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Impact investing: on its way to mainstream?

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Upsides

22 May 2012
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Impact investing is a hot topic. It has recently emerged as an investment approach that aims to solve social or environmental challenges while generating a financial return. Targeted areas are in both emerging and developed markets and include affordable housing, health care, nature conservation, education, renewable energy, and financial services for the poor. It has attracted the interest of a growing number of foundations, development finance institutions, institutional investors, individual investors, and fund managers. Does impact investing have the potential to enter the mainstream?

What our panel thinks

Luther Ragin, Jr.

Chief Executive Officer, Global Impact Investing Network

Because impact investing covers a broad scope of activity, it has significant potential to become a larger part of the mainstream investment market. Impact investments are investments made into companies, organisations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on the circumstances.

When providing illustrative examples, leaders in the industry are often eager to highlight investments at the frontier of social and environmental innovation. However, it’s important to remember that the impact investment market offers a wide range of opportunities, including some very basic financial vehicles. For example, investors with cash holdings in savings accounts can move those assets to a community development or sustainable development bank that makes loans to businesses that focus on improving the lives of disadvantaged people in various parts of the world.

The common thread to all impact investments – and the key to the credibility of the industry as a whole – is a commitment to transparency and accountability around social and environmental performance. The impact investment market is wide open to mainstream investors with the conviction to identify social and environmental goals and track their progress towards achieving these goals through their portfolio holdings.

Tammy Newmark

Fund Manager and President EcoEnterprises Fund

What a relief to now have the banner of impact investing to define our work. For almost twenty years, I have been championing venture financing for community-based businesses integral to the livelihood of local peoples  and sustainability of the natural resource base. Such companies offer a wide range of innovative products: from organic shrimp and dried fruit, FSC-certified furniture and biodynamic flowers to acai juice smoothies. To finally be able to explain my work by having a network of other players also touting the niche takes us all to a profoundly different level. This umbrella has led to an acceleration of thinking and doing in the field, inviting more sophisticated financiers, investors, and investment managers into the fold. All of this contributes to the mainstreaming of our objectives, which, given the significant environmental and social challenges at hand, is none too soon.

As I explain in my book “Portfolio for the Planet: Lessons from 10 Years of Impact Investing”(Earthscan/Routledge Press) we started a decade ago as a small hybrid investment fund with a significant grant-based technical assistance component. This instrument provided proof-of-concept, mirroring the limited appetite for such approaches in the field. In December 2011, we launched EcoEnterprises Partners II, LP, with a cap-goal of $30 million, six times the size of the first fund and designed as a more traditional venture capital instrument, reflecting the evolution and growth of investor demand in our space.

I am often asked when impact investing will truly be mainstreamed. With the increased standardisation of impact metrics, a deeper range of product offerings, and continued education on the importance of values-based investing, I think in ten years’ time when we launch “EcoE III”, our appeal will go beyond our historical investor base and scale our efforts further.

Marilou van Golstein Brouwers

Managing Director Triodos Investment Management

There is a growing awareness that how we use and invest our money, matters. That we can make money work for a positive and sustainable change in society. A change that is very much needed in light of the many crises our interconnected world is currently facing. Not only a debt crisis but also a climate crisis and a food crisis. We are facing the end of economic growth as we have known it for many decades. To build a fairer, more sustainable future, it is clear we need to transform our economy  that is reaching social and ecological limits. We need a transition to an economy where planet and people come first. Investors and financial institutions play a crucial role to make this transition happen. Investing in this new economy generates social and environmental returns as well as long-term stable financial returns. In our thirty-year experience as a sustainable bank and impact investment manager there is no trade-off. On the contrary; investing in sustainability is bringing a return today, and is preventing enormous societal costs for the future. I would argue this is the new fiduciary responsibility of investors. Impact investing is not about ticking boxes but it is a new investment paradigm. Investing based on values, with an intentional focus on positive social and environmental impact results in long-term stable returns and lower risk. Impact investing: on its way to mainstream? Yes, because there is no other way.

New wave of emerging markets on the rise

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Upsides – Global Community for Responsible Finance

21 May 2012

More and more, commercial investors are shifting capital from developed to developing countries in order to generate returns. The Emerging Market Private Equity Association (EMPEA) reported that fundraising for emerging markets grew by 64% in 2011 to USD 39 billion, accounting for 15% of global fundraising, up from 11% in 2010. The lion’s share of this amount is however aimed at just a few countries; private equity funds dedicated to China and Brazil alone captured 61% of funds raised.

