Read our latest Newsletter:
By Haggai Chomba, 22nd November 2019
The Global Steering Group for Impact Investment (GSG) formally announced the launch of a National Advisory Board for Impact Investment (NABII) in Zambia during the 2019 GSG Impact Summit held in Buenos Aires, Argentina from 18-19 November, 2019. The formation of the NABII is a critical step in the development of impact investment in Zambia.
The NABII Zambia initially started as a Taskforce launched in December, 2018 comprising of highly technical and qualified eminent individuals accomplished in their own rights emanating from the five pillars1 of the impact investment ecosystem namely: Supply, Demand, Intermediary, Market enabler, and Policy & regulation. Since the launch, the Zambia GSG Taskforce has been working through the membership process of the GSG for almost a year now until this week’s on-boarding to the GSG network thereby becoming a NABII.
The launch of the NABII in Zambia comes at critical time when the country needs more impact capital to achieve the 2030 SDGs and finance its Seven National Development Plan (7NDP). The Africa 2030 plan for reaching the SDG requires a minimum financing of USD 500 billion annually (SDGC Africa, 2019). When extrapolating research data from SDG Centre for Africa, Zambia needs to increase the level of investments in its impact sectors five-fold to USD 5 billion per year in order to achieve the SDGs by 2030. This corresponds to 1000 new investments per year when applying the average historical deal size. This illustrates the significant interventions required within the Zambian Impact investment ecosystem.
The NABII Zambia strategic direction will be governed by the single ultimate objective of ensuring a continued and sustained impact investment that recognises a return to capital while creating both social and environment benefits. The NABII Zambia will be focussing on removing impact investment ecosystem constraints through deepening impact investment awareness, institutional capacity building and improving the quality of the pipeline of impact investment projects in order to support the creation of a private sector driven impact economy in Zambia.
Zambia becomes the second country in Africa to successfully join the GSG network for impact investment. Undoubtedly, this adds momentum to the growth of impact investment in the Africa and will be a powerful force for addressing impact investment challenges identified in the country’s ecosystem context study report. Joining the GSG will not only give impact movement in Zambia international credibility but also allow the country to learn from international impact investment best practices.
About the National Advisory Board for Impact Investment Zambia
The NABII Zambia is an independent, influential private cross-sector driven coalition dedicated to driving more capital to improve lives and the environment. The NABII is a vanguard for impact investment and serves as a platform for connecting vehicles between local and global actors focused on directing private capital to public purpose. NABII’s mission is to mobilise stakeholders and resources to support the creation of a private sector driven impact economy in Zambiia.
About the Global Steering Group for Impact Investment
The GSG is an independent, multisectoral global entity catalysing impact investment and entrepreneurship to benefit people and the planet. It is present in 33 countries and the EU through National Advisory Boards (NABs) that bring together leaders from the worlds of finance, business and philanthropy to drive the adoption of measurable impact in all investment and business decision-making.
Christian Kingombe, 4IP Group Managing Partner, was a panellist at the WTO Public Forum 2019 Session 24 on Wednesday the 9th of October 2019 entitled:
co-organized by Center for Socioeconomic Development (CSEND) and
Food and Agriculture Organization of the United Nations (FAO)
Thibaut Mourgues, 4IP Managing Partner, completed in September a study about infrastructure prioritisation in Timor-Leste. This assignment funded by European Union identified the main areas where Timor-Leste is lagging with regards to the Sustainable Development Goals and proposed an infrastructure prioritization framework. Timor-Leste has benefited in the recent years of oil revenues that have allowed for partial reconstruction after independence in 2002 but with the depletion of the existing fields, the current Government is feeling the need to make sure public investment is optimized and geared toward economic and social development. High moment of the field work was a meeting with the Prime Minister, Taur Matan Ruak, together with EU Ambassador Alexandre Leitao.
Business Department: Private Infrastructure
Location: Geneva, CH or Milano, Italy
4IP Group aims to become a global private markets investment manager, striving to serve both HNWIs, Family Offices, Asset Managers and Institutional investors. We aim to have USD 100 Million in assets under management and around 10 professionals across our 2 offices in respectively Geneva and Milano. We realize potential in private markets by financing and developing great companies and essential infrastructure. We create value in our impact infrastructure investments through active and long-term (10 years) responsible ownership.
What it’s about
What we expect
What we offer
Careers at 4IP Group: http://4ipgroup.org/4ip-group-team/careers/
The African Continental Free Trade Area (AfCFTA) Trade in Services Signaling Conference was held at the Westin Hotel in Cape Town, South Africa on 2 – 3 September 2019. The main objective of the conference was to enable exchange among service providers and negotiators on non-binding indications of market openings, existing or future. Participants were also able to communicate their expectations from each other. The conference was attended by Ministers, chief negotiators and services experts from AU Member States. Representatives from the African private sector also attended the conference. Also in attendance were personnel from the African Union Commission (AUC), services experts from the following RECs Secretariats: ECCAS, EAC and SADC; as well as AU Partner institutions: UNECA, and Afreximbank, and from AU cooperating partners, GIZ and the World Bank. A group of experts from GFA Consultants, including 4IP Group, commissioned by the DTI/AUC, are conducting studies on the five priority services sectors as background for the negotiations. The first session covered presentations on the business and communication sectors. On day two
AGENDA ITEM 8: Presentations on sector studies – financial, transport and tourism services were done. The transport services study was presented by Dr Christian Kingombe, 4IP Group Managing Partner. He mentioned that typical issues affecting trade in the transport sector are market entry conditions and conditions on operations. These are specifically measures affecting competition, administrative procedures and regulatory transparency. Fewer than half of the current African WTO Member States (17) have made commitments in at least one mode of transport. The main issues of concern are market access, national treatment and the Most Favored Nation principle. The presentation highlighted that, in line with the AUC Agenda 2063 vision for Africa and the vision of the AU Programme for Infrastructure Development in Africa (PIDA), the long term transport vision for Africa should provide sustainable, reliable, modern, efficient, cost effective and fully integrated transport infrastructure and freight and passenger transport services that support continental and regional integration, and meet future transport demand and support African business through easy and seamless logistics systems.
Christian Kingombe will be presenting his AUC study at the forthcoming WTO Public Forum on the 9th of October from 8.30-10 a.m. Followers and clients of 4IP Group are welcome to register their participation should they wish to engage with 4IP Group on these transport and logistics services issues.
by Christian Kingombe
As part of 4IP Group’s knowledge sharing activities especially our involvement as co-editor of a forthcoming Compendium on Impact Investing in collaboration with the Graduate Institute Geneva, Managing Partner, Christian Kingombe, as a member of the Swiss Impact Investing Association (SIIA) took the “train” [not the car nor the plane to minimize 4IP’s Carbon footprint], all the way (4 hours) from French-Speaking Terre-Sainte, Canton de Vaud, up to the idyllic city of Zug located at the picturesque Zugersee in the German speaking part of Switzerland.
SIIA’s newly elected board consisting of Deniz Erkus, Michael Mosimann, Svetlana Baurens, and led by its new President Ben Banerjee, who replaced my compatriot Klaus-Michael Christensen at SIIA’s General Assembly in the spring, had concocted an excellent programme over two days all of which I shall not attempt to summarize in this article. I would not be able to do justice to the many interesting and important “impact” related activities presented by the many speakers ranging from Ocean-Climate Change, to Success in Asset Management through Transparent/ESG Investments Driven by Fintech Solutions via DeRisking Investments in the Blue Economy, to Creating Sustainable Impact In India and the Conversion of the Asset Management Industry, all in the morning session of day one of the event. Let me instead refer to the full Summit programme on SIIA’s website.
Instead let me attempt to extract some of the key messages from the Panel Discussion on the 2nd day focusing on Impact Investing – Insights from Assets Owners, which I believe is of the highest interest to 4IP Group’s clients and followers as well as our on-going Impact Investing Compendium project.
The panel was moderated by Gustavo Montero who also moderated most of the sessions during the entire event.
SIIA had assembled a very interesting panel of Asset Owners starting with Aygen Yayikoglu (AY) (Managing Partner at Crescent Capital, Turkey); Steffen Bauke (SB) (CEO at Belvoir Capital, Switzerland co-sponsor of the SIIA event along with the main sponsor Prager Dreifuss), who the day before had given an interesting talk about how his own family office had been converted towards impact investing two years earlier after 13 years of operating as a conventional investor with no regards to the purpose of their activities except to preserve the wealth of their high net worth clients. The only female on the panel was Daniela Herrmann (DH) (Founder / President at Topan, Switzerland), but her remarks probably left the strongest and most lasting effect in the audience, which in reaction to her interventions provided her with the loudest acclamations for her thought provoking and at time radical suggestions as we will dwell into in this article. Finally, Kostis Tselenis (KT) (Investment Partner at Quadia, Switzerland), who is a co-author of a chapter which will feature in our Impact Investing Compendium also provided a series of very interesting contributions based on more than 10 years operating in the industry with clients such as HNWI, Family Offices (FOs) and Institutional Investors.
