Impact Investing – Financing Innovation for Sustainable Development

Introduction

In preparation of my participation in the Global Impact Investment Network (GIIN) Investor Forum taking place at the Grand Hotel Krasnapolsky, Dam 9, 1012 JS Amsterdam, Netherlands later this week (Wednesday 7th and Thursday 8th) I have decided to complete the second part of my previous Impact Investment / Sustainable Finance blog. While the previous blog addressed the historical background and the current context of sustainable finance in Switzerland, the second part will discuss key issues presented during the substantive segment (i.e. Applied Policy Seminar) the 9th Session organized by the United Nations Economic Commission for Europe Team of Specialists on Innovation and Competitiveness Policies (TOS-ICP), which took place from the 3-4th of November 2016 at the Palais des Nations (UNOG) in Geneva. Since this Seminar focusing on “Innovation for Sustainable Development: Entrepreneurship and Finance” provided a platform for international knowledge-sharing and policy-learning in this area, I will share with the reader my own observations and views on the business community’s central role in driving innovation for sustainable development, as acknowledged in the 2030 Agenda for Sustainable Development, by taking innovative steps to make their own operations more and more sustainable. As mentioned by the UNECE-TOS-ICP “Investors, including business angels, venture capital funds and others, are increasingly looking for opportunities to fund [early-stage] innovative companies that combine economic return with a positive impact on society [that is aligning private incentives with societal needs]; and a good track record on sustainability [e.g. markets for sustainable products, production processes and finance (e.g. through certification schemes, standards and product labels)] can be an important asset for established companies to raise financing.”

 

The meeting of the UNECE in some ways distinguished itself from GIIN Investor Forum (see my next blog) both when it comes to the structure of the Agenda and the UNECE-TOP-ICP’s aim to allow for an interactive discussion among private and the public sector stakeholders. Where the GIIN Investor Forum’s aims to share knowledge through plenary and working sessions as well as providing a matchmaking service and networking through speed-dating and walk-in sessions and poster presentations, the UNECE applied policy seminar reported in this blog laid the groundwork for developing good practices and policy recommendations on the interactions between innovation policy, (innovative) entrepreneurship and finance. The conclusions also served as a contribution to the implementation of the 2030 Sustainable Development Agenda at the regional level (i.e. the UNECE region and beyond).

 

In what follows, I will first provide an overview of the Impact investing trends and prospects; followed by a brief discussion of the challenges associated with Measuring impact – standards, certifications, regulation. The third section briefly discusses Match-making – connecting innovators with investors. The fourth section focuses on Mobilizing Impact Capital – social impact bonds, impact funds, impact banking, crowd funding, public-private cooperation. This leads me to the final section, which attempts to conclude and carve out a way forward on the issues discussed at the UNECE meeting through the implementation of the research objectives of a pluri-disciplinary action-oriented Diaspora Impact Investing via Crowdfunding research project, which IHEID & EPFL in partnership with a number of International Organizations, NGOs and the private sector, hopefully will be able to launch next year partly thanks to the funding of some of the delegates attending the GIIN Investor Forum in Amsterdam.

 

Overview of Impact Investing Trends and Prospects

As an introduction to the first session providing an Overview of Impact investing trends and prospects,

The organizers had invited my compatriot (apparently, there are only around 60 Danes working for the UN agencies in Geneva, including Michael Møller is the Director-General of the United Nations Office at Geneva (UNOG), not bad for a nation of with a current population of “only” 5,703,994 people compared to other home country DRC Africa’s 2nd largest nation with a current population of 80,813,627 without any top position in the entire UN system nor within the BWIs or the AfDB?) Dr.Christian Friess Bach – Executive Secretary of UNECE, to inaugurate the Policy Seminar, since as he mentioned himself has private sector experience from trying to start-up two innovative companies – Worldbarrow[1] and a real mobile application, which he considered to be the toughest 2 years in his life, given the difficulty associated with developing a new product and entering market. The biggest challenge he experienced was the same problem that my own entrepreneurial brother experienced in 2009, namely getting the necessary start-up / seed finance. Like my own brother he was also unable to get any money out of the commercial retail banks. During his brief intervention he mentioned that the focus of the session is crucial for the big UN Agenda 2030 and also that we need sustainable economic growth that is ecological sustainable. It is through the drivers behind the 17 SDGs where innovation is crucial. In other words, the importance of the private sector in the implementation of the 2030 Agenda. That is the identification of the business opportunities that the implementation of the SDGs opens for the private sector and to develop a comprehensive map of how business can contribute to the achievement of the SDGs. It makes sense for the business sector to engage on sustainable development (SD) at a far more strategic level than it has been the case so far. There are new business models that can align profitability with social purpose and new financial tools that can crowd in private capital. But there are also responsibilities the business sector needs to embrace in areas crucial to public trust, such as tax, good jobs with fair wages, transparency, and accountability.

