Guest Blog Post by Sarah Stephen, PhD Candidate at University of Lausanne, about the impact investing debate at TBLI CONFERENCE EUROPE 2015 in Zurich. Views and opinions are that of the writer and are not the official views of TBLI CONFERENCE.
Most of us are familiar with "responsible investing", the mainstream investment philosophy in which investments are made according to social, environmental, or governance criteria. Such investments are supposedly more than $10 trillion of assets globally, a far cry from its former state when this was practiced by niche actors. Although Impact Investing is often categorised under such investments, Arthur Wood, Founding Partner of Total Impact Capital, considers this as being distinct: "In Impact Investing, you are saying can we design financial tools that have a specific social purpose".
This term "Impact Investing" was floating above the discussions amongst the 190 delegates at the TBLI ConferenceTM Europe 2015 in Zurich. Although newer among the family of alternative strategies, Impact Investing has been rapidly growing - in fact, Arthur Wood states that the rate is 17% per annum. Growth notwithstanding, practitioners at the event were polarised on the very meaning of the term (evocative of the weather: dry and sunny on the first day, blustery and pouring on the second!), with many being averse to placing this strategy within boundaries.
This motivated me to embark on a semantic analysis, including an Impact Investing 101. As investors, we need a clearer idea of the population encompassed by the term so that we are aware of what we are signing up for and the ramifications of our decisions. As those providing investment opportunities, we have to be cognisant of this preference of investors so that the products are designed accordingly.
And, as researchers or those observing this strategy and its outcomes, boundaries are needed for accurate identification and measurements. Unclear boundaries result in erroneous statistics and the strategy being dismissed. Furthermore, given the profusion of articles on "impact investing" in publications and websites such as Forbes, Wall Street Journal, and Bloomberg, readers would benefit from understanding how this differs from other forms of responsible investing and why this strategy's implementation is meteorically rising. Thus, contrary to Juliet declaring that "a rose By any other name would smell as sweet", it seemed worthwhile to identify the specifics of this "investment approach" (as categorised by the World Economic Forum, WEF).
What are the key characteristics?
Intention-driven: The Forum for Sustainable and Responsible Investment (US SIF) describes Impact Investing as being "targeted", or "intentionally" as conveyed by WEF. The "intention" component is invoked by both Hadewych Kuiper, of Triodos Investment Management, and Olivier Rousset, of Credit Suisse, whereas Pierin Menzli, of J Safra Sarasin, stresses that it is about directing the investments. Although very few investment decisions can be classified as unintentional, it is the drivers of the intention that applies additional layers of meaning to Impact Investing.
Impact-outcome: This impact outcome is generally of three types. In the first, this intention, as described by the WEF, is seeking "to create both financial return and positive social or environmental impact", one that is reiterated by Sandra Bergsteijn of Triodos Investment Management. This emphasis in a simultaneous financial return and positive social or environmental outcome is reiterated by Rousset and Dominique Habegger of de Pury Pictet Turrettini & Cie SA. The latter explains, "as long as you make investments in which you allocate the money and the money comes back so that you can make further investments and that those investments can have a positive impact". The second type relegates financial return into a second priority. For instance, Menzli specifies that such investments are to be in "areas and activities with a positive societal and environmental impact (first priority) [...]. The financial return comes only as second priority". In the third type, the financial aspect is missing (or perhaps the aspect is already assumed), as in US SIF's definition when they state that it is for "solving social or environmental problems".
Area of impact: The next layer would be the geographical (or economic) location. The overwhelming consensus restricted these investments being applied in the emerging markets or transition economies, one that could be labelled as the "economic south" that are undeveloped or developing. Exception to this is Triodos Bank, the European sustainable bank founded in the Netherlands, that also invests in developed countries in Europe.
Recipients of investments: The archetypal targets of Impact Investing are small and medium sized enterprises (SMEs), mostly unlisted and, as pointed out by Menzli, "generally lacks access to traditional investment sources (debt or equity)". The aim, as Christian Etzensperger, of responsAbility, conveys, is to help the local society, in a manner that Habegger specifies as being immediate. Nonetheless, Habegger argues that Impact Investing targets can also include situations in which engagement with multinational corporations (MNCs) result in positive social and environmental outcomes.
Who is it for?
Investment products and investors: The vehicles currently available vary widely. On one end, there is UBS (the Swiss financial services firm) developing Impact Investing products for their ultra high net worth individuals (UNHWI); on the other, the likes of de Pury Pictet Turrettini & Cie SA (an asset management company) catering to "private investors, family offices, mandates for institutional investors". For example, Credit Suisse (the Swiss financial services firm) provides 10 dedicated products that span different types of assets and risk-return profiles. With a participating investor population of around 5000, their investment solutions includes customised products for HNWI and institutional investors, as well as opportunities for retail investors (who can join with a minimum fund investment of CHF/USD 1000). Triodos offers the same, along with 18 funds, the newest of which would be a fund of funds (comprising of impact funds as well as screened green bonds) to be launched in December 2015.
Are investors behind the growth of this strategy?
Given the impact outcome expected from this investment strategy, client demand and pressure was persistently invoked as the drivers behind the rise of this strategy. Kuiper describes the process as people having defined preferences on where to invest, they are conscious of the difference made by their investments, and they wish to see their investments making positive change. This pressure is more pronounced when these individuals happen to be UHNWIs, as was the driving force behind the Cadmos-Guilé investment funds offered by de Pury Pictet Turrettini & Cie. Investors have pragmatic reasons for embarking on this. As pointed out by Kuiper, these investments have viable financial returns and social impact. Additionally, Habegger includes better risk management and lesser costs as being the pros of this approach.
Why are financial services companies involved?
Wood believes that the rapid growth of Impact Investing is possibly the element explaining the increasing involvement of banks and asset management companies. Evidence of this motivational force is seen when both responsAbility and de Pury Pictet Turrettini & Cie maintains that it is about making sound and responsible investment for their investors. In fact, responsAbility analyses the feasibility and promise of the entrepreneur's business model. In the case of Credit Suisse, Rousset views Impact Investing as being part of the core business and is complementary to the bank's capacity building engagement in the field. Additionally, he observes that Impact Investing can be seen as an innovation, thus allowing them to differentiate themselves from other global banks.
Why Impact Investing?
Wood observes that combating social problems requires the mobilisation of a range of actors, all of whom have different agendas and respond to different incentives. Impact Investing, according to Wood, is the "injection of existing capital market tools into this space, with the aim of incentivising collaboration, scaling, and bringing new capital sources".
Given the many layers of complexity, Impact Investing is likely to pose a range of questions from stakeholders. We could take a leaf out of Wood's book when he queries the following with respect to social impact bonds (one for which he is credited as the conceptualiser): "The principal has become the banks who are subcontracting it to social players and they are justifying it on the basis of a social metric which the social sector loves. But we need to ask questions: Who is it benefitting? Who is taking the risk? You need to ask metrics for who and how is that justified? Who is saying it? Why are they saying it? Who are they saying it to? And for whose benefit?". Indeed, very likely these questions may open up multiple Pandora's boxes. Yet, confronting these would help in mapping the future of Impact Investing. In particular, it might be the case that Impact Investing might prove to be attractive to conventional investors should a clear profit outcome be demonstrated. Considering the increasing awareness of societal and environmental problems, as well as the consequences of investing in irresponsible firms, responsible investing (and Impact Investing, in particular) is one that might ensure financial health.