Crescent Capital represented by AY is focusing on green energy investments such as investing in infrastructure such as power plants, hydropower, wind and solar assets in Turkey and surrounding regions. AY has been operating in the space of clean energy for the past 10 years with a natural progression towards impact investing. He believed that after more than 10 years of Impact Investing – that there are still not enough deals out there on the marketplace?
AY believed that the recent interest generated eventually will allow institutional money to flow towards impact investing by using a framework and impact which are useful to catalyse and bring institutional investors into the Impact Investing space. However, he also acknowledged that there has been a lot of repackaging of businesses under the name of impact. The counterfactual case is that there probably in any case would have been investment in renewables and waste management, which today are being repackaged or rebranded by the impact industry.
AY’s perception of the current state of affair was rather pessimistic in the sense that he believes that there is a need for a massive acceleration to be done in order to deal with the current pressing issues in the sense that we are pressured for time if we are to reach the tipping point within the next two years as advocated also by Sir Ronald Cohen. AY’s believed that the areas to invest in are massive but also that there is enough money available. The next step is a need to brainstorm on the way forward which was one of the objectives of the SIIA event, namely what can minds do from a wider perspective?
Kostis Tselenis (KT) addressed the fact that there has been a lot of interest from capital owners. However, he questioned whether we have enough quality deal flow – including repackaged impact investing. With the increasing interest and involvement this will inevitably lead to a shrinking in the high-quality impact.
Steffen Bauke (SB) argued about at what stage impact investors should enter the cycle – from the Venture Capital (VC) path towards Private Equity (PE) towards the public Capital market. In other words, investors need to decide where to step in and what risk to take, something that 4IP Group has addressed via our ESG tool kit mainly intended for Family Offices.
So, while there is a lot of deal flow, SB’s believed that not enough people are converted yet (cf. SSF’s annual report on the state of Swiss Sustainable Finance). SB highlighted that of the around US$100 Trillion if AUC, US$30 Trillion could be labelled as ESG of which almost only 1% is considered as impact investing. Of these $30 Trillion, $20 trillion is just about excluding bad businesses (tobacco, armament, gambling and prostitution) – but can’t be considered neither ESG nor impact. Hence, there is a lot of room for expansion.
As with AY, SB shared the sense of urgency by alarmingly stating that we only have around 1 year left given the fact that the ice at the North and South poles are increasingly melting. Hence, SB’s recommendation was that we need to convert people faster and bring the good deals out there to motivate people to invest or what he called carrying out economically sensible investment by making money while disrupting the industry.
It was a real revelation to be introduced to and listen to Daniela Herrmann (DH), not least because my own wife is working in the male dominated financial industry, albeit in the back office, which seems to make a huge difference when mirroring her experience with what DH had to go through as an investment banker. She started by stating that “People are still thinking about vacation homes when their children perhaps is without a future.” Despite the scientific facts most people in Switzerland are still ignoring these daunting SDGs and COP21 issues. Hence, like her fellow panellists (AY & SB) she also urged for the need to speed up the process and start finding the companies to put their behaviour into place as happened when the EC forced Switzerland to abandon its Banking Secrecy, which actually happened quite quickly. However, currently, we are still far too slow in terms of what we are facing she regretted. The only solution is that the investment attitude of investors have to change completely, as is being studied by Prof. Giuseppe Ugazio, another contributor to our Impact Investing Compendium! From Topan’s own experience, and that of 4IP Group, she was fully aware of the huge deal flows existing in emerging regions such as MENA, SSA and LATAM. However, the problem is that we won’t get there until the investment industry starts going away from a transactions focus only towards value creation. Moreover, there is already a lot of talent inside the investment industry, which theoretically should be able to make value while also contributing to the developing countries wealth creation process through the creation of value and impact. Through that process the investors necessarily have to accept higher risk. DH argued that you need to engage when there is great talent, great ideas and great tech solutions. The US has already realized this by flying into MENA picking software talent. The Europeans as usual don’t see these opportunities. 4IP Group fully subscribe to her suggestion that Asset managers in Europe to a much larger extent than hitherto need to embrace the world and make it happen given the tight time constraints.
Along those line Kostis Tselenis (KT) also advocated for the need to re-educate the investor community. Quadia’s has a 50% of its portfolio directed towards in the EU and the other towards the Developing Countries DCs. KT is more optimistic in the sense that he believes that this change can happen in the short term. He emphasized that we also need to do Impact Investing in the OECD. Its not that 4IP Group doesn’t agree with this view, we have just decided to oriented our own forthcoming Infrastructure Impact Fund towards Asia (50%), Africa (30%) and Asia (20%).
He cautioned that the investment community can’t consume too much time with every single deal, its important that we put the money to work, as the DFIs such as the AfDB also have realized by optimizing their internal decision-making processes. To this end, he recommended that we need more structures that can facilitate the current lack of talent in impact investing – and people who are willing to roll up their sleeves in order to make the projects/enterprises impact investing ready.
The good thing is that the Venture Capital Funds (VCFs) have done this already for decades, but we can’t rebuild the companies to invest in. There are a lot of construction sites available to make the impact investing ready for this.
Daniela Herrmann (DH) alluded to Financial Engineering – for example, if you develop a derivative that could feed into the impact investing market. She believed that its not possible to convert the guys in the trading desk. There is a need for indexes, allow me to draw the readers attention to the pioneering work to that effect by iGravity, which was presented by Remo Oswald in the previous session.
Similarly, Quadia has carried out an innovative approach in Switzerland. But we need several of those in order to go make it go viral or reaching the tipping point!
Steffen Bauke (SB) emphasized that beyond encouraging each other already operating within the impact investing industry and attending closed industry event such as SIIA’s Impact Summit, which unfortunately and surprisingly wasn’t as well attended as in China where events about Impact Investing now draw crowds that fill the auditorium to its capacity limit. Hence, we in Switzerland need to talk to the non-converted, that is the conventional traders and traditional investors, which is the most important thing to do in order to scale the movement.
According to Steffen Bauke (SB) its about “the liquid stuff”. Inevitably we have to carry out Due Diligence (DD), however, it is difficult to do so, because there are so many variables, besides the issue of how to define impact without existing MSCI standards. Moreover, the DD of the team, business plan, the deal sourcing and the legal issues all takes time.
This was somewhat countered by Daniela Herrmann (DH) who firmly believed that investors don’t have to sell their soul to everyone! They just need to do it. They should not want to get bogged down by the difficulties listed by SB. DH was seconded by Aygen Yayikoglu (AY) who also believed that what is being done now is simply not enough. AY believes that we need to reach more than 1 billion people – both through a combination of using carrots and sticks. The idea of using the gaming community as presented by Sergey Sholom, Founder of GNation in Serbia, during his earlier SIIA presentation “How to Maximize Impact 10 Times from Every EURO Invested” in order to push the corporate to funds massive amounts of initiatives, AY thought was is a great idea. Engaging 1 Bn gamers to put government and corporates under pressure might do the trick, especially as he mentioned fossil fuel is still the most government subsidized commodity in the world! AY suggested that we put corporate on some sort of shaming list. For example, it could be a pollution list whereby the political conscious consumer could punish the corporates for polluting by shaming them and not buying any of their products. Governments could be lowly ranked for not putting a ban on plastic bags. Government still can do a real change via regulation, but the majority of them are not doing it or not fast enough. Hence, pressure through public ranking and limelight in theory will make a big difference! In other words, AY’s proposes that the role of NGOs/CSOs should be to focus on the creation of a large-scale carrot and sticks system: In other words, a list where everyone can see who the polluters are.
SB bought into this idea by suggesting that we could rate the companies on who is doing good and those who are not yet out there. He sticks his hope on the current analysis of companies’ capital market performance which demonstrate that there is already a discount on companies – e.g. chemical companies, which have not been performing that well in the last five years: Not only have chemicals lagged the total stock market since 2011 in their total returns to shareholders (TRS) performance but the industry’s return on invested capital (ROIC) performance has flattened, and for some chemical subsectors, decreased signalling the end of the golden era.
On the other hand, SB’s highlighted that both Fintech and Agritech companies are outperforming the overall capital market due to the premium on their future strategies.
SB’s also suggested that many asset managers don’t allocate their money correctly. Hence a bottom up approach from investors and the community side should be exerted – by banning and pushing investment manager to changing the world.