Christian Friis Bach thus pleaded for the need of impact investing together with the integration of ESG factors. To illustrate this, he argued that in Denmark he started his career in 1990 in the Fairtrade movement (Vice-Chair of the U-landsimporten)[2] and during 10 years promoted initiatives aimed at supporting companies that want to invest, grow and produce while protecting the ESG impact throughout the value chain. Moreover, he highlighted that while Impact investing has grown a lot in recent year, this “niche” is still limited at $US60 Billion compared to the trillions needed to finance the SDGs. He moved on to talk about the existing challenges to encourage impact investing. While there already exist well-established methods to report financial performance, but the challenge is now how to measure ESG at an early stage moving forward. As I will probably discover at the GIIN Investor Forum in Amsterdam, he talked about why the match-making part is difficult, that is finding investors wanting to invest in ESG companies. Mis-matching between available capital is a major obstacle to the growth of the Impact Investment market. I hope that I will discover and learn how to promote the Impact Investing market to have a big drive forward through the GIIN Forum Matchmaker service side event. The 2030 Agenda for Sustainable Development (SD) calls for strong follow-up and review mechanisms at national, regional and global levels. Given the 25 April 2017 Regional Forum on SD on the Financial Constraints and Challenges and opportunities and innovative financing mechanisms for the UN Agenda 2030,[3] he concluded by stating that “Impact Investing” is the perfect topic at the perfect time. This statement was reiterated by the chair of the session who called Innovation for SD and Impact Investing as well as Financial Innovation as critical important topics. He expressed surprised at how Remarkable slow the progress has been in most parts of the world. On the other hand he highlighted fantastic examples like in Israel and the US, contrary to the EU where the success still has been limited as I highlighted in the first part of this blog.

 

 

The first Session was devoted to providing an Overview of what Impact Investing is and how it works. During the session the discussion revolved around some of the main actors; what sectors they focus on; and how this is impacting SD.

The first speaker was Mike Mompi from Impact Investment Committee, European Business Angel Network and Director of Early Stage Investment at ClearlySo (Bringing impact to investment),[4] which is an organization that works exclusively with high-impact businesses, charities and funds. It supports its capital raising activity through financial advisory work, and introduce them to institutional and individual investors who share their objectives and values. He began talking about the different levels of awareness of Impact Investing from the High-level view on how to think about Impact Investing with regards to the SDGs and in terms of what kind of future we are building for humanity. The majority of decisions made through that value set with the aim of having our children living in a Sustainable Society, where there is no-longer poverty, with clean water etc. These are values that increasingly are shared globally. He referred to the UN Brundtland Commission on Environment and Development “Our Common Future” and its 1987 Definition of SD when talking about how the adoption of the 17 SDGS will transform the world as we know it. He said that by incorporating the values that we have and share at home into asset allocation decisions goes beyond philanthropy. In fact, we clearly suggested that we can’t use the same financial tools to achieve the SDGs, which is why Impact Investing has been developed to generate a positive ESG impact as well as on capital according to the so-called Sir Ronald Cohen definition.[5] He then moved on to share a few examples of how this is being done.

 

For example, the EU Trade Association for Business Angels, Seed Funds and Early Stage Market Players (EBAN)’s Impact Investment Committee looks to encourage more investors to create a positive impact and incorporate values into their investment decision in order to enable companies to scale successful and to engage business Angels. EBAN has dialogues with policymakers in order to drive the level of Impact Investing and decision-making that drive positive change. EBAN provides benchmarking and sharing of best practices by learning between EBAN members and the Impact Investing Community.

 

ClearlySo (Impact Investment bank) on the other hand, through its mission to bring impact as the third dimension into investing, where all investors consider risk, return and impact, connects business and investors thereby trying to create positive impact. It attributes certain values to what it is trying to achieve. ClearlySo gives (individual and institutional) investors access to a range of impact investment opportunities, spanning many deal sizes, sectors and structures, as well as into businesses creating diverse social and environmental impacts. In terms of raising capital ClearlySo works exclusively with established businesses in the UK that create social and environmental change and are seeking investment to scale.

 

He also mentioned the ClearlySo Angels (CSA) [The UK’s first angel investor network], which are well-connected people who care and have capital to deploy to make them feel good and move forward to reach the SDGs. These CSAs can help accelerate the adoption of innovation by having higher risk tolerance than Institutional Investors, to bridge gap from innovation to the commercialization – where funding often is lacking, and where Angels can play a key role by bringing capital and expertise. They can also help identify high potential early, since they are fast, early and reactive as well as bring mentorship and advice.

 

Mike Mompi highlighted that there are an increasing number of individuals who want to do this, that is to invest in order to get a return and create a positive impact to make the world a better place. People want to do good and well, and this can be enhanced by increasing awareness. That is why learning and education as well as building a supportive eco-system is so important e.g. within Academia or PPPs through to funds co-investing alongside angels. He stressed the importance of collaborating across different angel groups and countries in order to help expand business to new countries and connecting individuals with opportunities seen as commercial viable.

 

With regards to the so-called Quantification of returns that is another challenge associated with Impact Investment due to the element of subjectivity that conventional financial investment doesn’t have (RoI). If Impact Investing tries to apply the same metric – it will surely struggle, because of this element of subjectivity. He suggested that when considering investment decisions that in addition to the systematic risk and expected return for assets spectrum when considering investment decisions (using the CAPM from the 1960s, which I first encountered in 1999) the 3rd dimension – Impact – needs to be added in every decision made. Many organizations are still looking to quantify in order to look at a statistical analysis correlating impact and return.

