What is Impact Investing?

Impact Investing has become the most widely used term to describe a “new form of investing”. What is Impact Investing? How is it different? Is there significant money going into it? Here are some of the common definitions that have been used.

  • Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.
  • Impact investing is an investing approach that intentionally seeks to create both financial return as well as positive social and/or environmental impacts that are actively measured.
  • Impact investing includes investments that range from producing a return of principal capital to offering market-rate or even market-beating financial returns. NO NEGATIVE SCREENS or avoidance.
  • Investments intended to create positive impact beyond financial return.
  • These are investments in business which have been designed with the intent to have positive social and/or environmental consequences. 
  • Impact investing is the deployment of capital with the specific objective of achieving positive social and /or environmental impact alongside financial returns.

This seems rather straight forward and all have very similar definitions.. However, if one looks at what most are claiming to be impact investment, the focus is on social impact. This often has a high level of what I call “The Photo Op”, or a ribbon cutting ceremony. Meaning, the communications seems to be more important than the content. Many investors, particularly endowments, have been trying to show how they are committed to this “new approach” to resolving societal and environmental challenges. Asset owners and managers often ask me what is the difference between ESG (Environmental, Social and Governance) Investments and Impact Investing. My answer is ESG is liquid investments and Impact was illiquid. I am sure many “advisors” will disagree, but I am not trying to sell a definition and write hours. TBLI is creating an active ecosystem for the ESG and Impact Investing Community to attract significant assets.

Impact Investment figures range from 60 billion in assets under management with 10+ billion invested in 2014 (Eyes on the Horizon:The Impact Investor Survey May 2015, JP Morgan and GIIN). There are many detailed graphs about impact and percentages of assets committed, if you need proof to believe that Impact is a good strategy. There are many of these reports and analysis with wide ranges of what it is and what researchers have found in asset allocations. Yet, we are constantly reminded that the investment opportunities are small, not scalable, not market rate, not quality, high risk and fundamentally they are “charity”.

There is a much more compelling story. Let’s focus on money flows. Look at the sectors below that make investments that match the definition of Impact, as stated above.

  • Public Transport Infrastructure
  • Fuel Free Energy Systems (Renewable Energy)
  • Secondary Market of DFI’s (Development Finance Institutions)
  • Green Real Estate including Retrofits
  • Agroforestry including Redd++ (avoided deforestation)
  • Social Impact

If one accepts these definitions then the amount of money going into Impact Investing, is actually in the Trillions and has been for quite a while. WRI(World Resources Institute) recently wrote a report called the Trillion Dollar Question. “The transport sector is growing quickly, with the global vehicle fleet on course to double by 2050. According to the paper, global transport investment is between $1.2 and $2.4 trillion annually.”

If one accepts the common Impact definition, then the present Impact discussions and case studies are vastly missing the point. We are focussed on the one small plant, that is pretty, in a massive forest of opportunity. When I hear the discussions around Impact by those trying to convince others, I am reminded of the scene from the movie Serpico, where Frank Serpico, a New York Police Detective is confronted with the scale of corruption in the narcotics division. One of the crooked cop describes the graft sums as “serious money”. Impact Investing is talking about “serious money” and always has been. One only needs to have an an open mind, look around and do the math. Do you want a financial return with a social and environmental added value? If so, why are you waiting for more research, when the opportunities are overwhelming?

 There are people who have money and people who are rich.

Coco Chanel

How to achieve 10x returns with Soulful Investing

It seems every investor that I encounter is obsessed with achieving 10x returns for social enterprise investing, by leveraging the power of technology. The thinking is that if we only throw some innovative technology at the problem, we can restore the social and environmental balance and achieve a high return on investment. The idea of just throwing more technology at problems and flipping a switch will fix the problem and generate high returns, seems out of touch with reality. I have another idea. Why not investing in social enterprises that target the soul?

We have more than enough technology. Another widget or software alone is not enough. There is far too much focus on this strategy and the “quick fix”. Hunting vs. farming. Ribbon cutting vs digging holes. What we lack is compassion.

I was thinking of my father, who was a tailor. He made custom made clothes for women and had a small store on the Madison Ave and E. 77th street in Manhattan, NY. He worked very hard and loved his work, as well as life. When the rent was increased by 400%, he saw that the financial model didn’t work, so he closed the store and worked from home. I would see him cutting material on the floor at home and working at the sewing machine, late into the night. I told him he was charging too little for the quality he was providing. “Raise the price”, I said. He said “If I do that I might have less work and more money, but I like what I am doing and don’t want to work less”. When I looked at him working and the passion and quality that he put into his work, you could see that the end product was soulful.