According to Kostis Tselenis (KT) he honestly admitted that he has been going to impact conferences for the past 10 years always meeting the same community. Notwithstanding that the Impact Investing industry is growing at a rate of 35% p.a., the industry is still very tiny with no chance of solving the SDG financing gap any time soon. Hence, he suggested that the SIIA community needs to stop saying how wonderful Impact Investing is! Instead, SIIA should lead a new approach which consist of bringing the leading players around the table, as we (IIX Chapter Lusaka founded by 4IP Group Managing Partner, Christian Kingombe) is doing in Zambia through the establishment of a GSGII National Advisory Board for Impact Investing, in order to identify and in turn address the 100s of challenges, which the industry is confronted with, if we want the Impact Investing industry to grow bigger. KT suggested that this could be done through:
KT mentioned that deal flows were different both 10 and 5 years ago, and today there is a need to build a network in order to get the right quality deals in place for the impact investors. He mentioned that one of the difficulties with building a deal flow Database is the fact that there are so many asset classes. There is also a need to distinguish between VC deals and PE deals. In short, its very difficult to build a deal flow database where impact investors can go to find deals such as e.g. the GIIN Impactbase, which is the searchable, online database of impact investment funds and products designed for investors. Consequently, according to KT the Co-investors – currently get the best deals. Also in line with the other panellists he also argued for the need to be out there in the field and not only sitting behind the computer. To this Daniela Herrmann (DH) mentioned that Topan, has 10 staff based in Europe and another 12 staff placed in the MENA region. Its crucial she pleaded to have staff on the ground, as we at 4IP Group also have in Zambia and elsewhere on the African continent.
She again bemoaned that the largest contributors can’t be educated because their whole DNA doesn’t get what we were discussing at the SIIA Summit, because their careers are built on the conventional two dimensional (return-risk) investment approach and they have KPIs that they need to comply with to get their bonusses. This pessimistic outlook led her to a rather radical remark that we instead need to wait for the next kind of environmental accident or disaster to happen so that “they” can be fined or hurt via the monetary/capital market.
Steffen Bauke (SB) mentioned that most HNWI when they inherit their money most of them if not everyone want to found their own philanthropic foundation in their own name. The problem with this egocentric approach is that one foundation can’t do enough philanthropic alone. In fact, most foundations only do very small things!
Likewise, in the Impact Investing industry everyone is also trying to establish his own business advisory, venture and asset management boutique. To my own excuse 4IP Group was established because most of the Impact Investing players in Geneva are founded by people with either Investment Banking, Wealth Management / Private Banking background, some of which responsible for the Global Financial Crisis in 2007-2008, didn’t want to recruit people like us with a Development Finance background (believe me I knocked on most doors here in Geneva after I left the AfDB), which reveals that the financial return still is valued higher than those of us who possess real expertise on the ESG dimensions of the Impact Investing equation. Hence, perhaps it is their Human Resources Departments which need to be properly educated so that the best and brightest talents on the labour market, independently of their educational and professional background, can be recruited by the Impact Investing industry, which as everyone on the panel acknowledge is not yet the case, a fact that I personally can subscribe to! Consequently, the Impact Industry in its current form won’t get anywhere either as is the case with the Philanthropic industry.
Contrary to these dwarfs, BlackRock is the largest independent asset management firm in the world currently managing USD5.98 trillion which was achieved by recruiting a lot of asset managers accumulating outstanding market knowledge with over 1900 investment experts in 135 teams across 30 countries spread over 70 offices and 28 investment centres and clients in more than 100 countries. That’s because today’s investors need a partner that plays a leading role around the world. Only firms at this size can manage the growing complexity and high level of volatility in the investment markets, as well as the increasingly stringent regulatory requirements, and realise their investors’ strategies and goals.
To Black Rock’s suggest could be added that yesterday Blackstone, the world’s largest private equity firm, has raised the largest ever private equity fund by collecting USD26 Bn for Blackstone Capital Partners VIII (more than 30 times the size of their first private equity fund in 1987). The fund is just over 5% larger than Apollo Global Management’s 2017 vintage Appollo Investment Fund IX, the previous record holder! Schwarzman writes that he did not make a single presentation to investors when raising his latest BCF VIII fund! What more is that investors who have committed to the fund include institutional investors such as California Public Employees’ Retirement System and the California State Teachers’ Retirement System with $750 Mn each and the Florida Retirement System Trust Fund which committed $100 Mn. Blackstone expects more than $100 Bn in capital inflow this year. Total AUM increased to $545.5 billion, up 24% year-over-year. Within that, private equity increased to $171.2 Bn, up 43% from $119.5 Bn the previous quarter.
This consolidation should be repeated in the Impact Industry in order to be able to do achieve the objectives as discussed at the SIIA Impact Summit!
DH recognized that there is beginning to be greater engagement of larger foundations, which are moving in the right direction. And there are big foundations now starting to focus on e.g. Ocean and other areas where they can’t engage politically. In other words, according to DH, the last 10 years has seen some progress.
In order to accelerate this positive trend, KT argued that whatever that is similar should consolidate! He mentioned that many fund managers come to Quadia with nice fund proposals and some with open ended proposal, however their fundraising starts to struggle at $35 Mn. Therefore, KT proposes that those who are doing similar activities, they should instead be lumped together and work together in the impact investing industry instead of separately as is still the order of the day.
Let me use this article to signal to the Impact Infrastructure industry that whoever is interested in helping us set-up our Impact Infrastructure Fund and who would want to cooperate with us in delivering our proposed ESG Services through our unique ESG toolkit, we are open to putting SB and KT’s recommendations into action – by walking the talk!
However, consolidation should also happen on the non-investment (demand-) side of the ecosystem:
AY highlighted that fundraising is both a time consuming and very inefficient process which may take years. There are too many unsuccessful attempts, something we at 4IP Group also has experienced with a client last year who attempted with our support to establish an investment fund for the development, construction, financing and operation of solar photovoltaic power projects throughout Sub‑Saharan Africa. It failed despite an excellent market analysis, strategy and proposed value creation, experienced fund management team and very promising asset pipeline e.g. in terms of both IRR, development status, commercial milestone, PPA tariff and debt financing available!
But to facilitate the fundraising process having a back office platform available where the Fund Management Team can plug in while benefiting from an existing platform to avoid hiring their own expensive lawyers and accountants which easily in Luxembourg can cost you up to $250,000, which is a potential barrier for a number of early-stage companies such as 4IP Group. A new plug in structure or platform could circumvent this binding constraint, especially since not every entrepreneur is a good lawyer, tax expert nor accountant as I realize very quarter when 4IP Group has to submit our VAT returns.
Daniela Herrmann (DH) further complained about the existing old-fashioned Private Equity Investment (PEI) structure whereby Private equity investors usually have an investment horizon of 5-7 years and plan to exit after that after making a substantial profit on their investment.
In her radical approach to the current state of affairs DH also finds that the notion of Series A, B, and C funding rounds, these terms are referring to this process of growing a business through outside investment, which are necessary ingredients for a business that decides “bootstrapping,” or merely surviving off of the generosity of friends, family, and the depth of their own pockets, will not suffice. The approach is pure non-sense!
The panel debate also included the idea of making illiquid market liquid by setting-up platform such as the Sustainable Finance Geneva (SFG) Swiss Social Stock Exchange for social enterprises along the UNCTAD, the UN Global Compact, the PRI and UNEP-FI driven Sustainable Stock Exchanges Initiative, which in the best of all worlds will help us put impact in the right direction.
AY emphasized that a lot of pension funds has an allocation problem. He illustrated this by referring to the impact investing fund launched in 2018 and managed by KKR. Global Impact is KKR’s dedicated lower-middle market private equity strategy established to invest in businesses delivering solutions to significant societal challenges. KKR align its efforts to the UN Sustainable Development Goals (“UN SDGs”). The problem as identified by AY is that the KKR 8 Bn Global impact fund has so huge ticket sizes that KKR can’t do what they wanted to do! The model is deficient from multiple angles.
We learned that Sweden has made it legal as an asset manager need to invest into impact. Apparently, the public will use AI to screen independent of asset manager to find out if there is any layer of their portfolio which is in conflict with the new regulation. This new trend has not yet arrived in Switzerland where you can’t pro-actively select pension fund offering because the institutional scenario is behind. Hence the panellist recommended the beneficiaries of the Swiss Pension Schemes instead to talk to or engage with the institutional investors.
There was little confidence amongst the panellists that a lot could be achieved by engaging the Governmental level on the other hand. Most of the civil servants working in central government are not proactively involved to change the current state of affairs in the Swiss asset management industry. There was a general consensus that it will have to be the grass roots which will make a difference.
It was argued that we have already missed the train when it comes to trying to convince the public decision makers to introduce an exclusion list. It was agreed that Governments in any case almost always follows the market.
One constructive suggestion was “How to use Impact Investing as a risk management tool to diversify risk in investment portfolios.” This argument should be used much more going forward. If we can prove this is the case rather than to push the government to force the pension funds to allocate x% of their allocation towards impact investing, then that might do the trick, it was agreed.
Because of the inertia of Government, saving the planet, despite the power of regulation and fines in moving the corporate world, it was agreed that the power of the corporate world is the only way forward. And this will only happen via viral grassroot movement putting pressure on corporates which only then subsequently is translated into legislation by the government. The challenge is that we don’t have 10 years at our disposal, but we have only until end of 2020 to reach the tipping point.