 

Finally he referred to GIIN’s Impact Investing projections, which estimate that Impact Investment will grow from currently $US60 Billion to ½ Trillion during the next 3 years. Once trigger that will help realise this is the G8 Social Impact Investment Forum Outputs and Agreed Actions,[6] held in London on 6 June 2013, where the G8 discussed how to move the social impact investment market towards global scale and sustainability. Moreover, at Big Society Capital (transforming social investment) they think there is tremendous potential for people to play an important role in social investment across the UK. They care about the social issues, may want to be further engaged with a charity or social enterprise they invest in, and together, could help provide the type of capital the sector needs at scale. In the long-term, we think millions of ordinary people could be connected to charities and social enterprises through their saving and investing choices.

 

The next speaker was Cecile Blilious, Managing Partner, Impact First Investments, which is the first Israeli investment firm specifically designed to leverage ‎local technology and innovation to create global social impact, while earning market-rate returns. By exclusively investing in ‎socially driven Israeli start-ups, the firm is uniquely positioned at the crossroads between ‎global social challenges and the emerging technological solutions that address them, and they are therefore closely involved a member of Pitango community ventures in start-up companies. She started by talking about the ‘slight’ difference in the definition of impact investing on Wikipedia versus the GIIN definition, and argued that impact investment at some point just should be called plain investment.

 

She stated that as Impact First doesn’t do any impact investment per se, but instead collaborate with Israel’s Largest Venture Capital Fund Pitango, whose mission it is to partner with great entrepreneurs to build companies and drive them forward - from infancy stage into category leaders. Pitango invests in seed, expansion and late stage companies in core technologies, consumer, and Life Sciences.

She mentioned The sixth edition of the Annual Impact Investor Survey,[7] which is based on an analysis of the activities of 157 (respondents) of the world’s leading impact investing organizations,[8] including fund managers, foundations, banks, development finance institutions, family offices, pension funds, and insurance companies, making it the world’s most comprehensive survey of the impact investing market. According to this joint JP Morgan & GIIN Report as of the end of 2015, 156 respondents to this year’s survey collectively managed USD 77.4 billion in impact investing assets. The average and median impact investing Assets Under Management (AUM) of these respondents were USD 496 million and USD 75 million, respectively, reflecting the fact that a handful of respondents are managing large pools of impact investing assets.[9] This represents a 30% increase from the previous year, but still only 0.03% of the $210 Trillion in global financial markets. Nevertheless the Impact Investing market size is expected to grow to over $400 Bn annually within the next decade. As a symptom of this trend, the main financial players are getting into Impact Investing and some of those are private institutions. On her power point slide she e.g. listed a numbe of the key players in the field: Skoll Foundation; Calvert Foundation (investments for social good); Acumen Fund; Ford Foundation, RSF (Social Finance), Rockefeller Foundations, Khosia Impact; W.K Kellogg Foundation (mission driven investments); CITI Foundation, Morgan Stanley (Institute for Sustainable Investing), UBS (Philanthropy and Sustainable Investing), Prudential (Corporate Social Responsibility) and my wife’s employer Deutsche Bank (Impact Investment Fund), launched in 2011 to support the growth of the Social Finance market through a £10m fund to be invested over 3 years, as part of its so-called responsible business. Moreover, Deutsche Bank drives social change by creating well-structured, targeted investments as solutions to pressing social and environmental problems and is a pioneer in the microfinance sector. With all these big players stepping in to the market it will be an even bigger challenge to look for deal flows. She also mentioned that Israel has a good track record with start-up, but surprisingly none of it directed towards ESG – doing good. To this she suggested that VCF – a company in Tech Sector can do less well, can and should be able to make return as good as the regular market in HighTech and possibly better, not withstanding the spectrum of different asset classes and the different types of investees.

Regarding Social Businesses – they are mostly not able to make high returns, because expenditures are not there with their non-ESG competitors. But in HighTech the ESG businesses don’t face this problem and they should therefore be able to make good returns comparable to the market rate she argued.

Then she went on to talk about the Vitalitix Social Responsibility platform, which connects seniors to their families, caregivers and Social Angels using Crowd Caring™ – considered The 21ˢᵗ century mode of active volunteering for busy people. Basically it looks at the stakeholders align social mission and make sure tech is available to provide a solution.[10]

After having told her passionate story about how it all started in Israel she highlighted that there are two types of entrepreneurs – those with a social passion and the existing companies who want to apply change to become Impact Investors. The Impact First Fund raised a $25 Mn VCF – hoping to achieve a market rate of return. Moreover, Israel doesn’t have an Angel Investor Network like in the UK, although there are people such as Cecile who are trying to get Angel Investors on board to bring capital for the early-stage companies.

Then she moved on to talk about Cambridge Associates (CA) and the GIIN, who have collaborated to launch the Impact Investing Benchmark, the first comprehensive analysis of the financial performance of market rate private equity and venture capital impact investing funds. While the impact investing industry is in an early stage of development, it is poised for growth as mentioned above. One of the chief barriers to industry advancement remains a paucity of robust research on financial performance. Credible data on risk and return can help both existing and future impact investors better identify strategies that best suit their desired social, environmental, and financial criteria. At launch, the Impact Investing Benchmark comprises 51 private investment (PI) funds in the benchmark, who pursue a range of social impact objectives, operate across geographies and sectors, and were launched in vintage years 1998 to 2010. The Cambridge Associates & GIIN analysis finds that despite a perception among some investors that impact investing necessitates a concessionary return, the Impact Investing Benchmark has exhibited strong performance in several of the vintage years studied as of June 30, 2014. In aggregate, impact investment funds launched between 1998 and 2004—those that are largely realized—have outperformed funds in a comparative universe of conventional PI funds. Over the full period analyzed, the benchmark has returned 6.9% to investors versus 8.1% for the comparative universe, but much of the performance in more recent years remains unrealized.