When I look at my wife and what she is doing in turning the hospitality concept on its head with her focus on “conscious travel”.  She combines cultural authenticity and sustainability by establishing a chain of Eco Lodges, in Bhutan. To support that and develop the hospitality sector, she created a hotel school (Bongde Insitute for Hospitality and Tourism) with Lausanne Hotel School alumni. Her focus was not technology, but the basics and values. It is working extremely well and was up and running in less than 4 months and generating revenue in less than 6 months.  If you look at the video of the students learning how to make bread, pasta, taste tatin, set tables, making beds, etc. you see the soul in their eyes. This was not achieved with an iPad and an ap but through love, dedication, and commitment.

Technology can be helpful in some situations but it has become the end all and be all. Why don’t we focus on supporting soulful enterprises and give them the wings to fly.

“The most powerful weapon on earth is the human soul on fire.”

Ferdinand Foch

Support our soulful work

Sustainable Investment has no value

Since the financial crisis, it seems that no one wants to compensate anyone for services provided. TBLI is inundated with requests for introductions to investors, advice on ESG and Impact Investing, requests for management briefings, strategic partners, job openings, etc. It has reached epic proportions and it is not limited to us. Nearly everyone I speak to confirms they experience the same epidemic of requests for free advice or payment for success.

Why does it seem that anything related to sustainability is not valued and should be given away for free. Other traditional advisors (lawyers, accountants, strategy consultants) are compensated. Do people believe that sustainable investment (ESG and Impact) doesn’t offer any value, so doesn’t need to be compensated?  There doesn’t seem to be any difference between asset owners (family offices, HNW, pension funds), asset managers, social entrepreneurs, etc. All ask the same? “Let’s meet to share experiences”. ” Do you have time for coffee so I can pick your brain?” “I would like to talk to you about a great investment opportunity and would like to access your network and knowledge”.

Some of the Strategy Consultants are a bit more subtle by reaching out at a cocktail party or through an introduction. Then the seduction starts with the ultimate goal of sucking power point slides out of your brain to cut and paste later and sell to clients.

Recently I was approached by a large company asking for help meeting Impact Investors for a large water investment in Europe. I said we could help and would know who they should meet and asked for our time and knowledge to be compensated. They said “We don’t do that. We would be willing to compensate should something happen.” I told him “if you have a backache and you go to a massage therapist, do you say, if my back pain doesn’t come back in 6 months I will pay you.” He laughed and got the message. Still wouldn’t compensate but he got the message.

Sustainable Investment advice has value and needs to be compensated, particularly if you want someone to commit their time and energy.

Time is the most valuable thing a man can spend.


TBLI Impact

Recently at our TBLI CONFERENCE Asia in Singapore I was approached by Pak Suwardi, owner of PT. Selo Kencana Energi, a private company focused on developing Hydro Electric Power plants in Indonesia.

His business story caught me off guard. During the TBLI CONFERENCE held in Amsterdam in 2009 he saw the keynote speaker who spoke of the devastating effects of climate change to the Arctic melting glaciers.

At that time, Pak Suwardi had investments in coal energy but none in renewable energy because he believed the return would be lower than that of coal fire and the development stages to be more complicated with renewable energy.

Following TBLI Amsterdam, he sold his coal fire portfolio to another company and decided to make their renewable pipeline (hydro power plants) a real project by signing a power purchase agreement with the local authority in 2010.

With his own capital and loans from a local bank, they have completed construction and started to deliver the electricity to the grid in Spring 2014.

“During one year of operation I saw several positive impacts such as reducing national fuel subsidy, an increase in economic activity among the communities in the area and a reduction in poverty and deforestation. We are now doing our own research on social impact measurement,” says Pak Suwardi.

What a testament. Thank you Pak Suwardi for sharing your story of inspiration and how TBLI impacted your life. I imagine there to be so many great ones like this over the years. If you have a story we would love to hear it.

Contact us at conference@tbligroup.com

Come join us at TBLI CONFERENCE NORDIC, June 15-16, in Copenhagen to have your own TBLI Experience.