To quote the Swedish youth climate action activity Greta Thunberg, when she arrived in New York after having crossed the Atlantic Ocean “Let’s do it Now.”
I was informed by the SIIA Board that for those who didn’t attend the SIIA event a selection of photos and videos from the event will be available on the SIIA website.
The 21st week of the year 2019 turned out to be the hitherto most Sustainable Finance intensive week of the year in Geneva. 4IP Group attended four of these Sustainable Finance events, and even had to omit attending a fifth “Impact Investing awareness” event, on 21st of May, organized by Svetlana Baurens, CEO Switzerland & Co-founder of Galileo International Impact Investing Centre (Galileo IIIC), Zurich, Switzerland and newly elected Board member of the Swiss Impact Investing Association (SIIA), which 4IP recently joined. This review blog seeks to extract the key messages and recommendations from the following four events:
Through invitation as a member of Impact Hub Geneva, 4IP Group (Dario Moroni, Patrick Fitzgerald and Christian Kingombe) attended the 13th of May celebration of The Impact Hub Switzerland association, which was founded earlier in the month of May 2019 by the five Swiss Impact Hubs with a total of seven locations in Basel, Bern, Geneva, Lausanne and Zurich. The newly founded umbrella organization «Impact Hub Switzerland» bundles the activities of all these five Swiss impact hubs and allows the hubs to launch nation-wide projects such as the incubation program Circular Economy Transition. This event was a great occasion to learn more about the promising impact activities of our fellow Impact Hub Geneva members.
Through invitation as recent members of Sustainable Finance Geneva (SFG), 4IP Group (Christian Kingombe and Patrick Fitzgerald) attended an event held 21st of May at the Palais Eynard in the old town of Geneva to celebrate that it has already been 10 years whereby SFG is actively promoting sustainable finance in Geneva. In terms of substance the official programme consisted of just a few speeches by Mme Sandrine Salerno, Conseillère administrative, Ville de Genève, which was followed by three successive reflections on when, why and how SFG was founded riddled with a few anecdotes by respectively: Angela de Wolff, SFG Co-founder / member of executive committee & former President and considered one of the 10 brightest Swiss Sustainable Finance stars; Bertrand Gacon, Initiator and project leader for SwiSOX (Swiss Social Stock Exchange at SFG; and Fabio Sofia, President SFG, a pioneer role in the field of microfinance joining Symbiotics at inception. The event was really meant for networking and celebration and therefore didn’t bring new elements to our knowledge about sustainable finance except to see how the field and its Geneva membership has incrementally increased since September 2008, and most importantly putting faces to the many names we so often have read about, but hadn’t had the opportunity to talk to face-to-face.
4IP Group’s management team had decided to attend for the first time, since our own foundation in May 2017 and the amendment to our constitution in May 2019, The Geneva Forum for Sustainable Investment (GFSI). The GFSI is the annual meeting place in the field of Sustainable Investment (SI) organized by Voxia Communications and Conser at Kempinski Hotel Geneva for investors wishing to learn about best practices and access quality products and innovative concepts. The objectives of this meeting were:
The one-day event was incredibly rich with its 18 successive time slots of which 6 were parallel workshops, thereby putting 4IP in the difficult position of having to choose between two otherwise relevant events for our own “sustainable investment” activities. Evidently, in order to limit the scope of this section, we shall only extract the most important key messages conveyed in those sessions which we from the 4IP perspective found most relevant for our followers and clients.
After the opening words by two familiar faces Angela de Wolff, Conser Invest et Fabio Sofia Sustainable Finance Geneva, Jean Laville, Conser Invest, provided an overview of Swiss Sustainable Finance (SSF), which apparently have 120 representative members. What he omitted to say is that the membership is CHF3,000 per year. On the 4th June SSF will release and present its annual state of Sustainable Finance in Switzerland study at Hotel Warwick (stay tuned for 4IP Group’s take on this study in a subsequent blog).
Mr. Laville in his contextualisation of the panel discussion highlighted that recently a citizen movement, Divest Vaud, asked the State Pension Fund (CPEV) to take into account the climate emergency. It has created an online platform where affiliates can demand that their fund divestment of fossil fuels. In its appeal to the CPEV, Divest Vaud calls for an investment strategy that respects the Paris Agreement on the climate. Divest Vaud is not the only group to have such claims. In Geneva, too, the State Provident Fund (CPEG) has been criticized for its slowness on the climate theme. “Instead of investing in green energy, the CPEG prefers to enter into a dialogue with fossil fuel companies,” said Thursday last week the Group of Insured Disinvestment in a statement.
This group, which brings together around a hundred CPEG policyholders, is calling for a decarbonisation of the portfolio, with the aim of reducing the carbon footprint by 50% by 2025.
To answer these accusations/pledges from the Swiss Pension fund members, SSF had invited Jean-Rémy Roulet, Président, ASIP and François Puricelli, Président, Groupement des institutions de prévoyance (CCB) to discuss whether the institutional investors should be subjected to strengthen regulation (e.g. EU Sustainable Finance directive) or whether they should instead be allowed to continue to auto-regulate themselves as hitherto.
The ASIP President started by emphasising that the pension funds have to adapt themselves to the members increased life expectancy. It would be wrong to lose the focus of its main mission which is to manage risks on top of numerous societal problems. The crucial concern as seen from his perspective is the lower return on investment and the aging population to a larger extent than thematic investments. Hence, it would be necessary for the members to be paying more in order to receive retirement for a longer period. Nevertheless, in the Swiss tradition he was willing to compromise in the Swiss tradition by committing his fund to contribute to addressing climate change challenges.
His fellow panellist, Francois Puricelli, emphasized that it was a question about how to manage the impact on environment, as illustrated through the case of Volkswagen. When it comes to the funds investment portfolio policy the situation is contradictory according to him. He emphasized that the real economy still is dependent on fossil fuel and that alternative energy sources were not going to be filling the gap anytime soon and imposing restrictive regulations would be counterproductive. Using the traditional negative screening approach as to whether or not to invest in publicly listed companies still has its limitations and constraining rules on pension funds would not help he argued.
Mr. Laville then asked what is preventing the pension funds from changing their investment strategy to which the panellist mentioned that each of Switzerland plus 1500 pension funds is responsible within a normative framework. As mentioned above the public pension funds are receiving a higher pressure from their members than the private pensions funds.
There was a consensus among the two pension funds that its better to engage in a dialogue with the oil companies rather than pursuing an aggressive constraining regulatory approach. The existing normative framework was considered largely sufficient by both panellists, because it provides performance, portfolio guidelines, fund management approach etc.
To illustrate their point, it was mentioned that to force the pension funds to support start-ups with a private equity fund financed from 1% of the assets of the 2nd pillar of around CHF650 Mn, was considered impossible to carry out. Too much constraints will lead to missing the target it was claimed. The problem being that legislation and directives do not evolve as fast as a dynamic society, and therefore the best advice they could give the competent Federal Authorities with regards to taking more sustainability risks was instead to let the Pension Funds do their job which is to ensure financial sustainability of the pension funds in the long run.
After this not so encouraging start to the SSF event the next plenary session focused on
which was given by Mary Jane McQuillen, Managing Director, Portfolio Manager, Head of Environmental, Social and Governance, Investment, ClearBridge Investments, filiale de Legg Mason Global AM. She talked about What ESG Investing is. She saw ESG as a fiduciary or risk mitigation approach. She highlighted a number (3) of ESG Integration Models about how to speak to institutional clients on how to know the difference of the actual approach to integrate ESG factors for long-term value versus green washing.
In other words, what makes ClearBridge Investments stand out is that they believe that all financial analysts also have to be an ESG analyst. The long-term investment analysis therefore also should go through the ESG analysis. ClearBridge then carries out an internal ESG rating of the asset managers. They believe that communication is important – everyone talks to each other about ESG factors – so any portfolio manager should understand the full picture of what the ESG factors.
Externally – analysts have a lot of experience, which need to be shared. This is done by speaking at large fora e.g. Institutional investors – about how to think about ESG integration and by sharing their experience.
When it comes to incentive & compensation – the portfolio manager scores the analysts on idea of communication and ESG analysis and where the value comes with regards to the stock valuation.
This compensation approach based on the review of the analyst – sends a strong signal that ESG is not a marketing exercise but an approach to analysis and carry out investment and that it is meant to support the analysts especially since engagement with companies takes time. In the past the Asset manager would meet with CEO/CIO and the ESG analysts would meet with the Head of sustainability. ClearBridge Investments believes that the most effective way is to have financial analyst also be the one asking about ESG targets, gender, executive compensation and governance, to bring the non-financial questions in front of the CEO / CIE not to the side as hitherto, since its important to these long-term strategic issues of importance to business evolution and growth. ClearBridge as an active manager has proved through this balanced and diversified approach what it takes to ensure consistent performance regardless of the macro-stability of the countries where they invest. ClearBridge is both competitive and outperforming the benchmark. So, this was a very good and more optimistic contribution to the GFSI event following the initial panel discussion with the two institutional investors.
