Views on How to Implement a global impact investment strategy, Part 1/3
By Christian Kingombe, 24 May, 2017
The day before I took part in The 2nd Annual Global Impact Investment Conference focusing on Trends & Considerations for Asset Allocators, Family Offices & Institutional Investors and organized by the non-profit Association ESAFON (The European and Swiss Network of Asset and Fund Managers, Family Offices and Strategic Advisers), the eagerly awaited Annual Impact Investor Survey was released by GIIN for the seventh time. This year, once again, the data attested to the industry’s momentum. It was with this encouraging knowledge in mind and the pride that our advisory company 4IP Group LLC likewise just had been incorporated at the Commercial Register in the Canton of Geneva the day before (see next blog on “The challenges associated with starting an Impact Investing Advisory Boutique in Geneva”) that I took my energy efficient bicycle and cycled the 15 minutes from my home to Hotel Mövenpick near the airport where the conference took place without leaving any Carbon footprint on my way. While I am sure it was convenient for the many participants overseas (I personally spoke with participants from the US, UK, Israel, Germany, Luxembourg, France and Denmark) that the venue was located just next to the airport perhaps the organizer ESAFON should consider in the future to use video-conferencing to contribute to reducing business air travel while at the same time helping the planet given the contribution of aviation to global climate change. Notwithstanding these initial remarks the conference itself was very well organized by ESAFON with their commitment to help drive the impact agenda forward; well attended with the number of participants almost doubling since the first conference last year; and the organizers had successfully managed to invite a series of excellent and insightful speakers to give the participants the strategic and practical tools we need to master an efficient and effective impact investment strategy. My appraisal of the conference is that the organizers succeeded in achieving this objective. Here is my take on what key strategic knowledge was shared and discussed to “shift attitudes, transform systems, and build the sustainable economy of the future.”
Business, Society and Sustainable Development
My compatriot Allan Lerberg Jorgensen, Director, Human Rights and Development, Danish Institute of Human Rights (DIHR), Copenhagen, competently chaired the entire event. In his opening remarks he talked about the interface between business and society – an expertise that DIHR has acquired by working with multinational enterprises (MNEs), such as Nestlé and Shell on their commitment to respect human rights, as well as with investors on sustainable development and human rights and the impacts associated with implementing the respect for human rights. From this experience he argued that we are living in a time where business and society needs to converge more for the sake of growth and that neither can survive if the other doesn’t strive. However, the proof of concept now needs to become much more mainstream, so that the impact investing term will be considered as a good conventional investment 10-15 years from now. On this background he perceived the UN SDGs as a typical UN agenda containing everything of what is it that the planet needs. They could also be considered from the point of view of an investor as a shopping list of what the world needs entailing huge business opportunities. He highlighted a landmark report “Better Business, Better World” launched in January by the Business & Sustainable Development Commission (BSDC), which is comprised of 35 CEOs and civil society leaders, that revealed that pursuing sustainable and inclusive business models could unlock economic opportunities worth at least US$12 trillion a year by 2030 in four economic systems and generate up to 380 million jobs, mostly in developing countries. The four economic systems examined by the BSDC and covered by 4IP Group LLC are: Food and agriculture, Cities, Energy, Health and Well-being, together representing 60% of the real economy. To capture these opportunities in full, businesses need to pursue social and environmental sustainability as avidly as they pursue market share and shareholder value. This of course begs the question: How does investors go for those markets and scale-up their investments? To talk about how this could be done the organizers had invited UNPRI located just next to the City of London, who are promoting responsible investments and in doing so is working a lot with family offices as well as collaborating with DFIs.
Latest Key Advances Concurring to The Growth of The Impact Institutional and Family Office Market
Kurt Morriesen made a presentation on the Latest Key Advances Concurring to The Growth of The Impact Institutional and Family Office Market. He began by saying that we this year mark the 10th year of the coining and definition by Rockefeller Foundation of Impact Investing. This definition, according to Kurt Morriesen, who had a previously worked with the World Bank, IFC and the IADB on advisory and investment project focusing on impact investing and public-private partnerships (PPPs) as we also do within the 4IP Group, said that the original 2007 definition was ideal for PEI or PFI project finance in infrastructure project which presents a clear metrics especially if you have a narrow concept of a (unique) business. However, the impact investing concept he argued has evolved over the last 10 years so much so that the initial 2007 concept doesn’t fit anymore because the ecosystem has expanded. He mentioned several types and sizes such as impact investing for small technology firms with no liquidity targeted by VC/Angel networks; Mid-size companies too small to be of interest to pension funds; and then large scale companies. There was a short discussion about whether an electric car company like Tesla could be considered an impact enterprise or not or whether listed equity firms could be considered as impact enterprises – without sacrificing their financial returns.
He also mentioned a research study into the impact of ESG on credit portfolio performance by Barclays entitled “Sustainable Investing and Bond returns.” Some of the key findings of the Barclay’s report were: ESG need not be an “equity-only” phenomenon and can be applied to credit markets without being detrimental to bondholders’ returns; The findings show that a positive ESG tilt resulted in a small but steady performance advantage; No evidence of a negative performance impact was found; ESG attributes did not significantly affect the price of corporate bonds; and no evidence was found that the performance advantage was due to a change in relative valuation over the study period. Moreover, today there are plenty of historical performance data to draw on.