New-wave-of-emerging-markets-on-the-rise

This concentration of commercial funds is in line with Dutch development bank FMO’s experience. One of their main roles is to mobilize commercial parties to co-invest in emerging markets. A recent review of FMO’s current strategy revealed that in the past few years, the majority (nearly 70%) of catalyzed commercial funds (in debt and equity) was aimed at upper-middle income countries  like Argentina and Turkey, while around 30% went to lower-middle income countries like Bolivia and Indonesia. Interestingly, FMO has hardly been able to attract commercial investors in deals in low income countries (1). This finding is perhaps not surprising as in these times of decreased risk appetite due to the global economic crisis, commercial investors will be hesitant to bet on a dark horse.

Perception is not always in line with reality. Findings from a recent FMO evaluation provide improved insights in returns that can be generated from a well-diversified emerging markets portfolio, including significant exposure outside BRICs and other upper-middle income countries. An analysis of FMO private equity investments from 2001 to 2010 shows that financial returns (IRR, 2) are not only solid but also remarkably comparable across country income classifications. In fact, the IRR on lower-middle income countries is higher than for upper-middle income countries (24% vs. 21%). With an IRR of 18%, low income countries are not far behind.

FMO has invested more than 80% of its private equity portfolio in low and lower-middle income countries. In these countries they also deal with first time fund managers. FMO’s experience is that commercial investors’ reluctance to invest in first time fund managers is not justified. Actually, much to their own surprise, first time fund managers have been able to achieve (much) higher returns than experienced fund managers (35% IRR versus 9%). A result that was earlier established in an elaborate analysis of International Finance Corporation (IFC) private equity investments. A possible explanation for the good performance is that these funds mostly operate in a sector or region with still few private equity players, allowing these funds to optimally use their first-mover advantage and select the best deals.

Past studies have shown that returns have been highest on investments (3) made during periods of low capital availability. Conversely, there is concern that periods of greater capital availability, depress returns; the competition for deals is higher, leading to more overpriced investments. The current focus of commercial investors on countries like China and Brazil could lead to similar effects. The challenge is to look for the new growth markets where there are still ample opportunities for investment and competition for deals is less fierce. FMO’s findings demonstrate that diversification across a wider range of emerging markets can improve returns while at the same time mitigate risks. Development banks like FMO are more than willing to show commercial investors the way. With their proven capacity to make sustainable investments in a wide range of emerging markets, development banks can generate attractive returns for investors as well as realizing much needed local development impact.

Author: Jeroen Horsten, Evaluation Officer, FMO

[1] The income groups are defined as follows (2010): low income, USD1.005 Gross National Income per capita, or less; lower middle income, USD 1,006 – USD 3,975; upper middle income, USD 3,976 – USD 12,275; and high income, USD 12,276 or more.

[2] Internal Rate of Return, in euro’s, net of fees and carried interest

[3] Liechtenstein, H., Meerkatt, H., 2010, New Markets, New Rules, Will Emerging Markets Reshape Private Equity?, The Boston Consulting Group, IESE Business School, November.

Forbes: Investing For Global Impact: Be Early Be Patient

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By Michael Schlein & Diana Taylor

Over the last several years, the world has woken up to the enormous market potential of serving 2-3 billion people at the base of the economic pyramid. A growing cadre of investors recognizes that we can create new ways to meet the needs of this huge population in a sustainable, business-like way. A new wave of socially responsible funds, institutional investors, microfinance investment vehicles, banks and even conventional venture and private equity funds collectively have raised billions to invest in social enterprises.

Some portion of the optimism stems from the success of microfinance – the provision of financial services to help those living in poverty. Today, microfinance has grown to reach over 200 million clients around the world who previously were ignored by mainstream financial services providers. As a result, 200 million people have access to loans and an increasing array of services including savings, insurance, payments and remittances that help them improve their lives and weather financial uncertainties.

Most of the incoming money, however, has been focused on more established enterprises. The newest, smallest – and perhaps, most innovative – companies are left out, considered “pre-investable.”

Conventional investment strategies may not fit the emerging demand. An April 2012 report from the Monitor Institute in collaboration with the Acumen Fund finds the impact movement hampered by a “lack of sufficient absorptive capacity for capital” – that is, “an imminent lack of impact investing opportunities into which large amounts of capital could be placed investors’ required rates of return.”