The first parallel workshop session I followed was entitled:
This workshop was delivered by Sheila ter Laag, Spécialiste ESG BNP Paribas AM. She talked about BNP Paribas’ on-going huge transformation in terms of sustainability. Before this initiative only covered 10% of AUM which had highly sustainable social responsible investment (SRI) strategies, or thematic investment and some impact investing. The new objective is to go full sustainable with 400 Bn AUM with the mission of no longer separating mainstream investment from the greener / thematic investment approach. A new Sustainability Centre has been set-up as the Hub/think tank on investing sustainably for years, how to address the issues of climate change (CC), environment and using up natural resources. BNP Paribas now believes that it needs to have experts able to analyse these factors by looking at the carbon footprint and encouraging/transforming the companies to reduce these carbon footprints. The BNP Paribas team has increased from 10 to 24 over the past year which has enabled BNP Paribas to enhance its capability of carrying out these types of analysis through their climate expert, head of sustainable investment, consultant of Principle of Responsible Investment (PRI). This larger team enables BNP Paribas to study the effects of CC and resource exhaustion but also about the effects of engaging on a very high level – via stewardship with companies and regulators and those running markets and countries (cf. green bonds) in terms of what affects the real economy.
The BNP Paribas presenter also briefly addressed the three critical pre-conditions for a more sustainable economic system (that is driven by a low-carbon sustainable growth):
On this background the present she emphasized that through the launching of the new 2019 Global Sustainability strategy aimed at getting the whole company on board that all asset classes managed by BNP Paribas will have integrated ESG criteria. Consequently, BNP Paribas has been ranked 1st in class by the PRI by walking the Talk – as a company – by being as good as the companies that BNP Paribas is investing in.
By June 2019 all BNP Paribas’ strategies for open-ended funds will have ESG integration.
She also mentioned that 40 Bn of thematic investment is expected to go deeper into ESG – transition funds. And the Climate Action 100+ – have institutional investors talking to the top GHG emitters around the world. While Investors can have a huge effect, she argued that we need other institutions to come on board to ensure that money is invested in a sustainable way. The presenter concluded by stating that the future makers should shape the world by creating value for clients through this type of ESG integration – thereby setting the standard for sustainable investment.
After these two initial plenary sessions the programme turned towards three successive parallel workshops. The first one which I chose to follow focused on “ESG investment, a performance factor in emerging equity markets”
The speaker was David Czupryna, Responsable des portefeuilles clients ISR from the Candriam Investor Group who started by addressing: What ESG means for the performance? He believes that ESG can bring a value addition for the selection of stocks.
He then went on to talk about the challenges which Investors investing in EMEs are confronted with:
He went on to compare over 10 years the performance of the index MSCI EME Equities with the part of the index with ESG Coverage. This showed that there is an overperformance of the better emitters compared to the MSCI EME Equities.
Using ESG filters has brought financial value to the investors. There is no selection of stocks it’s a selection based on ESG factors only. Out of 794 he showed that 344 are amongst the best issuers.
At the sectoral level ESG brought value to all sectors except two, especially the energy sector with positive value: Carbon based electricity and Renewable energy.
Its interesting to note that Candriam has a team of 12 ESG analysts, which contrary to BNP Paribas still is separate from the portfolio management team. They follow the so-called above mentioned Model 2, that is buy and use external ESG research, but the analytical model is home-grown (internally) by Candriam. Moreover, Candriam doesn’t use the same ESG approach to an EU portfolio with higher standards compared to a portfolio based on EMEs. Candriam systematically remove the most controversial enterprises when it comes to abuse of labour right – because they have been known for either of the following controversies:
Candriam excludes the following controversial activities: Weapon; Gambling; Alcohol (targeting minors); and Tobacco.
What I found interesting was the finding that if the enterprises is downgraded by ESG analysts what you see is that the enterprises on average underperform after 12 months. He argued that ESG can enable us to anticipate certain tendencies, because of the controversies which will affect the stock price of the affected enterprise. The ESG analysis is a norms-based filter of controversial activities, encompassing: Analysis of governance (e.g. screening how company’s structure with regards to shareholders, internal control, the members of the board etc.); Sustainability themes optimisation which gives an Overall ESG added value [the sum of these 4 pillars].
In conclusion – over the past 10 years the ESG approach generates 2.4% p.a. outperformance in excess over 10 years compared to the benchmark with a similar risk. Most of the ESG selection themes (Norms Based, Controversial, Sustainability themes) have had a positive added value to performance. The ESG analysis allows to select value that brings Alpha, but also provides prediction of the performance versus the market benchmark.
The presentation by the speakers Jean-Christophe Jouannais, Ingénieur Produits Structurés and Claire Douchy, Responsable de l’offre «sustainable & positive investments» both from Société Générale Private Banking Suisse didn’t provide any value added to 4IP Group’s business plan related activities, so I won’t dwell on the content of their presentation here.
The speaker Hervé Guez, Directeur de la recherche & Gestion actions et taux at Mirova countered the previous Candriam Investor Group presentation by stating that ESG filters doesn’t necessarily always lead to superior performance due to long-term challenges. He raised the caveat that you need minimum a 3-5 years of investment horizon to capture the environmental innovation.
He mentioned that traditional indices have a higher carbon footprint than the real economy. He also argued for the objective to have a more resilient economy in order to obtain a higher return in the long-term. He concluded that the goal is to find alternative solutions via innovation to reduce the carbon footprint.
The speaker Andréa M. Maechler, Membre de la Direction Générale, Banque nationale suisse (BNS), talked about the BNS as a big investor with a big balance sheet of CHF750 Bn to manage, which constitutes around 15% of Switzerland’s GDP. Money on the balance sheets has to be invested abroad, and BNS can’t hedge using the currency / exchange rate risk. Moreover, BNS focuses on the liquid markets e.g. EURO, but also the JPN (Asia). While BNS mostly focus on obligations/bonds, 20% of the balance sheet – CHF140 Bn is invested in stocks:
The challenge is that each country has its own rules and constraints, e.g. In Mexico can’t invest in ITC / Telecom.
In order to avoid conflict of interest as a central bank – no stock picking is allowed, but instead BNS follows a more passive approach / management, and BNS only uses the exclusion approach.
BNS’s Mandate – is not to optimize the return on investment but to lead a good monetary policy to ensure price stability and good foundation for the swiss economy.
She mentioned that green bonds – when changing the monetary policy – needs to remain market neutral – to avoid negative effects.
After her keynote speech, Ms. Maechler, joined what seen through the prism of 4IP Group was the most interesting panel discussion of the SSF event:
The roundtable was moderated by Angela de Wolff, Founding Partner, Conser, and the panellists were:
John Tidmarsh, Chief Investment Officer, R20 investing in reneweable/sustainable infrastructure;
Jos Verbeek, Manager and Special Representative to the UN and WTO, World Bank Group;
Olivier Kobel, responsable du financement et du développement, Helvetia Environnement.
Jos Verbeek started by pointing out the need of around 4.5 Trillion USD p.a. to finance the SDGs, while at the same time official development assistance (ODA) only is capable of mobilizing around 200 Billion USD yearly to fund the SDGs in the Developing Countries (DCs). In other words, a shift in mindset is required from the IFIs (e.g. WBG, AfDB, EBRD) to shift away from financing projects themselves (USD 100 Bn) towards starting to leverage and facilitate resources from the private sector to help finance development projects. Consequently, the new WBG strategy aims to bring the whole WBG together. The WBG was previously known for WBG lending money to Governments (member states); IFC investing in the Private Sector (that is private sector-to-Private Sector) and MIGA helping to provide guarantees against political risks to private investors. The new approach aims to bring all these approaches together to help countries find investors willing to invest in green-related opportunities. According to IFC calculations 20 EMEs alone is in need of USD23 Trillion in investment. Hence, the way forward would be:
As an example of this, Mr. Verbeek mentioned that in July 2015, Zambia’s Industrial Development Corporation (IDC) signed an agreement with IFC to explore development of two large-scale (100 MW) solar projects through Scaling Solar. The competitive auction organized through the program attracted 48 solar power developers, seven of whom submitted final proposals, and the bids yielded the lowest solar power tariffs in Africa to date equivalent to 6 U.S. cents per kilowatt.
IFC and the Government of Canada are providing approximately $25 million in financing for the second Scaling Solar project under development in Zambia, allowing construction to start on a solar plant that will provide clean and affordable power to ease the country’s energy shortages. The financing package arranged by IFC includes senior loans of up to $10 million from IFC and up to $12 million from the IFC-Canada Climate Change Program, plus $2.5 million in interest-rate swaps from IFC and a $2.8 million partial risk guarantee from the World Bank’s International Development Agency. The European Investment Bank is also providing $11.75 million in loans to the project that will be built near the capital Lusaka by Enel.
