Impact Investing 101
By Michael Gethen, Partner. Contributions were made to this article by Paul Meyers, who has a long background in venture impact investment, and by Roger Sharp, who observes the rise (and rise) of socially responsible investment in his capacity as a company chairman.
Increasingly, great technology businesses are being built across the Asia Pacific region that are creating both commercial outcomes and social impact. Their founders are now asking us “just what actually constitutes an impact investment?” so they can understand how to deepen their appeal to a new breed of investment funds.
Many people aren’t aware of a ground-breaking shift in investment thinking and strategy that has occurred globally over the past two decades - particularly in the last five years.
This paradigm shift is simple to explain, but its flow-on ramifications are complex and are now trickling rapidly down from the largest investors to the smallest.
Once upon a time, the dual concepts of “doing good” and “making money” were generally seen as being mutually exclusive, with investors consigning “doing good” largely to the realm of philanthropy, not-for-profit organisations, or government aid programs.
In 2021, this is no longer the case at all.
Today, a significant number of large and small investment funds are operating with the two concepts happily reconciled, proving it is indeed possible to create lasting social impact AND make good commercial returns for their investors.
And that’s what Impact Investment is: creating measurable social impact while providing positive commercial returns.
We present this article as we work with founders across the region to assist them in their investment propositions, to create clarity and purpose around their sometimes not-completely-well-articulated broader societal impact and contribution.
Before we go any further, let’s define some key terms that are now in daily use around the world.
Some Key Terms Defined
ESG: Environmental and Social Governance refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business: environmental, social, and corporate governance.[1]
CSR: Corporate Social Responsibility is a framework for companies to be socially accountable to their stakeholders by measuring their economic, social, and environmental impacts.
SDG: The Sustainable Development Goals are a collection of 17 interlinked goals designed to be a "blueprint to achieve a better and more sustainable future for all". The SDGs were set in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030.[2]
The 17 SDGs are:
(1) No Poverty
(2) Zero Hunger
(3) Good Health and Well-being
(4) Quality Education
(5) Gender Equality
(6) Clean Water and Sanitation
(7) Affordable and Clean Energy
(8) Decent Work and Economic Growth
(9) Industry, Innovation, and Infrastructure
(10) Reduced Inequalities
(11) Sustainable Cities and Communities
(12) Responsible Consumption and Production
(13) Climate Action
(14) Life Below Water
(15) Life On Land
(16) Peace, Justice, and Strong Institutions
(17) Partnerships for the Goals
Impact Investment: refers to investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Impact investments provide capital to address social and/or environmental issues.[3]
The Global Paradigm Shift
Bloomberg reported in October 2020 that “Almost 60% of Mutual Fund Assets will be classified as “ESG” by 2025” [4], quoting from a new report by PwC.
PwC further stated: “While the term was originally coined in 2005, ESG emerged as somewhat of a buzzword following the implementation of the UN Sustainable Development Goals (SDGs) in 2015. Although Impact Investing and ESG Investing were, back then, niche investment strategies, this marked the onset of a paradigm shift in the investment landscape - establishing the first voluntary link between sustainability and financial services.”[5]
We note PwC also said this shift represents “…the growth opportunity of the century…”
A great example is BlackRock, which is among the world’s largest investors, and has experienced huge capital inflows as it executes its mission to hold companies to account. In 2020, while most businesses were preoccupied with managing through COVID-19, BlackRock published its public company engagement priorities for 2020, stating that it requires directors to demonstrate material progress on their companies’ ESG practices and reporting. If you’re a larger company, you need to understand this.
Reflecting the same trend, the Australian Council of Superannuation Investors (ACSI) which represents investors controlling around 10% of the top 200 ASX-listed companies, reviews their ESG reporting annually.
Proxy advisory firms also are part of this landscape, ranking companies in areas such as corporate governance, the environmental and social impact of their products and services, data privacy and security, business ethics and human capital. They look out for involvement in “tainted” industries such as alcohol, oil, coal, genetically modified plants, pesticides, adult entertainment, gambling, tobacco and weaponry.
So larger investors are not just seeking out impactful investments; they are now adopting a policing role to try to reform the companies they perceive to be laggards in measuring and containing their societal impact if it’s negative.
These are two halves of the same coin, and they’re worth big money, with flows into socially responsible investment funds smashing all previous records and proving to resonate particularly with younger investors.
As large institutional, mutual and pension funds adopt the ESG protocols, we see this change flow down to the company level as these funds deploy their capital as Limited Partners (“LP”) in private equity and venture capital funds.
This is happening already across the region, and in Southeast Asia, a number of funds are either being deployed a) with an explicit Impact Investment mandate, as in, by way of examples: Patamar Capital, ADB Ventures and Bamboo Capital, or b) as a result of increasing pressure from LPs on the funds to adopt - at the minimum - an ESG filter in their investment decisions, if not as an explicit Impact mandate.