This shortage does not bespeak a lack of bold innovation among entrepreneurs. A host of new entrants, many of them based in Africa, Asia and Latin America, are pioneering innovative solutions to help the poor access quality financial services, building on technological advances such as the spread of mobile phones, expanding access to the Internet, and new ways of doing business with cloud computing and big data analysis to improve outreach, reduce cost, and increase convenience and affordability. Frontiers include:

  • Mobile phone-based businesses aspiring to create a world of branchless banking that may include services like savings accounts, remittances, credit and micro-insurance;
  • Specialized credit to finance micro, small and medium sized enterprises, housing and education, and sustainable energy initiatives;
  • Online or social media approaches that are pioneering peer-to-peer lending and other internet-based financial services;
  • Pay-as-you-go or lease-to-own models for energy products, modular housing and other “embedded” financial services.

These start-ups have the potential to both complement and disrupt completely our concept of how to provide services to the poor. They run into trouble, not because they don’t have passion and ideas, but because they face extraordinary challenges in undeveloped markets – isolated and uneducated customer bases, suppliers with limited capabilities, and poor infrastructure, to name just a few. They need formidable resources – financial and managerial – to successfully prove their new business models and technologies.

Can impact investors provide the right kind of help at the right time? At present, as the Monitor report notes, “few impact investors seem prepared to provide money and technical assistance in these earlier stages…This poses the question: how will promising inclusive business models get to these later stages where they become investable without support earlier on in their journey?”

What’s required on the financial front is patient investing, focused on businesses that are earlier in their development cycle than those normally considered “investable.” This capital must be risk-tolerant, provided in combination with technical and strategic expertise, as well as access to potential partners and, when appropriate, later-stage investors. At this critical stage, small amounts of capital with hands-on support can have a huge impact.

To that end, Accion has launched a new initiative – Venture Lab – dedicated to providing seed capital and management support to start-ups at a stage when their product or service is ready to test the market but has not yet proved its ability to generate revenue. The amounts are small – usually $100,000 to $300,000 – but tailored to the needs of companies at this stage. Venture Lab will provide not only convertible debt and equity to portfolio companies, but also a dedicated team to assist with early-stage tasks such as path-to-scale strategy, analytics, financial modeling and business development

Small amounts of well-deployed capital can make a big difference in the lives of individuals; we see this every day in the microfinance industry. We are confident that the same will prove true of investment capital for those trying to meet the broader needs of the huge market at the base of the pyramid. The right amount for the right company in the right market may have a truly disruptive and catalytic effect.

Michael Schlein is President and CEO, and Diana Taylor is Chairman of the Board, of Accion, a global non-profit organization dedicated to building a financially inclusive world. Accion’s Frontier Investments and Venture Lab both provide patient capital and support to financial inclusion entrepreneurs world-wide.

White House Enlists 45 Companies to Invest in Food Production for the World’s Poor

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NYT.com – By 

Published: May 17, 2012

The Obama administration has drafted some of the world’s largest food and finance companies to invest more than $3 billion in projects aimed at helping the world’s poorest farmers grow enough food to not only feed themselves and their families but to earn a livelihood as well.

Barry Malone/Reuters

New Alliance for Food Security and Nutrition seeks provide aid to farmers like these in Ethiopia.

President Obama and the leaders of four African countries will introduce the group of 45 companies, the New Alliance for Food Security and Nutrition, on Friday at a symposium on food security and agriculture that will begin the summit meeting of the Group of 8 industrialized nations this weekend at Camp David in Maryland.

“We are never going to end hunger in Africa without private investment,” said Rajiv Shah, the administrator of the United States Agency for International Development. “There are things that only companies can do, like building silos for storage and developing seeds and fertilizers.”

The alliance includes well-known multinational giants like Monsanto, Diageo and Swiss Re as well as little-known businesses like Mullege, an Ethiopian coffee exporter.

The introduction of the group will coincide with the administration’s report on the progress of what is known as the L’Aquila Food Security Initiative, the largest international effort in decades to combat hunger by investing in the fundamentals of agriculture, including seeds, fertilizer, grain storage, roads and infrastructure.

The initiative, first agreed upon by the Group of 8 leaders at their meeting in L’Aquila, Italy, in 2009, was a pledge to put $22 billion into food and agriculture projects. Although much of the money had previously been earmarked for agriculture projects, about $6 billion was new.

Almost all of the $22 billion has now been “budgeted and appropriated,” and 58 percent of it has been disbursed, Mr. Shah said. “I am confident that continuing into this year and the next, the U.S. and other countries will absolutely meet their commitments,” he said.

He conceded, however, that not all of the money is being spent as promised, which has drawn complaints from many nongovernmental organizations and African countries.

“The grand promise of L’Aquila was, if you build a plan for agriculture, the donors will help them find the resources for it,” said Gregory Adams, director of aid effectiveness at Oxfam America, an international relief and development organization.