IFC is also trying to set the market – because the impact investors are willing to buy and to set the standards for Green bonds. The WBG believes that there are resources out there sitting in negative interest rate and bonds – waiting to get the money out of there and into the EMEs.
John Tidmarsh started his intervention by stating that the biggest problem is that there is not enough bankable projects and that we therefore need to try to make the market larger and more liquid. The R20 – Regions of Climate Action is a not-for-profit international organization founded in 2011 by former Governor of California Arnold Schwarzenegger in cooperation with a number of leading regions and NGO’s, the United Nations, Development Banks, Clean-Tech companies, and Academia. Its mission is to accelerate sub-national infrastructure investments in the green economy to meaningfully contribute to the SDGs and advance the COP21 via bankable infrastructure project and to match these pipelines with investors. R20 aims to create partnership with fund managers, hopefully in time also with 4IP Group’s first fund, that creates funds dedicated to this deal flow. Consequently, R20 then share the management fee, which contribute to the establishment of the pipelines. R20 ensures that the projects are both green and attractive to investors while improving lives and helping to deliver the SDGs.
R20 believes that the sub-national level is important – because this is where the greatest opportunities are with regards to achieving impact. But it is also where the greatest demand is and where infrastructure delivery is needed the most. This is the type of infrastructure which is smaller than what is typically funded by the WBG.
R20 therefore works with local governments (LGs) e.g. – a city, a province or a state – below the Central Government (CG) level – while being fully aligned with CG’s infrastructure masterplan. R20 also believes that the LG has the greatest vested interest to help manage project risk.
John Tidmarsh ended his presentation by highlighting R20’s USD 88 Mn Flagship project – 50 MW Solar PV Power Plant project, which represents 10% of the capacity to deliver energy in Mali. Kita is a photovoltaic project with a capacity of 50 MW that was initiated in February 2013 by the signature of a Memorandum of Understanding between R20 and the Government of Mali to carry out pre-feasibility studies on renewable energy projects in the country. Initial public and private investors were attracted and, thanks to the feasibility studies, a PPA and concession agreement were signed, enabling the construction of the power plant to begin in early 2019. Once built, Kita will be the largest PV plant to date in Western Africa.
Finally, Olivier Kobel presented the first company in Switzerland to do a Green bond. In 2017 Geneva distinguished itself in the field of sustainable finance in Switzerland, by issuing two green bonds in the space of a few months. The two “green” loans were the first made in francs by a Swiss company and public authority. The European Investment Bank (EIB) acted as a forerunner by issuing in 2014 the very first green bond on Swiss territory. In the first case, the Geneva-based company Helvetia Environnement, which specializes in waste treatment and recycling, raised CHF 75 million in June 2017, with a maturity of 2022 due to an important capital (CapExp) requirement for waste management and recycling. In November, the State of Geneva issued a green bond in two tranches. for a total of CHF 420 million over a period of 10 and 14 years.
The advantage of this financing option was that it allowed Helvetia Environment to signal and to provide a sustainability commitment of company and position it with stakeholders as well as communicate it to the wider public. Investors rushed on these offers, allowing issuers to negotiate a better coupon.
Helvetia Environnement used the funds to develop its sustainable development business, mainly to buy the SRS company. The rest was used to build an automated sorting center. For Olivier Kobel, head of financing and development at Helvetia Environnement, the “green bond” was self-evident. “Previously, we used capital increases and structured bank loans, which was not ideal for the group.” These solutions present high costs and a lack of flexibility, according to the leader. The green bond option was considered both a good idea and easy to implement. Despite this success Swiss corporates didn’t follow Helvetia’s lead because they were worried about bureaucracy. But while there of course is both Due Dilligence and certification (not too much hassle) according to Mr. Kobel its just business as usual.
After the lunch networking break the next plenary session was focusing on:
The presentation was done by Nick Henderson, Gestionnaire de fonds dans l’équipe Responsible Global Equities, BMO GAM who e.g. praised the SDGs in providing a comprehensive – well rounded – framework around the sustainability issues. BMO use their own framework to clients – in order to disclosure how they are investing.
He discussed how we can drive improvement in businesses and encourage them to take on board SDG criteria risk and opportunities – through engagement. He e.g. provided historical data – from a 3rd party analysis of where engagement has worked and what the returns are. Whether it’s a question of causation or correlation it’s a fact that the linkage between successful engagement through 10 years of data – actually works – especially if you work with companies collaboratively, this can drive some improvements.
Who this is done is by driving down the SDGs and the targets and engage with companies. For BMO GAM 80 targets are engageable. They then build strategies – looking for quality businesses allocating capital efficiently. They look for where can drive engagement – see tangible evidence that there are results from successful engagements
In terms of how to engage along the lines of SDGs, they focus on:
Following the above-mentioned model 2, BMO has its own inhouse specialists in the ESG, of which 16 specialists are looking at SRI and if they have a good track record and corporate access. If the company do not have good SDG linkage, then BMO does not have a place for it in its strategy with investment aligned with SDG target as pre-condition for investment. Investors want to see financial return, but also the non-financial return and the ability to identify and measure impact.
The 16 team members have achieved success in terms of the number of companies engaged, e.g. in 2018 – they engaged 600 companies of which 240 are having success in this regard e.g. by providing clarity on what its doing for SRI.
Apparently, there is currently a real demand for explicit engagement activities to make companies better which allows BMO to provide to their clients the desire to align financial decision making with their own values. They want as broad a spectrum of impact as possible.
This plenary sessions was then followed by three successive parallel workshops. The first one was on
The presenters were Mélanie Schaus, Product specialist, Alexander Roose, Head of International Equities Sustainable Strategies of Degroof Petercam AM, which is an active fund manager based on research (bottom-up) investor convinced in strategies based on 3 objectives: (1) it does not invest in companies not respecting fundamental labour rights; nor in companies activities considered controversial; but instead they invest in companies showing best practices and best effort in their sector. These companies are ranked / scored and compared. The scorecards allows them to compete with each other based on quantitative score and ESG scores.
One could plausibly say that this investor also falls within model two above. Its Investment process is based on a Team of researcher (equity & fixed income), a SRI team and they also rely on extern resources in the form of – Sustainalitics and debt brokers. Management could ask to elaborate a sustainable investment process based on ESG.
The environmental risks are taken into account when looking at companies meaning that e.g. Monsanto is not eligible to sustainable funds. On the other hand, it invests in innovative companies that can address challenges such as carbon footprint, that is it invest in positive impact companies.
Degroof Petercam AM is a signatory of the UNPRI. The turnover of the funds is between 3-5 years and they provide a trimestriel screening because they believe that its not possible to manage a sustainable fund with frequent entry and exits!
The presentator was Léa Dunand-Chatellet, Directrice du Pôle «Investissement Responsable» from DNCA Investments who interesting has chosen an approach which is not to be a blackbox in the sense that they believe that the methodology of their portfolio management should be as transparent as possible! Their Philosophy is to manage the risk and understand companies’ future and whether it is positioned well towards the challenges in next 5-15 years.
DNCA Investments’ ABA framework has 4 axes in the analysis:
In total the ABA framework has 24 indicators – and they only use those indicators which are material. Thus, DNCA Investments’ has chosen a Transparent model, which disclose the reasons for the notation. The framework is being used to communicate with the public (adapted by company).
Their analysis is dedicated to the measurement of impact in the form of:
Whereby they look for relevant indicators and the data of the enterprise to measure the impact. They have talked to 50 enterprises – and used 40+ indicators, covering Health, Food, ecological challenges etc. to identify to what extent the strategy goes in the direction of impact, or how the company’s products and/or services will provide additionality compared to the norms and regulation. They also look at Indicators on the best performing enterprises with regards to carbon footprint; the Culture of the company – e.g. suicide rate, the line of hierarchy given the fact that it takes years to transform the culture of company. The 40 enterprises in their portfolio – they only looks for those with positive impact.
The présenter was Hamish Chamberlayne, Responsable des investissements socialement responsables from Janus Henderson Investors who argues that sustainability makes good business sense and good investment sense. However, he mentioned that the SDGs don’t spend much time talking about the negative – in terms of which other companies are contributing to negative sustainability. To illustrate his point, he made reference to Exxon Mobile’s so-called “Annual sustainability Report,” in which Exxon claims to contribute to 8 SDGs, including SDG13 Climate Action. From this the presenter underlined that there is a need to have clearly redlines and thresholds to exclude e.g. tobacco and oil companies with sustainability reports!
In 1991 Janus Henderson Investors launched a low carbon global equity strategy, which is more than not investing in fossil fuel. They are investing in solution providers related to The age of disruption through two generational investment trends:
Which they believe eventually will supersede the existing geopolitical environment – by transcending global politics and economics.
