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Making a profit from making a difference – FT.com

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August 5, 2012 5:40 am

Making a profit from making a difference

By Sophia Grene

Sustainable logging carried out in Cameroon in the Congo Basin natural woodland©GettySustainable logging carried out in Cameroon in the Congo Basin natural woodland: preserving forests is just one project impact investing can help

To many, investment is purely about generating a return on their money, but a growing band of wealthy individuals and institutions are seeking to achieve a little more.

“There’s a growing hunger from the wealthy to go beyond how to spend it, understanding if they don’t engage with these [social and environmental] issues, social problems will arrive on their doorstep,” says Paul Szkiler, chief executive of Truestone Impact Investment.

Impact investing, most commonly defined as investments made with the intention of helping to solve a social or environmental problem as well as generating a financial return, has seen growing interest from investors, particularly since the financial crisis.

It covers a wide range of areas, from microfinance to private equity in developing markets and even “social bonds”, an innovative way for governments to fund services provided by non-state bodies on a payment-for-results basis.

The term impact investing was coined by the Rockefeller Foundation in 2007 and a year later the Global Impact Investors Network was launched. Since then, investment managers and intermediaries report a steady increase in interest in the sector, but it is hard to pin down a reliable figure, given the sector’s fragmented nature and the difficulty of defining it.

For one of the most developed and codified sectors of the impact investing world – microfinance – estimates as of 2010 vary from $7bn invested (from Swiss microfinance manager and adviser Symbiotics) to $24bn committed (from the Consultative Group to Assist the Poor), demonstrating the difficulty of getting a sense of the size of the sector.

The GIIN definition is frequently adopted: “Impact investments are investments made into companies, organisations, and funds with the intention to generate measurable social and environmental impact alongside a financial return”, but even that leaves a number of queries, such as whether that financial return is expected to match market returns or if it comes second in any conflict between it and the social impact.

In general, practitioners and investors are keen to make a distinction between “social impact first” investments, where the investor is prepared to sacrifice some financial return in exchange for the belief their money is doing good, and “social and financial” investments, where the investment product aims to produce returns comparable with the market.

“The second type appeals more to high net worth individuals,” says François Passant, executive director at Eurosif, the European social investment forum. “It’s got that entrepreneurial spin that resonates with them.” For people who got rich by building their own business, it feels more appropriate to help others by encouraging them to work for themselves than to give money, he explains.

Mr Szkiler remembers a presentation to JPMorgan about his business: “The global research guys were saying ‘hmm, that’s ambitious’, but the wealth management people said ‘that’s exactly what we’re looking for for our clients’.”

Truestone is about to start fundraising for its Global Impact Fund, which aims to return an annualised 8 to 10 per cent net over the medium-to-long term. With a six month lock-up period, the fund does require investors to be prepared to take a longer-term view, but Mr Szkiler is confident of reaching his target of £40m.

Institutional investors are not immune to the appeal of doing well by doing good, he adds. “We see institutional investors in that area, but so far really only the giants,” he says. Their motives may not be precisely the same as those of individuals: “There’s an element of looking for stable financial returns, even if modest, that are decorrelated with the rest of financial markets.

“There’s also a reputational benefit for the large institutional investor, and there is the concept of universal ownership,” he adds.

The theory of universal ownership states that beneficial owners in a fund not only have an interest in direct financial returns but also in making sure their investments work towards improving the world in which the investors live.

The categorisation of an investment vehicle as impact investment does not always come from the promoter. Nikko Asset Management has two World Bank Green Bond funds, invested in the triple-A issuer’s bonds – proceeds from which are used to fund climate change mitigation projects.

“We didn’t set it up as an impact bond, but it falls in that direction naturally,” says Stuart Kinnersley, Nikko’s European chief investment officer. “Investors are getting this positive externality in addition to the market returns you would expect.”

Nikko’s institutional vehicle has seen approaches from investors specifically interested because they have identified it as an impact opportunity. “Many people are questioning the current model of capitalism,” points out Mr Kinnersley. A version that makes explicit use of the structures of capitalism to improve the world seems attractive to many of those questioners.

Unsurprisingly, development financial institutions such as the German KfW bank or Triodos Bank are interested in impact investing, as are many charities that rely on income from an endowment and prefer to make investments related to their mission rather than arbitrary unrelated investments.

In the UK, there are plans afoot to raise the profile of impact investing and make it more accessible to retail investors. This is the aim of the Social Stock Exchange, likely to launch some time next year.

