Making Impact Investing More Impactful

There has been a lot of hype about impact investing since the term was coined 5 years ago. It is often described as an emerging asset class with an estimated market opportunity up to USD 1 trillion.  A lot of the ‘enthusiasm’ focuses on how impact should be measured, but advocates of impact investing reckon that the actual volume of transactions remains minimal at best.

The Global Impact Investing Network (GIIN) defines impact investing as investments made with the intention to generate measurable social and environmental impact alongside a financial return. This I believe is a broad enough definition that can encompass a wide spectrum of investment approaches, from creating social value as the key driver on one end to generating financial value on the other. 

Impact First

Most of the discussions on impact investing centre around the notion of channeling private capital to improve the life of the Bottom of the Pyramid (BoP) and the disadvantaged, especially those in emerging economies. These impact driven investments can have different rates of return, from below market to above market. Investors may take the profits or reinvest them back into the business, in parts or in their entirety. In developed economies, this type of impact investing is often associated with community investing. 

Finance First

Impact investing could also be a concept applicable to investments made with financial returns as the key driver, though this is less talked about. Investors will look at the investment returns but they will also base their investment decisions on sustainability considerations.  This is where impact investing and socially responsible investing (SRI)[1] overlap. The recent global financial crisis has led to a critical rethink of some of the foundational beliefs that underpin the financial markets and investment models. Jack Welch’s about-face remark that ‘shareholder value is the dumbest idea in the world’ epitomized the market sentiment for a more responsible capitalism. More mainstream investors have begun to see the case to integrate Environmental, Social and Governance (ESG) factors into their investment decisions, as a means to mitigate risks and identify companies with long term financial performance advantages. Some finance first investors also see their investment as an opportunity to help change the world for the better, in addition to the monetary returns. This is what Victor Hwang in his book "The Rainforest: the Secret to Building the Next Silicon Valley" referred to as "extra rational motivations". 

Whist impact investments with ESG considerations are largely applicable to companies with large market capitalisation,  the concept of impact investing is also highly relevant to innovative, small to mid cap ventures that seek to improve the well being of mankind. The Investors’ Circle, for example, was founded in the US over 20 years ago to catalyze the flow of capital to high impact entrepreneurs. It has so far propelled US$168 million plus US$4 billion follow on investments into 269 enterprises dedicated to improving the environment, education, health and community. So impact investing is by no means 'new'. Depending on how one defines impact investing, it may not be entirely correct to say that the volume of transactions is small.

Impact Investing Goes Mainstream

Hitherto the impact investing agenda has largely been shaped by foundations and non-profit organisations with philanthropic objectives. This is good, but not good enough. Impact investing should by no means be restricted as a humanitarian or community development tool. If impact investing is to achieve world-changing impact, we need more mainstream investors to join the discussion and more importantly the action. Traditional impact investments are private equity securities with very limited liquidity. Some analysts believe that publicly traded companies with ESG portfolios will unleash a new market for mainstream investors and bring in the largest dollar amounts of assets. We also need more angels, venture capitalists, and family offices to invest in entrepreneurs who seek to change the world for common good with innovative, sustainable and scalable solutions. And beware that these entrepreneurs come in different forms and shapes – they do not necessarily label themselves as social entrepreneurs.  Not only do we need thought leaders like Jed Emerson, we also need more visionary investors like Timothy Drapers and Peter Thiel who back entrepreneurs who seek to change the world through disruptive innovations.  This is particularly the case for Asia, as angel and venture capital investing are still at a nascent stage of development. 

Impact investing is far from being a single and discrete investment category. We should refrain from applying value judgment on whether a particular class of impact investing is more impactful than the others. Take job creation as an example. One may argue that all things being equal, there is no reason why creating job opportunities in developed economies should have less impact than in developing economies. Some businesses can also benefit both the BoP/disadvantaged segment and mankind in general. Clean technology is one obvious example. So are medical and health breakthroughs, which are not very often discussed in impact investing fora. Essentially, impact investors can have a portfolio of investment spanning across the whole spectrum, from finance first to impact first investment. One can also begin with finance first investment and then gradually migrate towards impact first investment over time.  

Indeed if impact investing is to gain market traction, a lot more work needs to be done with mainstream investors who are driven by financial returns. There is probably no need to position impact investing as a new asset class as such. From the asset allocation perspective, impact investment is no different from venture capital or private equity investment in terms of the structure and tools of investment[2].  From the risk and return perspective, impact investing is also similar to socially responsible and sustainable investing. After all, impact investing will only be able to achieve its impact if one day the majority of investors realise that doing good also means doing well in the long term. 



