. This growth was a direct reflection of many people’s frustrations and disillusionment with traditional business and government. It was apparent to even the most casual observer well before the financial collapse of 2008 that many of society’s chronic problems were not being adequately addressed.
The financial meltdown provided more impetus for change. Impact Investing, while still in a nascent stage, was a direct beneficiary of the 2008 fall out as people from all corners of the globe began to re-evaluate the financial system, their role in the system and their investments.
While related to socially responsible investing, II has been applied primarily in smaller, non-publicly traded companies that are proactively creating positive financial, social and environmental benefit. Impact Investing fills the gap between philanthropy and the traditional “business as usual” for-profit sector. If you think about the hierarchy of available capital resources you quickly realize that philanthropic dollars are the most precious because people can only afford to give away so much money no matter how passionate they are about the issue. That has been a constraining factor to the scalability of most non-profits and NGOs. The problems that they are trying to solve are huge but their financial resources are very limited. If however, those same people could invest in those organizations on a for- profit basis and get a decent return on their investment,the allocation of dollars would increase substantially. That is where II comes in: it represents the intersection of values and profits.
The capital markets are arguably the most powerful force for change (both positive and negative) on the planet, and that if you want to create large-scale, sustainable economic development and social change then you need to be able to invest on a for-profit basis in enterprises that are working to create that change. Apparently many other people around the world feel the same way. Since 2008, the finance sector in general has experienced massive layoffs while at the same time Impact Investing is growing rapidly.
For those entrepreneurs and investors who are interested in investing in accordance with their values there has never been a better time. A 2010 report authored by the Rockefeller Foundation and the Monitor Consulting Group estimated “that within ten years Impact Investing in just five sectors [housing, rural water delivery, maternal health, primary education and financial services] offers the potential for a $400billion to $1trillion U.S.D. of invested capital and profit of $163 to $667 billion.”
The infrastructure of the II sector is being created. New corporate structures are being designed in the United States such as B Corps and L3Cs, which seek to protect both the financial interest of the investor and the social mission of the business.
The creation of systems and metrics to measure social value and impact; new tax policy that considers the social benefit delivered by impact- driven enterprises, as well as the creation of social capital markets for improved financing of impact businesses is all being established.
Unique funding sources are being developed. II stock exchanges are in the planning stage in at least six countries, the first one—IIX Impact Investment Exchange—recently opened in Singapore. In addition, specialty Impact Investing Boutique Firms are offering a broad range of equity and venture funds in different sectors and with diverse return strategies. These include bonds and loan guarantees, as well as mixed for-profit and non- profit funds. II are well on their way to becoming their own asset class.
To date probably the best known II is microfinance. Although now mired in controversy over some funds’ lending procedures and what is perceived to be predatory interest rates, over the past twenty years micro-loans have improved the lives of millions of the poorest people on the planet.
While there are many inspiring stories from all over the world, including the more developed OECD countries, the opportunities for Perpetual Travelers in the developing markets covered in Unbound seem to be the easiest to spot, because these countries pretty much need everything and it’s cheaper to start a business there. The risk is obviously different. The investor or entrepreneur has to consider different work values, levels of education, rule of law, technological sophistication and government support for business in each country. While Impact Investing is challenging and there have been no monster, Google-size companies to date, there have been many successes.
An agriculture fund that is providing low cost capital to farmers in Africa, and other frontier markets, has funds invested in return for a discounted portion of the farms’ crop production. In addition to receiving low cost capital, the farmers are getting both technical and agricultural assistance in order to improve their yields.
II presents the opportunity to do both well and good. The message is appealing to many as can be seen on college campuses across the U.S. and Europe where social enterprise courses are the amongst the most popular.
This popularity is by no means limited to college students. A banker at JP Morgan decided to start a social finance unit at the bank and within a week had received 1,000 calls and emails from others at the bank wanting to get involved.
Impact Investing is not easy. As Larry Summers wrote, “It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too.”
While I agree, I am encouraged by II which appeals to a larger part of the human spirit and experience than some of the traditional business models. It is not easy, but the rewards in terms of financial gain as well as the satisfaction derived from investing in something you feel is important can be great.
Today, II is starting to influence traditional investing. A number of the large, traditional investment banks are looking at allocating capital to II funds. Carlyle, the giant private equity firm, has established a sustainable investment practice. Can II be a source of not only great profitable investment and or companies but serve as a driving force a better future?
As Wayne Gretzky famously said, “I skate to where the puck will be not where it is.” By the same token we can choose to work in the world the way it is or in a way that fosters our vision of where we would like it to be.
For those interested in either starting an impact investment enterprise or investing in an existing one, there are more resources available now than ever before.
Chip is the CEO of M2 Inc. a boutique financial advisory and venture capital firm. He is an advisor to a number of venture philanthropy funds, Impact Investing entrepreneurs and businesses as well as family offices looking to build an Impact Investing strategy and presence.
Some Notable II
The cell phone is incredible technology and is being used in a variety of creative ways to tackle difficult issues. In the belief that connectivity increased productivity, Iqbal Quadir founded Grammen phone in Bangladesh. Over an eight-year period he brought 200,000 phones to Bangladesh’s poor rural villages. at one point 400 people were using each of the phones so he had brought connectivity to 80,000,000 people. His initial investors who had invested a total of $1.65 million U.S.D. sold their stake eight years later for $33,000,000.
In India cell phones are currently being used for medical care in rural villages that have no access to physicians or hospitals. Photographs are taken with the cell phone and those along with a written report are sent via the phone to doctors in places such as the mayo Clinic for review and diagnosis.
In Africa cell phones using a Vodafone mobile banking application are used to provide mobile banking services in areas where people have no access to banks. In latin america a cell phone application to solve unemployment issues is being tested.
The phone is being utilized as a job bulletin board for both short term and long term jobs.
Aside from the use of cell phones there are numerous other inspiring stories:
In 2005, Mumbai, a city of almost 11 million people (today about 13million) did not have an adequate and reliable emS and ambulance service. that year Dial 1298 For ambulance in Mumbai was launched with $400,000 of investor funds and one ambulance. by 2010, Dial 1298 For ambulance had 240 ambulances and $80 million in government contracts to expand the service outside of Mumbai.
Until recently many subsistence farmers in Africa have had to sell their produce the day they harvested it due to lack of storage facilities.
Investor funds are being used to build warehouses and form agricultural co-ops. this will give the farmers more control over their business. the ability to store their crops provides flexibility regarding when to sell their product enabling them to negotiate for a better price.
CHIP FEISS was a Senior Fellow at Harvard’s Kennedy School of Government where he worked on for-profit Impact Investing models to drive economic development and social change. He received an MPA from Harvard and a MBA from the Thunderbird Graduate School of Global Management.