Furthermore, CA & GIIN also found that

·      Impact investment funds that raised under $100 million returned a net IRR of 9.5% to investors. These funds handily outperformed similar-sized funds in the comparative universe (4.5%),

·      impact investment funds over $100 million (6.2%), and funds over $100 million in the comparative universe (8.3%).

·      Emerging markets impact investment funds have returned 9.1% to investors versus 4.8% for developed markets impact investment funds.

o  Those focused on Africa have performed particularly well, returning 9.7%.

Finally, the CA & GIIN report conclude that “Creating and analyzing benchmarks for private investments, especially for a younger, emerging portion of the market such as impact investing, poses a number of challenges. Difficulty acquiring private fund performance data and strict inclusion criteria limited our ability to amass a large dataset, which presented data analysis limitations that are unavoidable at this stage.” Apparently, the Cambridge Associates will produce an ongoing quarterly Impact Investing Benchmark report to track the industry over time, which I look forward to reading.

On this background Cecile Blilious talked about three tools in this regard:

1.    Internal score card as part of due diligence process – clear social mission on how we want to address the problem, and on how to embed that into the business case/plan to show the amount of customers and who the stakeholders are, and how to embed the Social Impact Investing into the process. The two are combined within own internal tool presented to investment committee.[11]

2.    B Corps are a new type of company that uses the power of business to solve social and environmental problems and to meet rigorous standards of social and environmental performance, accountability, and transparency.

3.    Sinzer (online tool for social impact measurement) is the solution for social impact management. Whether you are a public authority, social enterprise, investor/funder, non-profit or corporate, measuring, monitoring and managing your social impact with Sinzer helps you to make better decisions, improve your impact and enables you to be accountable to stakeholders by looking at the cost savings and what it is worth for the stakeholders to apply that. The importance is not number at the end as opposed to EoI, but instead the process itself. This is because the entrepreneurs are forced to go through the process of what is the average weight of each stakeholders, what is going to be the output(s), outcome(s), deadweight attribution, allocation for soft allocation, well-being of family.

Last but not least she outlined the existing Israeli Impact Investing Eco-system:

·      Social businesses – which are not scalable and therefore not interesting for international investor;

·      Social Impact Bonds – e.g. deal with diabetes;

·      Accelerators and incubators;

·      Funds.

The challenges they are confronted with include:

·      Creating proof of concept;

·      Eco-system building using adequate grant capital;

·      Lacking track record (question always asked);

·      Government assistance (regular investors in early stage start-ups are not always applicable for Impact Investing companies need to be highly intensive on R&D, but they don’t have huge IP. Consequently, there need to be some adjustment here);

·      Deal-flow quality need to get better in Israel;

·      Align expectation of investors with what the Risk – Return spectrum can provide;

·      There is a different eco-system in each country (i.e. idiosyncrasy).

Measuring impact – standards, certifications, regulation

The Second Session focused on Measuring impact – standards, certifications, regulation, based on the fact that the measurement of ESG is still at an early stage, but critical for the supply and demand for impact investments.

 

The first speaker Sophie Paquot, Director, Toniic Uk. While I will not dwell on the details of this nor the 3rd session, I will though before I jump to session 4 highlight the following from these two intermediary sessions. Sophie Paquot mentioned that there has been an evolution from Angel to a Portfolio approach – including investment platforms with direct deals, funds of funds, (social) impact bonds and different asset classes. If I understood her correctly, Toniic (the global action community for impact investors) have 320 active impact investors across 26 countries – formed of high networth individuals, foundations, mix of industry leaders, and Toniic has been doing this for the last 10 years. There is a unique group within Toniic consisting of 80 members allocating 100% of assets to impact investing, that is, $3.5 Bn in assets via the network. She explained that this 100% impact network of 80 members share their portfolio with each other. The sharing of the portfolio is confidential. Toniic Investment Portfolio Project launched last month aggregates the findings of portfolio sharing.

The project is based on three pillars

·      Education, peer-to-peer network – members educate on another – there are no intermediary – no-one claim expert of Impact Investing.

·      Community events bringing people together. During the Working Group sessions the members talk about topics they are interested in and they find the solutions together.

·      Investment platform with 100s of deals brought in by members. The due diligence have already been done in order to facilitate finding co-investors. The Investment activity in 2015:

o  Geography – mainly in Africa and Asia, but also in EU, LAC and US;

o  Sector – Agricultural, Education etc.

o  85 direct deals [when investing in social enterprise, not a fund, which would be classified as an indirect deal], and

o  22 funds listed on the platform.

o  In 2015:

§ there were 25 investments and 14 co-investments done and

§ 41 portfolio have been shared within the 100% impact network.

The aggregate data will be shared on the website and through reports.

 

Regarding Impact measurement, she mentioned that it is key for the movement to become mainstream, and in order to work with HNWI, Family offices and Foundations, but also when speaking to corporate impact funds, and governments. There is a need for tangible data and measurement, which for the moment is not completely standardized. Given the high interest in Impact Investing measurement they organize a session on Impact Investing measurement at every meeting held. And yet there is still a lot of frustration because of lack of standardization, which tools to use, since they don’t seem to fit what they want to measure. Tricky.