It is the brainchild of Pradeep Jethi, a former product developer at the London Stock Exchange, and is backed by the Rockefeller Foundation and the UK’s Big Society Capital.

“I want to use my capitalist skills to make the world a better place,” says Mr Jethi. “If we don’t do something, capitalism will eat itself.”

Copyright The Financial Times Limited 2012.

The State and Future of Impact Investing – Forbes

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Photo: Jai Catalano

In a recent interview with Antony Bugg-Levine, CEO of Nonprofit Finance Fund, we discussed his new book about the impact investing sector, emerging trends and ideas in this space, challenges and opportunities moving forward, what the world would look like if the potential of impact investing were to be realized, and advice to traditional investors interested in becoming an impact investor.

Antony Bugg-Levine is the CEO of Nonprofit Finance Fund, a national nonprofit and financial intermediary dedicated to mobilizing and deploying capital effectively to build a just and vibrant society.  In this role, Mr. Bugg-Levine oversees more than $225 million of capital under management and a national consulting practice, and works with a range of philanthropic, private sector and government partners to develop and implement innovative approaches to financing social change.  He is the co-author of the newly released Impact Investing: Transforming How We Make Money While Making a Difference (Wiley, 2011).

Most recently a Managing Director at the Rockefeller Foundation, Mr. Bugg-Levine designed and led the Rockefeller Foundation’s Impact Investing initiative. He convened the 2007 meeting that coined the phrase “impact investing” and is the Board chair of the Global Impact Investing Network. A former consultant with McKinsey & Co., he also teaches at Columbia Business School. A native of South Africa, he served in the late 1990s as the acting communications director at the South African Human Rights Commission.

Rahim Kanani: Describe a little bit about the motivation and inspiration behind writing your new book, Impact Investing: Transforming How We Make Money While Making a Difference.

Antony Bugg-Levine: In the book we describe the “bifurcated world” that most people inhabit, in which they assume that the only way to solve social challenges is through government and charity and that the only purpose of business and investing is to make money. Impact investors reject that worldview. We recognize that for-profit investment can be both a morally legitimate and economically effective way to address social and environmental challenges.

I certainly come from that bifurcated world. I began my career working in politics and human rights and assuming that investors had sold out their principles to get rich. But working for the South African Human Rights Commission in the late 1990s, I saw how economic power and business dominance allowed people to perpetuate oppressive practices even when official policies had changed. On the other side, working at McKinsey and with TechnoServe, a business-focused nonprofit in East Africa, I came to see that business can be a creative force for empowerment and upliftment.

So with the support of the Rockefeller Foundation, starting in 2007 I began helping to bring together people around the world who share an excitement about the positive role that investment can play in addressing social and environmental challenges. As interest in this concept exploded, my co-author Jed Emerson and I thought it timely to write a book that could both serve as an introduction to this concept and also identify the systemic challenges we must overcome to enable impact investing to reach its potential.

Rahim Kanani: As you assess the current landscape of impact investing, what are some of the recent trends we should be both mindful of, and be paying special attention to?

Antony Bugg-Levine: Many of the initiatives that were being planned when we were finalizing the book are now starting to bear fruit.  In the four months since the book came out, banks in the US and Europe have launched impact investing products for their clients. RBC, the biggest bank in Canada, has announced an impact investing fund, and Big Society Capital, the UK’s public-private partnership to form a major impact investing intermediary has secured more than $500 million in initial capital. Impact investing is also gaining traction among leading business schools. Some private foundations are also starting to be bolder in their embrace of impact investing and the idea that all their assets should contribute to the social mission they were set up to fulfill. And governments from the US to Australia are getting involved, most noticeably through strong interest in the social impact bond and other tools to harness private investors to fund organizations that can prove the positive social outcomes of their work.

Rahim Kanani: What are some of the critical challenges that lay ahead of this sector?

Antony Bugg-Levine: Our book makes the case that impact investing is transitioning from its initial phase of proving the concept through deals to a more mature phase in which we will have to muster a social movement to build new systems. These include new regulations and policies, new approaches to leadership that celebrate collaboration and execution— not just vision and charisma— new philanthropic leadership that puts all foundation assets to work for mission, and new capital markets products and services. We also have to overcome the stubbornness of the bifurcated mindset.

Beyond these systemic challenges, we also need to put impact investing in its rightful place. Impact investing is a tool, not an end in itself. If you approach the world asking “where can I make an impact investment?” you will end up doing far less interesting work then if you ask “what social challenges do I want to address, and how can impact investing be one of the tools I use to address them?”

