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Impact investment comes of age

June 2014

The proponents of impact investing believe that we are witnessing a seismic shift in investment behaviour.
Miranda Ingram reports

 

It is hard to imagine what the past fifty years would have been like without the rise of the venture capital industry which lead to new types of investment models for entrepreneurs and gave us, among other innovations, the commercial internet and mobile ‘phones.

Today, the proponents of impact investing believe that we are witnessing another seismic investments shift. “Now we are seeing start-ups and innovative products pop up around the world, not just in Silicon Valley and London, but in Nairobi, Delhi and Lagos,” says Sir Ronald Cohen, Chairman of Big Society Capital.

“We have a similar opportunity to now accelerate the impact investing industry on a global scale – to bring large financial resources to bear on some of the world’s most pressing problems.”

While this might sound like wishful thinking from the man dubbed the “father of social investment”, two landmark financial reports, increased government support, the failure of traditional investment models and an overall change in the way we consume and invest all signal that 2014 is indeed the year that Impact Investing is moving from the sidelines to centre stage.

Philanthropy is nothing new, of course, and socially responsible investing can arguably be traced back to the early days of the C18th Building Society movement. More recently, as fortunes were made in the 1990s (later to be lost in the noughties) socially responsible investing (SRI) became fashionable among some investors. SRI then became known as ESG (investing for environmental, social and governance goals) – and now we have Impact Investing.

So what’s new about II? The main difference is that while socially responsible investing avoids the baddies - tobacco companies for example - impact investing is proactive and deliberately seeks out the goodies.

Ethics first
“It is about intent,” explains Joe Ludlow, who leads Nesta Impact Investments. “We invest in companies which are lead by ethics first. It is their stated intention to do good that counts even though the business model also has to be financially viable.”
Traditionally, impact investment is also more hands-on with investments being made at an earlier stage of a start-up’s existence and the investment fund playing a guiding role.

Nesta Impact Investments, for example, sits on the boards of the companies they invest in in order to back up their investment with experience and expertise. In the early days, investees were often those who had been refused traditional finance, perhaps because they were too small, for example, but now the hands-on nature of impact investment funds makes them a first port of call even for businesses which might qualify for traditional funding.

While this sounds ethically fantastic, it also sounds financially risky so what it is that has changed in the investment landscape to make Impact Investing suddenly so attractive?

Firstly, a 2013 report by RBC Global Asset Management stated that “the chief finding of this research is that socially responsible investing does not result in lower investment returns... individual investors and trustees of institutional funds can pursue a program of socially responsible investing with the expectation that investment returns will be similar to traditional investment options”.

A second report, by JP Morgan and the Global Impact Investing Network (GIIN), backed up these findings, concluding that “the vast majority of surveyed investors report that ... despite the market’s early stage, investors’ portfolios are meeting financial expectations in addition to social and environmental expectations.”

In other words, while it may not yet bring top returns, with a good portfolio spread, impact investing is no more risky than traditional investing. Putting your money where your conscience is is no longer an idealistic – and costly – indulgence.

Impact Investment also received a big boost from the negative examples in the early 2000s such as the implosion of WorldCom and Enron after the companies misled investors, as well as from the excessive risks taken in the property and mortgage markets that prompted the 2008–9 financial crisis. Such events swiftly convinced investors of the need for responsible corporate governance and social investing’s emphasis on managing risk started to look very attractive.

In Britain, a leader in the impact investment field, the continuing shenanigans at the Co-op Bank have even destroyed faith in ethical banking.

Government support
Another boost for impact investing in Britain is continuing government support, including David Cameron’s inclusion of Impact Investment on the G8 agenda and the Government’s 2013 budget announcement (effective from April this year) of a new tax relief for socially responsible investors. “Although the scope is still a bit limited,”says Nesta’s Joe Ludlow, “as it only concerns Community Interest Companies and charities, is it an important psychological boost in that tax relief status legitimizes impact investing in the public’s perception.”

A final reason the future of impact investing looks so rosy is our own changing attitudes, post financial crash, to the nature of business and of how we consume and invest. “The wider the field grows,” explains Ludlow, the more opportunities there are for impact investors and for change – as well as for financial returns. As Impact Investors, we see the major issues facing society today as the economic opportunities of the future.”

Nesta specifically focuses on the UK, on old-age and loneliness, the education and employability of children and young people, and the social and environmental sustainability of communities. Companies they have invested in have come up with innovations such as ‘chair cheerleading’, for older people in care homes (Oomph , pictured); a new online and mobile story writing community aimed at improving literacy skills amongst teenagers (Movellas ); digital services which allow people who cook at home to provide meals for those who can no longer cook and digital technology to facilitate communication between children’s carers to avoid further disasters like the Baby P case (both FutureGov and both now sold internationally as well as in the UK).

Whilst these are undeniably laudable achievements, are they not picking up the government’s slack and, to that extent, somewhat political?

“Not political in the obvious way,” says Ludlow, in that such initiatives enjoy cross party support. What some do find political, however, is the idea that areas of social need are being served by private companies. There is a perception that only charities or non-profits should get involved in social good.

But two things are clear, he says. “We can’t go on “solving” things in the old ways and if governments aren’t going to pay we have to find another way. We’re four years into austerity, and government’s plans for public services reforms are being undermined fraud investigations and a lingering suspicion that services aren’t being run for the public benefit.

“If ever there was a time for a new type of investing to be leading the way then surely it is now? We invest in all structures: charities, non profits and entrepreneurs with a clear social mission, committed to making an impact. These are the people that I believe deserve to be running our public services.”

Measuring impact
Impact investors, both corporations and individuals, are by their nature keen to assess the impact of their investment as well as the financial returns and there is an emerging range of standards coming into force. Firstly, the expected positive affect is assessed: for example ‘chairobics’ for the elderly will improve their health and wellbeing. Then the ‘impact risk’ is measured: how certain are we that this will be the affect? Thirdly, the scale and reach of the innovation is measured, as in: how will our investment increase scale and reach?

One leading impact investor – and eBay founder – Pierre Omidyar, however, says that impact investors are still being too risk averse. Another believer that business can be at least as powerful a force for good as a charity (look at all those eBay entrepreneurs), he set out to try and build a viable business which would sell to the very poorest consumers, where costs must be pared to the bone, to prove his case. Today, the jewel in Omidyar Investment crown is perhaps D.light, maker of cheap, safe, solar lanterns which absorb solar energy during the day and dispense light at night and which is now shipping half a million units a month to India and Africa.

Given that his own wealth still hovers at around $8.5 billion, Mr Omidyar is perhaps a man worth listening to: impact investing is the future.
 




Europe | Impact Investing

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