 

Sophie Paquot mentioned the TIIP project beginning this month in which 41 of the members of 100% network replied to their question on Impact Investing Measurement. They found that 38% are measuring their impact, but don’t find their ways when it comes to:

·      B Analytics a customizable platform for measuring, benchmarking and reporting on impact;

·      IRIS metrics designed to measure the social, environmental and financial performance of an investment;

·      ESG Sustainable Impact Metrics;

·      GIIRS – B-Analytics.

 

Moreover, they found that 81% of respondents use quantitative metrics; 44% of respondent use ESG; 38% use B-Analytics / GIIRS Ratings and other metrics; and 31% of respondents use IRIS metrics.

But the main challenges encounters by members are that they are not able to standardize and compare what others are doing. Basically the situation is one where every country use different wordings and metrics, which is not good reporting as seen from investees’ perspective.

Toniic does ask for reporting, but for the entrepreneurs and the fund-manager it is simply considered to be too time consuming and they mostly don’t have the staff to do it, so consequently they don’t report properly. In short, it costs too much to pay employee or buy the right software. Toniic has also asked how much it cost to do the Impact Investing measurement – and they have asked members if managing an Impact Investing portfolio is more expensive than traditional portfolio and most members replied YES, which probably explains the reluctance to get into this costly reporting business. But Sophie suggested that while there is a lot of frustration, there is also a real intention to wanting to measure impact (97% of the members) and the trend seem to be going in the right direction.

 

The session didn’t lead to a recommendation as to whether the harmonization of the Impact Investing measurements is a future job for the UN. I instead wonder whether the lead couldn’t be taken by the E-DFI association whose collaboration includes EDFI’s Harmonised ESG Standards in relation to the Environment, Social Matters and Governance (“ESG”) in investment activities?

 

Match-making – connecting innovators with investors

Since the Matchmaker service will be an important feature of the the GIIN Investor Forum I will likewise not dwell profoundly on the issues addressed in the 3rd session of the UNECE Policy Seminar (see instead my forthcoming blog). I will only briefly refer to the intervention by Dan Gregory, Head of Policy, Social Enterprise UK, United Kingdom, who talked about how to overcome the barriers between investors and enterprises by understanding what investors look for and how they think and explain to investors what social enterprises are in order to bridge the cultural gap. He also talked about the need to understand where investee might get the money from. He mentioned that finance is not interesting for a lot of social enterprises, only 3 % have used repayable finance (according to a survey). In fact, 61% are not interested in finance, for them it is not natural to think about finance! Only half have access to external finance and only 1-2% of SMEs looking for external finance actually seek equity finance. Less than 1% of SMEs seek external equity finance. He stressed that finding the anchor customer is more likely to drive success than finding external finance. He also mentioned that the House of Lords’s Charities Committee were interviewing the impact Investment industry – Parliamentlive.tv – on Tuesday 25 October 2016. From this he stressed how tricky it can be to explain that social enterprise investment and that investors don’t always understand what social impact bond (SIB) is (cf. innovative SIB case designed to reduce re-offending among short-sentenced male prisoners leaving Peterborough prison) and that it is hard work to make investment more socially useful! But Dan Gregory’s organization is running workshops across the UK about what Social Investment is as well as peer-to-peer social enterprises knowledge exchange.

 

Mobilizing Impact Capital – social impact bonds, impact funds, impact banking, crowd funding, public-private cooperation

 

The last Session focused on Mobilizing Impact Capital – social impact bonds, impact funds, impact banking, crowd funding, public-private cooperation through a very interesting panel consisting of Pierrick Balmain, Blue Orchard; Louis Zanolin, responsAbility AG; and Tenke Zoltani, Director, UBS (she has subsequently left the UBS Sustainable Finance team, I found out when applying for an Impact Investment Analyst position).[12]

 

The session was begun by Pierrick Balmain, Blue Orchard (Impact Investment Managers, where financial returns meet social impact), whose vision it is to foster inclusive growth and shared prosperity, BlueOrchard‘s strategy is holistic, targeting three key areas: Financial inclusion; Education; and Climate. Its strategy is aligned with the game plans of leading development institutions, such as my former employer AfDB. BlueOrchard is one of largest microfinance players in Switzerland and the World, given the market share of the Swiss Microfinance industry (see my previous blog) managing US$1.5 Bn, which a drop in the ocean.[13] However, within Sustainable Finance and Impact Investing, the microfinance market of US$12-13 Bn is quite significant, since it represents almost 10% of the total SRI market.

BlueOrchard mobilize capital towards different forms through 3 channels: Time during the year; Time across longer period (e.g. last 5 years are different from previous 5 years). Public money and partnership with DFIs is considered the best way to put capital to action. Also deals with public pension fund businesses; insurance companies; and large foundations, because they have deep pocket for the long run almost as long as the DFIs such as the AfDB. BlueOrchard also has a good pool from pure private banking sector, which use BlueOrchard as asset manager, although the portfolio manager Pierrick Balmain emphasized that they never pitch to the Asset manager (considered an illegal activity) but instead they go through private banks – to put capital to action in the microfinance sector. Moreover, he also mentioned that they don’t talk directly with high net worth client via client managers who see this option as valid for portfolio and tackling the challenges of time. Apparently, this is currently picking up. He also said that some investors come because of the risk-return generating for different funds at 4-5% which is negligible.

