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)
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)
Posts