This may sound like just semantics, but we have seen in our work at Nonprofit Finance Fund that this approach opens up great opportunities. In New York City in 2009, we set up a window to provide working capital loans to frontline agencies such as soup kitchens and homeless shelters. But we found them too financially shaky to take on debt. If we were only looking for places to invest, we would have moved on to find other less risky borrowers. But because preserving New York’s safety net is crucial, we have structured a new initiative, the Community Resilience Fund, to support 100 agencies seeking to transition to a more sustainable business model. This Fund would not be possible without impact investors offering millions of dollars of loans. But it also requires credit enhancement from the city government and substantial grant support from private donors. No one piece would work alone. Each is necessary.

I believe the most interesting impact investing in the next few years will involve similar collaboration, as impact investors work with governments and donors to tackle challenges that cannot be addressed with any one tool.

Rahim Kanani: At the same time, what are some of the key opportunities?

Antony Bugg-Levine: The growing awareness that business-as-usual approaches are not working for our societies or our planet are a powerful prod for people to reexamine their assumptions. That’s crucial to level the playing field to make the case for impact investing. In the last few months, the sensibilities around the Occupy movement also spurred more people to reconsider their relationship with mainstream financial services institutions.

In the US, the “move your money” campaign led a reported 5.6 million people to open up accounts at community banks and cooperatives. We need to figure out how to harness this energy of critical reexamination to create space for impact investors. At the same time we need to fight the growing skepticism that any investment can be socially useful.

Rahim Kanani: If impact investing were to be fully realized, what would the world look like?

Antony Bugg-Levine: We would live in more just, vibrant and sustainable communities because we would organize integrated solutions to the problems we face. Impact investing would work alongside philanthropic and government support, with each part playing a more powerful role because of its complementarity. At Nonprofit Finance Fund, we call this approach Complete Capital. After decades of experimenting with the different components of this integrated approach we now know how to fit together financial capital (grants and impact investments), intellectual capital (the ideas about what we need to do and how to do it), human capital (the ability to support organizations to implement bold strategies) and social capital (that allows people and institutions unused to working together to collaborate). Most of the easy problems that can be solved with siloed approaches are already being tackled. The increasingly complex and accelerating challenges that remain are going to require Complete Capital approaches to solve them.

Rahim Kanani: And in that vein, what steps do we need to take as a society to place impact investing on precisely this path?

Antony Bugg-Levine: I worry that too many impact investing conversations are ahistorical and acontextual. Impact investing must become more than just a few investors dabbling in new ways to fund charismatic entrepreneurs. Instead we need to take stock of the times we live in: at least in the West, government retreat from their traditional role as the funders of social services is threatening the viability of many organizations that communities rely on.

How will impact investing help solve this crisis and create and preserve just and vibrant communities? If impact investors are not asking that question, and coming up with creative answers, then the whole impact investing movement could prove to be a bit of a sideshow.

If impact investors do take up this question, they will find themselves having to push beyond business-as-usual thinking. Instead of waiting for investment prospects to come across their desks that look and feel like the deals they’re used to, they will proactively go out to forge collaboration with donors and governments. And they will seek out partners who can put these types of coalitions together instead of trying to go it alone.

Rahim Kanani: What advice would you give traditional investors interested in making not only financial returns, but social and environmental returns as well. Where should he or she start?

Antony Bugg-Levine: First, don’t believe your bankers or advisors or trustees or professors when they tell you that impact investing is impossible or imprudent. Now that conservative, government-regulated pension funds and foundation endowment managers on one end and retail investors on the other have figured out how to become impact investors there’s really no reason you can’t as well.

Second, arm yourself with the facts. Take advantage of the rapidly expanding evidence about impact investing on the Global Impact Investing Network’s website’s Resources section. If you’re an investment advisor check out the resources available from ImpactAssets . If you’re interested in how impact investing can fund social service delivery go the Pay for Success learning hub(and send me other helpful resources you find—I’m always on the lookout!)

Third, don’t try and do it alone. Tap into existing expertise. You will need to be a prudent investor and make your own assessments of your investment options. But if you are a retail investor check out Calvert Foundation who has been offering impact investing products for years, or RSF Social Finance who are pioneering radical impact investing practices. Or contact an organization like Nonprofit Finance Fund that has existing investing capabilities and is eager to partner with new investors.

But as you do this, be realistic about what impact investing can achieve. There are many social challenges and organizations that require donations, not investment. Remember that impact investing is an exciting tool but not a silver bullet.