He concluded by saying that within the Private Equity Investment space it’s all about what value you add as an investor – this is key for micro-, small and medium-sized (MSMEs) with no-one opening the door for them otherwise. However, he expressed some fear that Switzerland will miss out if too many investors gets involved? The approach works for small projects, but how to get approval for many investors?

 

The next speaker was Louis Zanolin from ResponsAbility AG (investments for prosperity), which is one of the world’s leading asset managers in the field of development investments and they offer professionally-managed investment solutions to both private and institutional investors. ResponsAbility created in 2003 currently has USD 3.2 billion of assets under management that is invested in around 561 companies in 96 countries with 271 employees making it also one of the largest impact investors in the world. Most of their offices are located in the South.

 

Following the development investment definition, ResponsAbility is basically trying to invest with impact, but they also invest in projects that will provide market based returns to the best way to have an impact by growing Asset under Management. Their view is that the more capital that is investing in developing countries the more impact they will have.

 

The Investment process can be divided into three phases. Moreover, the sectors that have a large impact in the investment recipient countries are the following:

1.    Highly relevant for society as a whole especially the lower income segments of society and especially the MSMEs

2.    Need to be investable sectors (that is the issue of accessibility).

a.    Finance – is the backbone of every economy and finance is responsible for the economic development to happen via a well-functioning financial system consisting of e.g. Microfinance (including lending, deposit, micro-insurance, payments).

b.    Agriculture – is accounting for 65% of population in developing countries that are working in that sector and therefore it will have tremendous impact for large sections of the rural population (cf. UNCTAD LDC Report 2015). Given the increasing need for agricultural products it is expected that agriculture will continue to increase over the next decade due to population increase and diet change.

c.    Renewable energy – there is an increasing need for energy, which partly will be answered through renewable energy production, transmission and distribution.

d.    Education & Health care – it is considered difficult to find profitable projects in these two areas – and therefore responsibility sees more opportunities in the other sectors above.

He also mentioned Business models – with specifics, such as:

i.              Those targeted to affordable services and products;

ii.             Those targeting not the richest part of the population but the lower and average income part of the population (bottom 40% according to World Bank’s shared prosperty?) & MSMEs;

iii.           Those models that are highly scalable in order to have more impact.

Innovative Business Models, are characterised by:

a.    Available technology:

a.    For example home solar systems, while the technology has existed for many years it was not available 10-15 year ago because it was considered too expensive. Today the price has been divided several times and the products are now available to be marketed in the developing countries.

b.    Affordability of the targeting population

a.    It is still too expensive for households to buy solar panel – however products with a financing facility linked to the products would enable the local population to purchase it – that is access the product.

c.    Adequacy the services in the sense that the offering needs to be tailored to the target population

a.    When people need to use another type of light when leaving house – the new solar home system now have portable lamps to be used outside the home and USB keys to charge the mobiles phones.

In other words, if the business model is the right one, the more success it achieves and the more impact it will have on the population. Regarding the Service to end client – since they are often poorly literate – you just can’t sell product in the traditional way, instead you need a proper service that can help the clients during life of the product to make sure that they use it properly. Finally, he emphasized the need to act responsible towards clients and environment (important aspect) – that is, when the home solar system doesn’t work anymore the client should not just thrown it into nature.

Louis Zanolin when on to talk about the role of Public-Private Partnerships (see my previous blog on the subject of People-First PPPs). He mentioned the Global Climate Fund, which aims to mitigate climate change by fighting CO2 emission via the funding of renewable energy projects in emerging markets (EMEs). He highlighted two types of investment: Payment streams between funds and companies in EMEs. The provision of debt directly to the enterprise via local financial institutions providing loans to end client (developing knowledge at local level) – that is the obligation to lend / provide debt to specific project with energy efficiency targets on either production or savings.

He talked about the so-called Risk mitigation system with funds structured as a different tranches (Notes; Senior; Mezzanine and Junior), with the lower tranches bearing most of the risk and receiving investment mainly by public investor / sponsor / Initiator.

In the fight against Climate Change it is important to emphasis that there is a multiplier effect impact for each USD invested. Bank lend again for projects instead of money being given directly from the public sector in that way money is reused several times. Moreover, the public funding is leveraged by the private sector funding. First loss protection attracts more private money into the scheme. The volatility is absorbed by lower ranked tranches – that is the junior tranches – which thereby provides a large safety net before the private investor is affected. During the first year it is only public money at stake – during which the proof of concept takes place, which subsequently gives the necessary confidence in private sector that can see the results. Apparently, more than US$300 Mn has been invested in 16 different countries in the South leading to 7 MT of CO2 emission reduction while at the same time offering interesting investment returns. ResponsAbility have only suffered one loss at the moment with a rate of 1½%, however this never touched the private investors given the risk mitigation system mentioned above.

Evidently, this begs the question if this scheme is so advantageous why isn’t there a rapid increase in investments in the energy renewable sector thereby seeing a rapid increase to scale of the SMEs?

Louis Zanolin replied that the scheme is different from one sector to the other. In the Renewable Energy space more money available in Africa than needed. In other words, fashionable (SDG) areas channel a lot of money. However, the challenge is to find a good project and make a difference. He suggested that microfinance in certain countries have enough capital and even too much.