He talked about the Social Impact Bonds (SIBs) funding mechanism, also called payfor-success (PFS) in the United States. SIBs were first launched in 2010 through a United Kingdom program called Social Finance UK. The UK program sought to reduce the rate of recidivism at Peterborough Prison in Cambridgeshire. Following the UK program, SIBs took off and landed on American soil in 2012. New York City initiated its first SIB contract through an education and social policy research organization called Manpower Demonstration Research Corporation (MDRC). Similarly, he mentioned that only two months ago The National Australia Bank has announced a new bond to support Australian organisations that champion gender equality in the workplace. He cautioned that while impact investing is as flexible as possible, there is a need to understand how to measure it properly.
Concerning what happens right now – the latest above mentioned GIIN Dataset is derived from a sample (67% of the sample) of 140 (for-profit 58% and not-for-profit 9%) fund managers who collectively raised over USD 11.1 billion in 2016 and plan to raise USD 18.5 billion in 2017, a 67% aggregate increase. According to the 2017 GIIN Annual Impact Investor Survey “Fund managers responding to our survey manage capital from a range of sources. Almost 75% (100) reported raising capital from family offices/HNWIs, and more than 60% (84) reported raising capital from foundations. More than a third also reported raising capital from banks, pension funds or insurance companies, and DFIs. The largest sources of capital by percentage of funds raised were pension funds/insurance companies (24% excluding outliers) and family offices/HWNIs (18%).” The database on pension funds, the size of $1.3 Trillion, covers both small, medium and large firms, including social and green bonds as well as listed equity firms. Hence on this background the UNPRI representatives argued for the need to take a more holistic view on impact investing. Another interesting fact mentioned was that there are 665 impact investors investing in this moment around the world [source unknown?] with materialized investment of which $900 Bn of the investment volume is related to energy, especially Green bonds, which are perfect for early stage investors. In other words, UNPRI doesn’t see impact investing as a niche, since its already mainstream and scaling every year.
Another interesting trend he highlighted was that the Family Offices in Asia are in the process of redesigning the way of doing Impact Investing and in this process they are turning Hong Kong into a global hub for sustainable finance and impact investing with the China, City University of Hong Kong and Tsinghua University, with the support of NDRC, being an International (People-First) PPP Specialist (in Public Transport Logistics) Centre. Hopefully, the lessons learned could be used to strengthen Geneva’s position as a rival leading global hub for sustainable finance. Overall, impact investing is moving very fast from only $600 Bn just 2 years ago to an estimated size similar to the global Private Equity Investment market in 5 years time. In fact according to François Golbery, Chairman ESAFON, this market is set to be worth 500 billion $ by 2025, and it is driven by investor’s willingness and preference to achieve alongside financial returns, environmental and social returns as well.
Four Initiatives towards a common impact investing measurement standard
Finally, there are still no uniform standardized framework, which evidently creates a challenge for impact investors. To address this situation, Kurt Morriesen highlighted three current global initiatives:
- OECD Social Impact Investment Global Steering Group: The findings from its four work streams (Data; Case studies; Knowledge sharing; and Policy) will be pulled together into a second report to be released at the end of 2017;
- WEF Shaping the Future of Sustainable and Impact Investing initiative: In Phase 2 (2016-2018), the initiative will mobilize investors, governments, and impact enterprises to tackle existing roadblocks and provide tangible pathways to scale the sector.
- UNPRI (an investor initiative in partnership with UNEP Finance Initiative and UN Global Compact) launched by the United Nations in 2006 after former UN Secretary-General Kofi Annan brought together a group of the world’s largest institutional investors, academics and other advisors to draft a set of sustainable investment principles. At the heart of the six Principles for Responsible Investment is the premise that investors have a duty to act in the best long-term interests of their beneficiaries and this means taking into account environmental, social and governance factors.
“Measuring impact, as we have seen, requires systems to collect and aggregate data across a number of funds. This can be both complicated and costly. However, with the development of standard indicators, there are methods and tools emerging that simplify this process for investors.”
It is believed that in the next 5 months – a common impact investing measurement standard will be proposed for the Impact Investing industry based on these parallel initiatives.
Surprisingly, nothing was said about a newly started 4th initiative by the UNECE International PPP Centre of Excellence (ICoE) “International UNECE PPP Forum Implementing the United Nations 2030 Agenda through effective, people-first Public-Private Partnerships” which so far have organized two fora (in Geneva 30 March – 1 April 2016 and in Hong Kong 9-11 May 2017) to discuss people-first Public Private Partnerships as a key mechanism and development model to contribute to the 2030 Agenda of the United Nations, representing a shift in priorities to environmental and social projects, and as a tool to achieve the SDG’s.
In Geneva the delegates last year discussed the adoption of the SDG’s and how they have created a strong rationale and the need for standards and Project Team Leaders introduced progress reports on the development of PPP standards and invited the experts to identify the main challenges in the development of PPP standards, the role of Project Teams, the coordination with each other, and their responsibilities, with the aim to discuss actions to accelerate the production of the standards and the action plan for going forward. In addition, a key objective of the UNECE Forum consisted in identifying and showcasing 30 concrete case studies of PPPs which meet the SDG’s [12 projects specifically highlighting the overall impact of SDGs] so that they themselves could inspire others and be used by governments. The second UNECE PPP Forum in Hong Kong the week before the ESOFON Conference took place aimed to make progress and accelerate the Standard making process in key areas of PPPs for the SDG.