Rahim Kanani is a writer, advocate, strategist and entrepreneur for global social change. His articles, opinions, and interviews with global leaders can be found at www.rahimkanani.com. Follow him on Twitter @rahimkananiand on Facebook.

Have an idea for a great interview? Email rahim@rahimkanani.com.

Impact Investing Creates Template for Responsible Capitalism

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Posted: 02/14/2012 10:13 am

 A microfinance lender in Tamil Nadu, a rice farm in Tanzania, a housing project in Chiapas and a rural development bank in Pakistan: all these projects are recipients of impact investment capital, committed to “doing good while doing well,” in one of the fastest growing investment trends of the past two decades.

Impact investing has developed out of traditional philanthropy in an effort to find solutions that allow investors to make profitable investments that can also address social and environmental challenges. Impact investors seek to combine the seemingly conflicting aims of investing for maximum risk-adjusted returns and contributing to social good. The level of return expectation varies according to the type of investor. Individuals or foundations tend to prioritize social impact over financial return and are willing to forgo the latter if the social goal is clearly advanced.

By contrast, institutional investors, especially those like pension funds which owe a fiduciary duty to their beneficiaries, usually look for a return that is at least competitive with traditional asset classes. As a result, investment risk appetite will also differ. Most impact investing takes place via private transactions with small businesses, often operating in emerging markets where poor governance and inadequate information flow may add greatly to the risk of the projects.

Investors in these companies will look for a commensurate financial return, as well as measurable social impact on the ground. While some prefer the terms venture philanthropy or social investment, impact investing represents a distinct style of responsible capitalism which has become particularly popular among foundations, endowments and high net worth individual investors.

Industry pioneers, such as the $3 billion Rockefeller Foundation in New York, see impact investing as a way to find solutions to poverty reduction and other social problems; but more importantly to access the private sector capital markets that ultimately hold the wealth required to scale up these solutions globally. While charitable donations by high net worth individuals were down 35 per cent in 2010, according to Bank of America Merrill Lynch and Indiana University, the impact investing sector is expecting steady growth.

In 2010, JP Morgan forecast potential impact investment capital of $400 billion to $1 trillion globally over the next ten years. Much recent activity in impact investing has been effectively direct investing, with the typical venture capital approach sometimes supplemented by grants and capacity building. The Omidyar Network, for example, launched in 2004 by eBay founder Pierre Omidyar, “has invested $450 million in equity and grants to promote microfinance, entrepreneurship, technology and government transparency, mostly in developing countries.”

Investment managers such as the Acumen Fund and the Capricorn Investment Group, which manages the Skoll Foundation’s multi-billion dollar portfolio, are active in emerging markets across Asia, Africa and Latin America.

Impact investing does present significant challenges to investors. It can be difficult to obtain basic investment information in emerging markets, and equally hard to monitor and track the performance of small companies and projects. This is compounded by the complexity of trying to quantify the non-financial “impact” of investments: it is not that simple to compare the social benefits of investing in, for example, vaccinations in Ghana versus cleaner burning cooking stoves in India.To help donors and investors tackle this issue, the Global Impact Investing Network (GIIN), a non-profit company supported by the Rockefeller Foundation, has worked with B Lab to develop industry infrastructure aimed at improving information flow and creating a more efficient marketplace.

GIIN’s Impact Reporting and Investment Standards provides a standardized language and framework for measuring the social and environmental performance of impact investments, including a list of nearly 400 metrics, such as customer poverty level and access to education. B Lab has created a similar tool for institutional investors, with support from ratings agency Moody’s and several financial companies.

Improved transparency, the creation of analytical tools for investors and the beginnings of a clear market structure are encouraging mainstream institutional investors, such as pension funds, to look at impact investing as a credible asset class. For example, TIAA-CREF, a huge US pension fund, has committed approximately $650 million to impact investing, mostly to low income housing; and American insurance company Prudential is another significant player, with about $400 million in impact investments.

As more funds are allocated to this sector, the impact investing industry is evolving rapidly to meet the demands of a wide variety of investors. Traditional debt and equity are being supplemented by more innovative structures, such as the Social Impact Bond issued in the UK, where return is linked to measures of social performance such as reduction in prisoner reoffending rates.

Alexandra Tracy is chairman of ASrIA, the Association for Responsible Investment in Asia

This article was originally featured in a special report on Sustainable Investments, produced by Raconteur Media and distributed in The Times (UK)