In the ever-evolving world of tech, we now even have a new category, RegTech, for SaaS software and data analytics companies providing solutions explicitly to measure and provide reporting on large organisations’ ESG and sustainability performance. A good example of an early-stage company growing rapidly in this category is ESG Tech (https://www.esgtech.co/).
How Do Founders Attract Impact Investment?
Many tech founders we speak to are already aware, often with purpose, that their companies have an impact imperative alongside their commercial aspirations for success. A number of founders, however, are not; often because they are not yet aware of how they can successfully pair the two forces of impact and profit.
We recommend founders review their business strategy - firstly by familiarizing themselves deeply with the 17 SDGs, and then by actively aligning their purpose, strategy, operations (and the investment pitch materials) with the appropriate impact goals that their business reflects. A clarified alignment to the SDGs may help a company’s efforts to find investment, as well as developing new users or customers.
Certain currently ‘hot’ investment sectors such as EdTech, FinTech, Supply Chain/Logistics Tech and Food/AgTech have relatively obvious potential to make a great societal impact. But we also note there are other sectors within the tech ecosystem that can also make a great contribution, such as Manufacturing, Energy and Transportation. As these sectors evolve in the coming decades, we see more of focus on sustainable strategies and a subsequent heightened investment enthusiasm for those companies that demonstrate a focus on positive impact.
When building an investment proposition that may be of interest to impact investors, founders and business leaders should bear the following in mind when it comes to their company’s impact credentials:
1. It must be real
2. It must make a meaningful contribution
3. It must demonstrate measurable results
The third criterion – demonstrating measurable results – is of particular importance nowadays. We are rapidly moving past an era where organisations pay lip service to their impact on society, and savvy investors quickly sniff out any attempts to “green wash” an impact investment offering. Being honest about your company’s contributions and results can only help in securing the kind and size of the investment you are looking for.
Other Related Impact Efforts
In addition to VC/PE investment resources, we’re seeing a blossoming of related organisations and models that focus on impact investing and resources.
For example, the Asia Venture Philanthropy Network (AVPN), helps build and support awareness of impact investment philosophies, while also helping to clarify usable definitions. AVPN is a funders’ network based in Singapore committed to building a vibrant and high impact social investment community across the region. It is an advocate, capacity builder and platform that cuts across private, public and social sectors embracing all types of engagement to improve the effectiveness of members across the Asia Pacific region.[6]
We also see larger corporate structures evolving, with the emergence of a “single purpose, dual structure” approach where a ‘for profit’ company is closely coupled with a ‘not for profit’ or CSR entity. At a global level, the best example of this is WordPress (https://wordpress.org/), which powers by some estimates around a third of all websites globally. Your free WordPress website comes from wordpress.org, and your paid templates come from wordpress.com.
Here in APAC, we see AidHub (https://aidhubservices.com/ ) following this approach with its SaaS productivity and collaboration suite structured in two parts, with AidHub Services being the commercial business operating the paid AidStore for premium products, and AidHub International being its NFP arm providing freemium software to the ten million Aid/NFP organisations globally.
How to Learn More About Sustainability
There is considerable literature and documentation on the goals, objectives and measurable outcomes for each SDG.
The IISD website is a great starting point for your exploration: http://sdg.iisd.org/. Jonathan Greechan, Co-Founder of the Founders Institute has written a good article here on how startups can lead the charge in meeting sustainability goals[7]. And the TBLI Group – or Triple Bottom Line Investing[8] - sponsors many resources and educational events around global impacting investing and business building. They can be found at: https://www.tbligroup.com/.
In conclusion, we see many opportunities in Asia-Pacific for entrepreneurs to build large and sustainable businesses that will be highly valuable and generate material profits AND make a valuable contribution to our broader society.
Equally, we see increasing pressure on established companies to report thoroughly on and manage their societal risk profile.
We are convinced there’s a weight of money behind Impact Investing and policing negative corporate impact. What will your response be?
Michael Gethen - Partner - North Ridge Partners
Singapore, February 2021
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[1]: https://en.wikipedia.org/wiki/Environmental,_social_and_corporate_governance
[2]: https://en.wikipedia.org/wiki/Sustainable_Development_Goals
[3]: https://en.wikipedia.org/wiki/Impact_investing
[5]: https://www.pwc.lu/en/sustainable-finance/esg-report-the-growth-opportunity-of-the-century.html
[6]: https://avpn.asia/
[7]: https://about.crunchbase.com/blog/how-startups-can-lead-the-charge-in-meeting-sustainability-goals/
[8]: Triple bottom line (abbreviated as TBL or 3BL) is an accounting framework with three parts: social, environmental (or ecological) and financial. These three divisions are also called the three Ps: people, planet and profit, or the "three pillars of sustainability". https://www.tbligroup.com/about