The UNECE moderator of the session asked what a good project is? And what constitute a good management team? If funding available and clear needs exists, where is the gap or binding constraint? According to Louis Zanolin, the challenge is with the implementation. In some countries it is easier to do business than in others (see World Bank’s latest Doing Business Report 2016). For example, in Kenya, where most people have access to mobile technology, there is a clear dependence on this sector.

He also mentioned that in the Impact Investing space the return will be longer to materialize – typically regarding private equity in the agricultural sector the returns takes much longer than in any other sectors such as the ITC section mentioned above (see case of Israel). Nevertheless, responsibility is still investing in the agricultural sector, because the risk-return is interesting. Moreover, the expected growth as mentioned above will also compensates for the time needed to realize the return on investment.

 

The next speaker was Tenke Zoltani, Director of UBS’s Sustainable Finance unit and member of advisory boards in a number of foundations. She e.g. talked about the CO2 market in London which 10 years ago was a market dictated by the Kyoto Protocol – with investment into EMEs energy, water projects etc, but it didn’t succeed. She also argued that the COP21 raise too many questions for investors to enter the space and put more assets.

 

UBS had worked in Philanthropy to bring third party managers on board focusing on ultra HNWI making their own decision supported with due diligence. Less focused on direct investment, but instead marrying philanthropy with impact investing. In 2015 a restructuring took place within UBS which brought Impact Investing into Chief Investment Banker’s office. One house view this as what Impact Investing and how we define and approach it. Step back and house view and come out with report on what Impact Investing looks like.

Finally, she talked about having both players from the private sector and the public sector as well as the UN increasingly participating leads to a fragmentation of market. She believed that many funds will not survive because they don’t communicate well, and therefore they will eventually be consumed by larger funds. UBS focuses on the Ultra HNWI segment, because it is flexible and can move quickly without the bureaucratic hindrance of other institutions. She also suggested that there is a Huge room for blended structures and PPPs as the previous speaker also alluded to.

Finally, Buke Cuhakar, Vice President, Global Entrepreneurship Network, in Washington DC, who was supposed to have intervened in the previous session, spoke about Crowdfunding for Impact – which solves a major problem associated with Venture Capital.

 

Currently, there are many different definition of what Crowdfunding is – e.g. an online extension of getting money from family and friends; and maximizing stakeholder value – that is, to democratise the access to capital thereby creating new deal flows.

According to academic research – motivation of complex interplay of institutions – many are more attracted by the idea of Social Ventures than achieving financial returns (see Othmar M. Lehner, Director of the ACRN, Oxford Research Centre). The top three reasons to invest in Crowdfunding are the following:

·      Rewards products or services (related to social entrepreneurship);

·      Being a community and supporting other people (related to social entrepreneurship);

·      Support the idea or the cause.

She cautioned that the fact that the funders are not necessarily the clients, maybe an issue.

She also presented a few key Crowdfunding statistics:

·      The avg successful Crowdfunding campaign achieves around US$7000;

·      The avg campaign last around 9 weeks;

·      The social media plays an important role to achieve those results.

·      65% of Crowdfunds comes from strangers – good indication of the extended audiences.

She illustrated the huge growth of Crowdfunding by looking at the evolution from 2010 to 2016:

·      In 2010 - $880 Mn was mobilized with 283 Crowdfunding platforms;

·      In 2016 the figures had increased to more than $45 Bn and 2000 number of platforms.

Her breakdown of the volume of different Crowdfunding models 2015 showed: Donation; Rewards; Lending; Equity – has tremendous potential; and Royalty are the most common models. Moreover, Angels have already invested via Crowdfunding platforms.[14]

Some of the leading Crowdfunding platforms for Impact are: Kick starter ; Indiegogo; KIVA ; Global Giving; StartsomeGood – which successfully crowdfunded The Food Justice project in Australia; Crowdrise; Crowdfunder (venture capital: crowdsourced) (Santander’s Changemaker Fund is a good model to be copied) etc.

She also mentioned that recent regulation in the US on Crowdfunding has allowed private equity Crowdfunding (see Homestrings.com activities in EMEs) and with that it has passed EU in under six months, since the new regulation was launched. All in all, there is a large number of private equity crowdfunding platforms in the US, but also in the EU.

The recent GEM report on Social Enterprises, which reports findings on the prevalence of social entrepreneurship around the world, have quickly adopted those platforms with high success rate. Yes the US is behind the UK when it comes to Equity Crowdfunding regulation, but will increase in the near future. When looking at (Equity) Crowdfunding Regulation around the world one of the early adopters is Brazil, but many parts of the world is catching up quickly.

In order to become a global game-changer, Equity Crowdfunding requires supportive legislation to facilitate the growth of the platforms, investor audience and high quality companies. There needs to be legal monitoring and compliance, and hand-holding in the process, and there need to be a template provided by the platforms. Appropriate training is necessary for entrepreneurs but also for the investors and for the governments. There is currently no data on the EMEs, but now it is becoming a trend in other parts of the world. In short, there is a lot of potential. Due to the exponential growth of platforms people will only go to the trusted platforms, especially since there is a huge risk for those who don’t know.[15]

Some initial thoughts on how to move this Promising Agenda Forward

It is clear to me that an action-oriented research project which endeavours to encapsulate the benefits of integrated science and holistic thinking by developing and testing aspects of a pluri-/multi-disciplinary framework explaining from successively an (New Institutional/Transaction Costs) economics; behavioural investment (cognitive psychology); political scientific; and sociological angle whether and how developing-country immigrants significantly can enhance the venture impact investment environment in their home countries through remittances of money and ideas, while in the process also addressing many of the above mentioned issues, challenges and opportunities, surely will contribute to moving this important Impact Investing Agenda forward.