Hence, Janus Henderson Investors are investing in world leading companies finding the best companies in each sector, globally recognized names, not an isolated investment universe. They believe its important to invest in big businesses – to make a real difference. The believe firmly that sustainability is a winning investment strategy which is outperforming the conventional indices. They have done so by e.g. analysing every company looking at both qualitative and quantitative targets allocated to one of the 167 targets of the SDGs in order to show how their portfolio contributes to all of the UN SDGs.
The last of the afternoon parallel workshop which I attended was focusing on:
The présenter was Ominder Dhillon, Responsable international de la distribution institutionnelle from M&G Investments, which has 303 people working in the finance investment team using a long-term bottom up approach. As with BNP Paribas, they believe its important that their Credit analysts fully understand the ESG issues within each sector they are covering, that is an in-depth understanding covering all the angles financial as well as ESG for any particular investment. In other words, they also analyse the non-financial factors – the effects.
The presenter believes that Impact Investing is easier to implement in an equity context – where the equity investor has a vote and seat on the board and therefore more influence on what going on in that particular company. This allows the investor to play active part of the industry in contributing to the debate at the policy level.
The debt / fixed income investor could instead be part of various working groups around e.g. Hydropower and renewable energy, which is usually initiatives going on for a number of years. M&G Investments has for example invested 20 Bn £ in debt in social housing, green transportation, education etc.
Following above mentioned model 2, the analysts also work with external partners like Sustainalytics to support and challenge the research by investment analysts.
When it comes to Public debt – financial return, diversified portfolio – measurability of impact is more difficult!
However, value creation is an integral part of Impact Investing’s balance between return and impact.
Ominder Dhillon warned not to overpay for the positive impact effects that these investments can have. In fact, overpaying for the positive impact is becoming an increasing risk, and the presenter there suggested the need to be very selective. The presenter also talked about the challenge of green bond which is recommended to be used selectively.
When it comes to using private debt for impact investing M&G Investments look for putting in place something that generates some positive outcomes socially or environmentally, and that wouldn’t have happened except for the impact investment. They endeavour to set thresholds at right level e.g. look at proportion of students in accommodation from less privileged background.
The also develop Measures to show clients that money/capital is having impact that they want to happen such as Environmental impact: Green House Gas (GHG) emission avoided.
They are matching their investment themes to the SDGs – which they consider as a helpful framework to put portfolio against this framework. In fact, the SDG builds into a theme for impact investing.
In conclusion, overall, it was well worth spending the whole day at the Geneva Forum for Sustainable Investment in the company of 4IP Group’s peers. A lot of best practice methods, approaches, measures, concepts, trends and perspectives to absorb in one breath. We have tried to digest them and capture some of the most important ones in this extensive blog post and welcome any feedback or wishes to engage or collaborate with 4IP Group or those who wish to show case their experience in our forthcoming Impact Investing Book project in collaboration with researchers at the Graduate Institute Geneva.
Part two of the review of the two 10 Year celebration events will feature the SECA Impact Investing event and GRFI’s 10 year celebration.
The Swiss Private Equity & Corporate Finance Association (SECA) is the representative body for Switzerland’s private equity, venture capital and corporate finance industries. SECA has the objective to promote private equity and corporate finance activities in Switzerland. On the 4th of April 2019, 4IP Group was invited by SECA to a SECA Romandie Networking Event to celebrate the Spring Season in Riverside Café (Rue du Rhône 19). We were promised that this would be an opportunity to connect with interesting people from the industry while enjoying drinks, food and music. So with that spirit, Christian Kingombe, Managing Partner 4IP Group, went ahead and joined the evening with the objective to find out how much the SECA members knew about Impact Investing and to what extent the Private Equity (PE) organizations they represented actually invested in emerging markets and thereby would be interested e.g. in 4IP Group’s investment opportunities and/or our forthcoming back-to-back investment conferences in Lusaka, Zambia, 18-20th of June 2019. After more than 3 hours of networking, investment promotion and impact investment awareness the only thing that 4IP achieved besides meeting a lot of interesting people, was an invitation to SECA’s first members event on Impact Investing. While, 4IP didn’t have anything to do with the choice of topic, it was at least somewhat of a consolation victory that SECA found it worthwhile introducing their members to this new mega trend.
So, on May 23rd 2019, 4IP decided to attend the SECA Romandie evening event at the Palais de l’Athénée in Geneva, not so much with the expectation of learning something new about What is Impact Investing? which was introduced very nicely by a short 4 min 30 seconds youtube video. However, while we at 4IP Group evidently are not new to the topic (see Part 1) the event turned out to be an interesting Impact Investing Panel Discussion on an Emerging Investment Strategy through listening to the converging perspectives of respectively Patrick Seeton, Partner at AHL Venture Partners, Guillaume Bonnel, Member Executive Office at Sustainable Finance Geneva, Alessandra Ricagno, Director and Head of Clients at Align17 and moderated by Tim Radjy, Founder & Managing Partners at AlphaMundi who since the 2009 (10 years ago, since Part 1) has been fully dedicated to the emergence and mainstreaming of impact investing.
Here are some of the most important messages, which I took away with me from listening to 4IP Group’s impact investing peers.
Align17 is a private, digital marketplace start-up which she established last year through a sponsorship by UBS. Align17 brings visibility to the world’s best impact investment opportunities. It uses the UN’s 17 Sustainable Development Goals (SDGs) as a framework to present tailored opportunities to investors. Working with top institutional impact investors to source global investments, and third-party industry experts to vet them, it presents deals that both yield results and match the values of investors.
AHL Venture Partners is one of the largest and most successful impact-focused venture capital firms in Africa, with an award-winning team on the ground across West, East and Southern Africa. AHL Venture Partners enjoys long-term support from mission-aligned investors. Since 2008, AHL Venture Partners has committed more than US $75M to 35 impact-focused businesses and early-stage equity and debt funds that operate across 27 different African countries and ranging from financial inclusion, access to energy, food and agriculture. To date, their investments have produced strong financial returns while employing over 11,000 people and providing access to improved goods and services to more than 9,500,000 people at or near the bottom of the economic pyramid. One of their best-known investment were in the KIVA Microfinance learning platform. Kiva is an international nonprofit, founded in 2005 in San Francisco, with a mission to expand financial access to help underserved communities thrive. Kiva does this by crowdfunding loans and unlocking capital for the underserved, improving the quality and cost of financial services, and addressing the underlying barriers to financial access around the world. Through Kiva’s work, students can pay for tuition, women can start businesses, farmers are able to invest in equipment and families can afford needed emergency care. By lending as little as $25 on Kiva, you can be part of the solution and make a real difference in someone’s life. 100% of every dollar you lend on Kiva goes on funding loans.
He mentioned that while he 10 years ago from July 2009 to June 2011 worked as a Sustainable and Responsible Investment Advisor at BNP Paribas in Geneva Area, Switzerland sustainable finance was still just considered a niche topic. He spent this time there creating and monitoring of a complete range of sustainable investment funds (Microfinance, Renewable Energies, Ethical funds, Impact investment funds) for the Wealth Management offering. He also mentioned that he left BNP Paribas to join in August 2011 Médecins Sans Frontières (MSF) as a Financial and Human Resource Coordinator for little more than year in Cameroon in Central Africa. Apparently, he spent this time there preparing annual budgets and carrying out Financial analysis to achieve a more efficient allocation of financial resources. From there he moved to Symbiotics as an investment analyst carrying out due diligence for microfinance institutions (MFIs) in Sub-Saharan Africa (SSA) (e.g. Ghana), Latin America and Asia. This experience led him to become an Impact Investment Advisor at Lombard Odier in Geneva from May 2013 – Oct 2016 where he spent his time creating and managing the first private fund of funds active in the development finance industry. He raised over USD 125mn, which was invested in 80 emerging countries, in 45 different currencies based on Due diligences of the underlying fund management companies as well as Risk and investment allocation monitoring. Lombard Odier’s impact investing product – Funds of Fund investing in impact investing aimed to promote economic development and to give investors the opportunity to invest in: Financial inclusion; Infrastructure; Education and Health. The Funds-of-Funds approach – allowed him to feel the interest from private investors and some institutional investors.
He has also been involved in tackling the climate aspect – through Green Bonds – invested in alternative energy and related to Climate Change by launching a fund in the Climate Change space. Finally, through his work at Sustainable Finance Geneva (SFG) he has been promoting Sustainable Finance and enhanced Sustainable Finance in Geneva to help create and leverage the unique ecosystem in Geneva consisting of International Organizations, the Banking sector and attempting to bridge the gap between these two worlds thereby creating unique ecosystem contributing to reaching the UNs SDGs.
The moderator Tim Radjy, Founder & Managing Partner at AlphaMundi, had no reason to envy the achievements of the three speakers. Besides being the Founder and a Managing Partner at AlphaMundi Group in Switzerland since 2008, a Board member of AlphaMundi Foundation and SocialAlpha Investment Fund (SAIF), and the fund manager of SocialAlpha-Bastion in Luxembourg since 2009, Tim Radjy has been involved in more than 100 transaction in around 35 companies.