“Now there are 30 plans of varying degrees of quality with shovel-ready projects donors could invest in today, but instead donors have put their money in other things.”

Some donor countries have insisted that their money be spent on traditional food handouts rather than the building blocks of an agricultural development program, Mr. Adams said.

Several companies that were contacted said the administration had asked them not to speak about their commitments until Friday.

Mr. Shah, however, offered a few examples. Tanseed, a Tanzanian seed company, will commit to spend $11 million over time to buy certified seed and sell it in little packets to meet the needs of small farmers.

Derek Yach, senior vice president for global health and agriculture policy at PepsiCo, a member of the alliance, said it grew from work the World Economic Forum had been doing on food security with the African Union.

“What’s exciting about it is that the companies participating really extend across the value chain,” Mr. Yach said, including seeds, plants, processing and financing.

Mr. Shah said that the administration does not plan for the private sector to take over.

“The president will commit to encouraging ourselves and our G-8 partners to seek to maintain the high level of commitment to agriculture and food security even as we go forward beyond the formal L’Aquila period” of three years, he said.

This article has been revised to reflect the following correction:

Correction: May 17, 2012

 

A previous version of this article referred to the alliance of 45 companies as the Alliance for Food and Nutrition Security.

Morgan Stanley Smith Barney Announces Launch of Investing with Impact Platform

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Investing with Impact Platform offers an investment approach targeting risk-adjusted financial returns as well as positive environmental and social impact

Submitted by:Morgan Stanley

Categories:Socially Responsible Investing,Finance

Posted:Apr 26, 2012 – 01:30 PM EST

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NEW YORK, Apr. 26 /CSRwire/ – Morgan Stanley Smith Barney today announced the launch of a new investment platform designed to help clients align their financial goals and their personal values. The Investing with Impact Platform offers clients and Financial Advisors a broad range of investment options.

The concept of integrating social and environmental impact into investment decisions is not new, but its growing importance has led to a greater opportunity set for investors. Nearly one in eight dollars under professional management in the U.S. or about $3.07 trillion follows investment strategies that consider corporate responsibility and societal concerns.1

“This is an important initiative for Morgan Stanley Smith Barney,” said Andy Saperstein, Head of Wealth Management, U.S., at Morgan Stanley Smith Barney.”We hear frequently from clients and Financial Advisors about the importance of integrating sustainability themes into their investment portfolios. Now through the Investing with Impact Platform, MSSB is able to offer our clients an action-oriented approach to combine financial returns and their personal values.”

At launch, the Investing with Impact Platform will offer clients access to many opportunities spanning public and private market products through their Financial Advisors. This is the first phase in Morgan Stanley Smith Barney’s focused effort to meet investors’ desire for investment opportunities that center on positive social and environmental impact, without sacrificing financial performance potential. The launch of the Investing with Impact Platform will provide a substantial base on which to expand our offerings over time.

“Our goal is to build this into a robust offering to meet our clients’ needs, regardless of their impact priorities or what their portfolio fit might require,” said Paul Hatch, Head of Investment Strategy & Client Solutions at Morgan Stanley Smith Barney. “With over four million clients who have more than $1.7 trillion of investable assets, we are in a unique position to extend the reach of an ‘investing with impact’ program to one of the largest sets of investors in the world. Even a fraction of this total represents a substantial amount that could be invested in support of the common good.”

“At Morgan Stanley and MSSB, sustainability is at the core of our business and now, with the launch of the Investing with Impact Platform, we are able to help our wealth management clients align their investments with their desire to positively impact their communities,” commented Audrey Choi, Head of Global Sustainable Finance at Morgan Stanley. “We believe investments targeting positive environmental and social impact should be available to all investors from individuals to large scale institutions, and we look forward to continuing to broaden the reach.”

To find out more about the Investing with Impact Platform at Morgan Stanley Smith Barney, please contact your Financial Advisor or email InvestingwithImpact@mssb.com.

Morgan Stanley Smith Barney, a global leader in wealth management, provides access to a wide range of products and services to individuals, businesses and institutions, including brokerage and investment advisory services, financial and wealth planning, credit and lending, cash management, annuities and insurance, retirement and trust services.

For further information about Morgan Stanley Smith Barney, please visitwww.morganstanleysmithbarney.com.

Morgan Stanley (NYSE: MS) is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm’s employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,300 offices in 43 countries. For further information about Morgan Stanley, please visit www.morganstanley.com.