At the Centre for Finance & Development at the Graduate Institute Geneva & the Cooperation and Development Centre at Ecole Polytechnique Fédérale de Lausanne (EPFL) we have assembled an outstanding team of pluri/multi-disciplinary researchers with the aim to identify concrete innovative strategies (e.g. using both Crowdfunding and Blockchain innovations) for facilitating and boosting diaspora impact investments in African LDCs (Members of the EAC).

Some of our project key words are: Blockchain; Crowdfunding Platforms; Diaspora Mutual Investment Platform; Entrepreneurship; Impact Investing; (African) Least Developed Countries; Private Capital Inflows; Remittances; Rural Development / Rural Non-Farm Economy & Agri-business; East African Community (Tanzania & Rwanda); Sustainable Development; Sustainable Development Goals; Sustainable Finance; Switzerland.

Most of the concepts behind these key words are addressed to some extent in the various sections/sessions of this blog. Although this 2-year action-oriented research project mainly seeks funding form the Swiss Network for International Studies (SNIS) through its 10th call for projects, we are also expected to mobilize resources from other sources such as foundations or DFI trust funds or why not participatory crowdfunding. This to some extent explains my participation in this year’s GIIN Investor Forum in Amsterdam. And it is my hope that some of the 600 delegates who find time to read this extensive blog post will find that our research idea indeed falls within their remit of interests and activities. I am at least ready to engage with the impact investing industry tomorrow and while at the same time expanding my network on a global scale, meeting investors, fund managers and advisors from all over the world the results of which can be found in my next blog….

 

 

[1] Worldbarrow is designed by Christian Friis Bach in cooperation with Ravendo, Designit and OCEAN Presenning and is protected by design protection and utility model protection in Denmark and Europe. In Africa it is an "open source" wheelbarrow intended to be copied and produced locally.

[2] In 1992 he received the Initiative Price from Ford Motor Company (DKK 40.000) for the work on establishing a Danish Fair Trade Labelling organisation (Max Havelaar Denmark).

[3] The conclusions of the 2016 Regional Forum were forwarded as a contribution from the UNECE region to the 2016 High-level Political Forum on SD in New York. Furthermore, UNECE member States agreed to continue the process of informal consultations on a future regional review mechanism for the follow-up and review of the 2030 Agenda at the regional level in the run-up to the sixty-seventh session of the Commission in April 2017.

[4] EU’s leading Investment Bank – work with management team to structure and secure value for businesses that have a positive impact on society and environment.

[5] Sir Ronald Cohen, the chairman of the G8 taskforce on impact investment, challenged the sector to “bring the invisible heart of markets to guide their invisible hand” in order to capitalise on the social impact investment opportunity.

[6] The need to build a global social impact investment community that is collaborative and open to new actors will be supported by a new Social Impact Investment Taskforce and a working group of development finance institutions focusing on social impact investment and international development.

[7] J.P. Morgan is an anchor sponsor of the 2016 survey. The study was also produced with support from the U.K. Government through the Department for International Development’s Impact Programme.

[8] US$15.2 Bn committed by 157 respondents to 7,551 impact investments in 2015.

[9] Fund managers, which account for 57% of the total respondent sample, manage 58% of sample AUM. DFIs, which make up only 3% of the total respondent sample, account for 18% of sample AUM, while banks account for 9% of sample AUM. Overall, the median AUM for DFIs and pension funds/insurance companies are USD 1,742 million and USD 435 million, respectively.

[10] The only cloud-based crowd-caring platform that is technology based and is able to connect any connected device technology (watches, pendants, mobile devices etc) with a dedicated mobile application for caregivers, family, friends and angels.

[11] After due diligence, the investor works with the investee in: • Determining key performance indicators (KPIs) to track on the monitoring scorecard. • Gathering and analyzing data on the KPIs post investment to monitor the social impact performance of the investee.

[12] In preparation for my job application I read the following UBS documents which demonstrates that UBS is a global leader in this area: 23 September 2013 News Release “UBS set-up and closed its first (SME Focus) Fund for Impact Investing” as a fund-of-fund managed by OBVIAM and expressing that the social impact of the investments is monitored and measured independently by Global Impact Investing Reporting Systems (GIIRS); UBS’s sustainable investing primer “Adding value(s) to investing” published in March 2015; UBS’s first edition of its quarterly publication from the UBS Chief Investment Office (CIO) WM Global Investment Office: “To Integrate or To Exclude: Approaches to sustainable investing” that will delve into aspects of sustainable investing, published 13 July 2015; and finally I have just read “Doing Well by Doing Good: Impact Investing”, published 29th May 2016, which turn to the third of the three basic approaches to sustainable investing

[13] Impact investing is a category of Socially Responsible Investing (SRI), which accounts for over USD 20 trillion in assets globally. The asset class of impact investing has more than doubled in the past two years counting over USD 100 billion in assets. A sub-type of impact investing, commercial microfinance assets exceed USD 13 billion in 2015. Source: Global Sustainable Investment Review, 2014.

[14] Source: GEM Social Entrepreneurs, 2015 Figure. 18

[15] I was surprised that no one mentioned the role of AlliedCrowds in this session

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