He mentioned that during the last 10 years – The Global Impact Investing Network (GIIN) – had measured that the return of investment for the majority investors is actually at the market risk adjusted rate – and that more than 80% of the impact investors are achieving a market rate across different asset classes. Also, the Impact investing industry has seen a 20% growth p.a. The moderator rightly believes that in order to achieve sustainable development a – broad range of instruments, which don’t substitute for ODA or philanthropy, but instead should just be considered to be another instrument to promote the sustainable development model.
After these initial presentations of the speakers and the moderator a number of questions were raised by the moderator.
Alessandra Ricagno mentioned that Align17 when originating investment apply strong Due Dilligence on companies. They apply traditional DD on experience, track record and performance and core of business responding to the ESG dimensions, but Align17 also looks at:
The investor shaping strategy is asking for a system of measurement – ex ante, on-going and ex-post to assess impact expected from investment – which is going beyond what the company does.
Guillaume Bonnel also talked about the complexities associated with the Measuring of impact, which includes:
Mr. Bonnel also referred to the joint 2015 study by Cambridge Associates and GIIN Introducing the Impact Investing Benchmark, the first comprehensive analysis of the financial performance of market rate private equity and venture capital impact investing funds. One of the motivations behind the study is that 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. Funds in the benchmark pursue a range of social impact objectives, operate across geographies and sectors, and were launched in vintage years 1998 to 2010. 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.
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. Those focused on Africa have performed particularly well, returning 9.7%.
Patrick Seeton also confirmed that with a market-rate of returns it is achievable to be doing good and doing well at the same time. Long-term value is created more effectively in a company creating impact. The ESG piece – intentional – negative screen – informs on what the company is doing poorly – how the company is doing things. He stated that investors shouldn’t look for concessionary return and instead look for even better than market returns.
Alessandra Ricagno mentioned that when it comes to the definition of Philanthropic Investment and Sustainable Investment – the differentiation is linked to the intention of investor when approaching investment. Impact Investors are looking for impact and positive risk-adjusted financial return. The Trade-offs between impact and Financial Return – is a choice that the clients take by deciding to become an impact investor.
Guillaume Bonnel made reference to a recent Symbiotics and GIIN report entitled The Financial Performance of Impact Investing through Private Debt (2018) to which he had provided and support and input as part of an external advisory body for this study. This report adds vital new data to the expanding base of evidence regarding the financial performance of impact investments. In general, this analysis shows that private debt funds seeking positive impact can offer very stable returns across various private debt risk-return strategies, sectors, impact themes, and geographies.
Private debt or fixed income instruments comprise the largest asset class in impact investing, accounting for 34% of impact investors’ reported assets under management (AUM). 50 Private (including microfinance) Debt Impact Funds (PDIFs) took part in the joint Symbiotics & GIIN research.
Key Findings include:
It is worth noting that he highlighted that in Switzerland it is no longer considered too risky to do Sustainable Investment which can achieve a risk-adjusted return. Consequently, there has been a big shift in the mindset of Pension Funds (cf. Part 1).
Patrick Seeton emphasized that there is a difference in liquidity prospect in SSA – and that the continent is starting to see exit with short-term gains. But SSA needs to take a longer-term view.
He also stated that evolving from return to risk-adjusted return is key to sustainable development. Its important to include risk in all elements of the analysis of return. He curiously, also stated that in the presentation of PEI funds you don’t see much about the real risks and the mitigation strategies to address these risks.
EMEs and Developed Countries (OECD) markets have different structural characteristics for the capital to go into those countries. Funds are split between different themes in respectively:
Patrick Seeton highlighted that SSA in general and East Africa in particular has a different macroeconomic story – being the fastest growing region in the world, e.g. with Ethiopia, Kenya and Uganda gaining a burgeoning middle class. In SSA has a lot of opportunities to bridge the development gaps e.g.– SSA has been skipping telephone landlines and leaped directly to cell phones.
Despite the demographic explosion and increasing productivity gains on the continent, Patrick Seeton rightly highlighted the on-going inefficiency in of the financial markets in the developed countries which keeps concentrating their attention on around 5,000 listed companies in OECD Stock Exchanges instead of directing capital into non-listed companies in EME which is where the SDG impact lies because a huge part of the population in these developing countries lacks everything. So, Patrick Seeton’s recommendation in terms of impact and financial return is that Impact Investors headquarters in the Developed Countries should direct more of their AUM into EMEs, fully in line with 4IP Group’s approach towards the Swiss-based Asset Managers and Owners.
One of the reasons for this sub-optimal exploitation of this major investment opportunity in EME, is that there is a lack of tools for the bigger public to get the knowledge they need to understand what is the best sector to invest in. There is a need for companies (services providers)
Idea, he argued, is not to become a sophisticated impact investors – but instead there is a need to develop further the market so the necessary information is there to ensure that it can be grasped by the investors to allow them to make an informed decision. He also emphasized the need to see that this type of investment has a certain impact, e.g by using the GIIN IRIS – 600 indicators or the ISO standards of Impact. Moreover, IFC has launched the Impact Management principles to be more transparent on how they measure impact.
AHL Venture Partners follows the same approach as early-stage Venture Capitalists by using ESG as a negative screen. AHL Venture Partners has 5-6 professionals finding pipeline deals in thematic areas worth– $1-$5 Mn. They proceed through the pipeline in a normal way. Intentionality is an early screen – aligned with an impact story. The firm invests in early and growth stage SMEs capable of delivering impact at scale alongside market-rate financial returns. AHL’s primary investment themes are financial inclusion, energy access and food & agriculture. To date, AHL has made 35 investments and committed over $60 million to its portfolio of funds and SMEs across Sub-Saharan Africa.
The AHL Growth Fund is designed to give HNWI, family and foundation investors cost-effective access to a curated selection of the most exciting impact investment opportunities in East and Southern Africa. The AHL Growth Fund focuses on rapidly growing businesses that are providing essential goods and services to people living at or near the bottom of the pyramid. Investee companies must be market leaders with plans for geographic and product/service expansion through a scalable, tech-enabled infrastructure. Hence, Patrick Seeton, rightly so, was proud of having M-KOBA as one of their initial investee. M-KOPA Solar offers residential solar systems on an innovative, affordable micro-leasing platform, with an initial deposit, followed by daily payments. After completing the payments, customers own a world-class solar home system, with multiple lights, phone charging and a radio, and can finance additional product assets and lifestyle products such as television, bicycle, smart phone, energy efficient cook stove and water tank.
Alessandra Ricagno mentioned that Align17 is working with PwC on an impact assessment methodology – which will be addressing different measures per theme but also per geographies, so that the method adapts to certain characteristics of geography.
When it comes to the ranking and screening the same applies to fund investing in Africa and Asia such as whether a fund-of-funds has consolidated metrics, such as when it comes to Financial inclusion, the metrices could be:
It is also important to look at each fund separately – when it comes to
They also look at case studies – e.g. looking at company in terms of what they do (i.e. their outcomes). Another example is the so-called Green Bonds which need to publish reports on the impact they are having on climate – by deriving information on the impact side and developing different methodologies.
The SDGs and IRIS+ metrics – are ways to standardize how to measure impact, however, what is lacking is data (under construction) to do the work properly. Ms Ricagno believes that an institution is lacking which could validate the investment opportunities contributing to the SDGs. However, Impact measurement is still under construction. Patrick Seeton, on the other hand, didn’t agree on the UN certification proposal.
It was mentioned that the Capital Asset Pricing Model (CAPM) has been existing for nearly 70 years, but now was the time to factor in impact into the calculation of the required rate of return for any risky asset. That will lead to a willing to pay for impact when we get the data codification into CAPM.
The panellists alluded to the expected shift in demographics between the baby boomers generation and the Millennials. By which over the next 3 decades an estimated $30 trillions in wealth will be transferred from the baby boomers to next generation. This new generation has a very different mentality and it will see many more women as capital/asset owners too.
Everyone on the panel agreed that the Pension Funds and Insurers will be the last to move towards Sustainable Finance (see Part 1).
There was also a consensus among the panellists about ESG becoming a standard (cf. EU – integrating ESG metrics into everything in financial sphere). Impact Investing will be the next differentiator. This has led to a dramatic growth with the appetite already there across the globe.
Exit is still missing from the space. Nonetheless, VCF are already starting to look into this space and more exit are starting to happen in Africa as companies get more sophisticated, although IPOs still escape the average impact investees.
 PDIFs were identified through various networks and databases, including the GIIN’s ImpactBase database, ImpactAssets 50, LuxFlag, Fundpeak, and the Symbiotics databases of microfinance and small and medium enterprise (SME) funds. Financial Services (including Microfinance) is the most represented sector in the sample by both volume (80.4% in 2012 and 82.7% in 2016).