References:

Spectrum of Impact Investing, AVPN (www.avpn.asia/about-us/avpn-background/)
Values Based Investing, UBS (www.ubs.com/globsl/en/wealth_management)
World Economic Forum (http://www.weforum.org/content/impact-investing-how-do-we-harness-hype)

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[1] SRI also includes negative screening of companies that do harm to the society and/or the environment.

[2] Dr Christine Chow, Founder, Homage Consulting

Is Social Enterprise a Passing Fad?

The backlash against the deficiencies of capitalism has led people to rethink the purpose of businesses. Governments are advocating the development of social enterprises as a viable alternative to public service delivery. Impact investing has emerged as a new asset class. There are stock exchanges established specifically for social enterprises. Business schools are setting up social entrepreneurship programmes one after another.

Amidst all the interest and enthusiasm, there is still no shared consensus on the essential nature of a social enterprise. Many people think that social enterprises exist to help the underprivileged by building up their capacities and creating opportunities for them. Some believe that social enterprises must be non-profits.

Wikipedia defines a social enterprise, based on the book “Understanding Social Enterprise: Theory and Practice” (Ridley-Duff and Bull, 2011), as "an organisation that applies commercial strategies to maximize improvements in human and environmental well-being, rather than maximising profits for external shareholders." A social enterprise can be structured a for-profit  or a non-profit. This is a very broad definition, and certainly encompasses more than just organisations with a charitable purpose.

If we take a look back at history, the function of business was to provide the goods and services that a society needed. It is largely in the last 100 years that the meaning of "business" has been distorted. Instead of satisfying needs, companies now “thrive on” creating wants and desires and value creation has become synonymous with returns on shareholder value on a quarterly basis.

The relentless pursuit of profit has wreaked havoc on our economy, society and environment. It is also unsustainable for businesses themselves. The average life expectancy of a Fortune 500 company is between 40 and 50 years. The pace of corporate funerals is set to accelerate, according to a Yale study.

Studies have shown that the companies that perform best over time are purpose-driven organisations. These companies make money but profit is not their raison d'être. They improve the lives of people, address environmental issues, provide meaning for their employees and build sustainable businesses in the interests of all stakeholders.

My favourite example of such a purpose-driven organisation is Zappos. Tony Hsieh, CEO of the online retailer, says Zappos is all about “making customers and employees happy.” By demonstrating the crucial link between the purpose of an organization and sustainable growth, the Zappos culture is influencing companies around the world in a big way. Nonetheless, most people would not equate Zappos with a social enterprise.

Instead of singling out social enterprises as a desirable category of business, there is a strong case to be made that every business should integrate a social purpose into its core. Instead of teaching social enterprises as an elective, business schools should inculcate in every student the imperative of building for-purpose organisations. We need to encourage all aspiring entrepreneurs to think about in what ways they can make a difference to society. It is with this objective in mind that we launched the Make a Difference (MaD) Venture Fellows Programme in Hong Kong last year.  The Programme celebrates and supports young, innovative, doing-good and doing-well entrepreneurs. 16 MaD Venture Fellows from Hong Kong and 9 countries participated in an intensive 4-day programme, meeting with mentors, potential investors and business partners, as well as inspiring other entrepreneurs.

The three 2013 MaD Venture Stars, selected through an expert judging and crowd-voting process, demonstrate the myriad possibilities for a business to create a better world through innovation:

·       Insight Robotics, Hong Kong (www.insightrobotics.com) applies robotics technology to protecting critical infrastructures and key resources around the world. It detects and visualises remote incidents such as forest fires, oil leaks, water pollution, floods, droughts and security breaches for management authorities and assists them in devising the most efficient disaster recovery and contingency plans.

·       Wibbitz ,Israel (www.wibbitz.com) has created text-to-video technology that automatically turns any text-based article, post or feed on the Web into a video within 20 seconds. It helps reduce costs and production time for SME publishers and content providers, breaks down language barriers and has tremendous application potential in education.

·       Wifinity Tech, India (www.wifinitytech.com) applies simple and cost-effective wireless technology and artificial intelligence to help enterprises and buildings monitor, manage and economise on energy and water consumption. Enterprises and public institutions can reduce energy bills by 20% and water wastage by 15%, with ROI in less than 12 months.

None of these MaD ventures identify themselves as social enterprises, but their founders definitely have the vision to change the world for the better. It is cool to talk about social enterprises these days. We hope that this will just be a passing fad, as one day all businesses should have a social purpose. It is time to get back to the basics.