Investment model: finding the balance

Impact investment, where investors aim to achieve positive social or environmental gains, is emerging as a distinct asset class. As global businesses look to be of service as well as being financially successful, Vision examines how it is appealing to a new generation of entrepreneurs

Impact investing, in which investors seek to create social as well as financial returns, has been around for as much as four decades. But it has only recently reached prime-time visibility in the global financial sector. The reasons for this are complex, ranging from the difficulty of measuring social benefits to the unfortunate reality that much do-good investing turns out not to do much good.

‘We believe that investing with impact is a rich, growing, profitable and sustainable area, and we are looking forward to identifying more products for the platform’

Audrey Choi, Head of Global Sustainable Finance at Morgan Stanley

Still, the many proponents of impact investment remain determined to improve the sector’s patchy track record and take their new twist on enlightened philanthropic self-interest to the next level. “It’s time for Wall Street to wake up to the fact that what investors want now is very different from what they have wanted in the past,” financial columnist Thomas Kostigen commented in the Wall Street Journal’s MarketWatch blog. “While ‘greed is good’ may have been the mantra of the financial community, what people are saying now is: ‘Greed can do good.’”

Shifting expectations

That view is shared by Nadine Kettaneh, Managing Partner at Dubai-based impact investment group Willow Impact. More financially successful people than ever want to do good as well as make good, she says.

Paul Szkiler, Chief Executive of London-based Truestone Impact Investment Management, says investors understand that if they do not engage with social and environmental issues, those problems will, eventually, land on their doorsteps. He also notes that to many entrepreneurs who grew rich by growing their own businesses, helping other entrepreneurial startups by providing venture capital is more appealing than straight philanthropy.

Shifting demographics is also in play. “We’re seeing a significant demographic force at work – specifically, the shift in wealth transfer from the Baby Boomers and the Greatest Generation to Millennials and Gen-Y, who have very different expectations from their investments, including a greater desire for social and environmental transparency,” says Audrey Choi, Head of Global Sustainable Finance at Morgan Stanley.

Measurement of social and environmental benefits as a function of investment is one service that Truestone offers in an effort to persuade clients to entrust the firm with their capital.

Measuring success

Standardising the measurement of such impacts is among the top concerns of the Global Impact Investing Network (GIIN), launched in 2008, a year after the Rockefeller Foundation coined the term impact investing. The non-profit organisation, sponsored by Rockefeller Philanthropy Advisors, has developed ‘IRIS’, a set of impact reporting and investment standards to describe and track an organisation’s combined social, environmental and financial performance.

“IRIS is designed to address a major barrier to the growth of the impact investing industry: the lack of transparency, credibility and consistency in how organisations and investors define, measure and track their performance,” GIIN states on its website.

Even some mainstream banks that now offer impact investment services are coming on board. “We are hoping to provide more clarity as to what it means to invest with impact, more visibility into the investment options, more accessibility to invest in the current offerings, and to help bring thoughtful scale to the field so over time we can leverage additional capital to products that positively address global challenges,” says Choi.

As an example of what has gone wrong in the past and how that could be changed, take the Palestinian olive oil industry – one of the few entrepreneurial sectors in the Middle East to have been significantly targeted for impact investment. Writing in 2009, Peter Laban, a Ramallah-based agronomist and social scientist working with the International Union for Conservation of Nature, described how US$50m of investment had been poured into the sector over the previous 10 years with little to show for it. He suggested money provided under fair trade philanthropic programmes had been used ineffectively to build “new steel and glass offices”, to subsidise a small number of “pampered olive oil presses” with the effect of pricing others out of the market, and to produce reports and brochures with “few links to the real world of olive oil production”. Ironically, the investment influx had made Palestine’s the most subsidised olive oil sector in the world, Laban concluded.

“Olive oil production is an economically viable activity and should not be subsidised,” he observed. “These investments need to deal with the whole chain of production, processing, storage and marketing to have the desired effect,” he said. “Awareness of the requirements necessary to produce high-quality olive oil needs to be increased among farmers and olive press owners. It would be economically more interesting to support such small-scale but high-impact investments,” Laban suggested.

Operational upgrade

The US-based Aspen Institute guaranteed a loan (not a subsidy) for a cooperative of 1,700 Palestinian olive farmers who had been unable to obtain traditional financing to purchase a modern olive oil press and stainless-steel storage tanks – the type of operational upgrade that Laban had reported was widely needed.

“The farm’s production capacity has dramatically advanced, and the company can now store and export quality olive oil year round. The farm has also hired 15 new employees, and more farmers can participate in the cooperatives and receive higher prices for their harvests. Most important, the company is providing the training and the technical assistance necessary to grow and harvest organic olives that consistently meet international standards,” the institute said in a report.

Kettaneh, whose Willow Impact is focused on the Middle East and East Africa, believes this is the type of initiative required to carry impact investment forward. “What we really need now is effort put in by networks, governments and foundations to encourage the growth of social investment,” she said in April at the Skoll World Forum on Social Entrepreneurship in Oxford.