©2012 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 493016 / 04/12

1 U.S. SIF: The Forum for Sustainable and Responsible Investment, Report on Socially Responsible Investing Trends in the United States, 2010

Access To Formal Banking Services Raises The Incomes of the Poor

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Feb 2012, Pande, R., Cole, S., Sivasankaran, A., Bastian, G., & Durlacher, K.

Examining the impact of access of formal financial services on poverty alleviation

This report examines the impact of access to formal banking services on poor people’s income. It analyzes whether providing access to financial services can lift the poor out of the poverty cycle. It states that inability to access financial services prevents poor people’s consumption smoothing and investments in health, education and income generating activities. Formal banking services may be able to reduce or remove market imperfections and facilitate financial inclusion of the poor, ultimately leading to higher incomes.

The report finds that offering new savings products can increase income by allowing households to accumulate assets. Findings include:

  • Improving banking technology has the potential to increase income by allowing households to smooth consumption and accumulate savings;
  • State-led expansion of the banking sector in rural areas can reduce rural poverty, increase rural wages and increase agricultural investment;
  • Access to credit is associated with higher agricultural incomes and increased and/or smoother consumption for rural farming populations;
  • Supply and demand constraints may limit the ability of formal banking services to achieve growth.

http://www.dfid.gov.uk/r4d/pdf/outputs/systematicreviews/BankingAccess2012Pande.pdf

 

Microfinance Growth Slows in Andhra Pradesh, Quickens in Other Indian States

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Posted by  in Category: Asia,Trends/Challenges at 12:01 am

According to a statement attributed to chief executive officer Mr Alok Prasad of Microfinance Institutions Network (MFIN), a trade association of 46 Indian microfinance lenders, the microfinance sector in the Indian state of Andhra Pradesh is expected to experience reduced growth for the financial year ending on March 31. Financial information has not yet been released, but unnamed experts cited by Mr Prasad say growth in the state could slow to zero. This will be the second year- since a repayment downturn hit Andhra Pradesh in 2010- that the sector has experienced slower growth.

On the other hand, the microfinance sector in other Indian states reportedly is experiencing approximately ten-percent to 15-percent growth. According to a statement attributed to chief financial officer Mr S. Dilli Raj of SKS Microfinance (SKS), an Indian microfinance institution (MFI), SKS had more disbursals in non-Andhra Pradesh states in the fourth quarter of this fiscal year than it did in 2011. Grameen Koota, a Bangalore-based MFI, reportedly experienced portfolio growth of INR 100 million (USD 1.9 million) this year. In 2010, Grameen Koota reported a gross loan portfolio of USD 56.4 million.

By Charlotte Newman, Research Associate

About Microfinance Institutions Network (MFIN)
The Microfinance Institutions Network (MFIN) is a trade association of 46 Indian microlenders that operate as non-banking finance companies and together reportedly account for approximately 80 percent of the Indian market. MFIN is supported by the Omidyar Network, a US-based philanthropic investment firm, and the International Finance Corporation (IFC), a member of the World Bank Group.

About SKS Microfinance
SKS Microfinance is a microfinance institution (MFI) that was launched in 1998. It delivers microfinance products through a group-lending model to impoverished women in India as a for-profit, non-banking finance company. They have recently diversified into providing gold loans, funeral assistance and loans to small retailers. SKS converted into a public limited company in May 2009 and launched an initial public offering on July 28, 2010. Its equity investors include Quantum Hedge Fund, Sequoia Capital, Vinod Khosla, Small Industries Development Bank of India, Bajaj Allianz, Yatish Trading, Kismet Capital, Sandstone Capital, Silicon Valley Bank and Unitus. SKS currently trades on the Bombay Stock Exchange. As of December 31, 2011, SKS reports total assets of USD 389,370,524, a gross loan portfolio of USD 341 million, approximately 4,303,000 borrowers, return on assets (ROA) of -66.10 percent and return on equity (ROE) of -152.48 percent. SKS has raised approximately INR 918 crore (USD 181 million) through securitization deals since January 2012.

About Grameen Financial Services Private Limited
Grameen Financial Services Private Limited (GFSPL), popularly known as Grameen Koota, was founded in India in 1999 as a project under the nongovernmental organization T Muniswamappa Trust and today is an independent non-banking financial company (NBFC). GFSPL operates in Maharashtra, Karnataka and Tamil Nadu states and offers products and services such as housing microfinance, vocational training loans, workshops and educational centers. As of year-end 2010, GFSPL reports total assets of USD 65 million, a gross loan portfolio of USD 56.4 million and 321,161 active borrowers.