Philanthropy & CSRNovember 14, 2019

Big investors need to change the way they do business

As more mainstream investors enter the impact investment market, we need them to think about impact, front and centre.
2019-11-26 00:00:00 India Development Review Big investors need to change the way they do business
7 Min read Share

Amit Bouri is the CEO and co-founder of the Global Impact Investing Network (GIIN), where he has championed the cause of impact investing over the past decade. Today, the impact investment market is sized at USD 502 billion.

In our conversation with him, he talks about the role of family offices in India, how mainstream capital has changed the nature of impact investing, and what it means to scale with integrity.

How are you seeing Asia shape up, and specifically India, in terms of impact investment? Where are we at and how does it compare with the rest of the world? 

The stage of development of impact investing across Asia is very different depending on the country. India, for instance, is one of the most developed markets for impact investment in the world, not just in emerging markets, but globally. 

There is an incredible entrepreneurial spirit and inspiring set of leaders who are building businesses that are directly trying to address the needs of hundreds of millions of people who are often overlooked by the markets. And I think this will only grow with time as there are more people with experience building companies, and a stronger set of investors and fund managers who are helping to grow them.

Related article: IDR Explains | Impact investing

India is one of the most developed markets for impact investment in the world, not just in emerging markets, but globally.

One area where we’d hope the market will evolve in India is that currently, most impact capital in India comes from abroad – from development finance institutions, institutional investors, high-net-worth individuals, and global foundations. While this has helped build a robust ecosystem for impact investing, it is also important for India to develop a strong domestic base of asset owners who are putting their money to work. 

We are already beginning to see some of this. One example is industrialist, Sunil Munjal, who put USD 15 million into Aavishkar’s recent Bharat Fund. My hope is that this will inspire more Indian families, businesses, and domestic institutional investors to see the impact investment opportunity in India in the same way that the rest of the world sees it.

What role do family offices play in impact investing?

Family offices—whether they invest directly in the social enterprises or through funds—play a critical role in establishing new models that can develop a track record, which in turn can attract institutional capital later.

What do they look for when they consider impact investments? Do they look at it impact-first or finance-first?

Family offices can be both impact-first as well as finance-first. These terms originally came from a 2009 report by the Monitor Institute called Investing for Social and Environmental Impact. The meaning of these terms has changed over time to become a shortcut for talking about returns. People today refer to finance-first investments as those that seek market-rates of return, and impact-first as those that yield below-market rates of return. Originally, however, it wasn’t about the returns one was seeking, but about the perspective that one was coming into impact investing with.

If an individual who started off with philanthropy decided to add impact investments to their portfolio, their view might be led by impact. For them, impact investments offer an opportunity not just to make grants, but also to make investments. However, there are many other types of organisations that start with the financial perspective. So, their investing portfolio seeks market rates of return and they are seeing how they can bring impact into their investments. 

My expectation in India is that most of the interest for local money will start with the finance-first model.

If for individuals, the money is from their foundation, it will typically carry an impact-first approach. Regardless of the return offered, the principals will look at it through a lens of what impact can be achieved and what’s the best tool to do that. 

But if impact investing is being considered by the same individual’s family office, it will most likely be finance-first because their primary goal is to achieve financial goals for the family’s money, and they are thinking about impact investing as an investment strategy. 

My expectation in India is that most of the interest for local money will start with the finance-first model. 

There is a lot of conversation, in India at least, where investors say that most enterprises are not investment ready, while social businesses say there isn’t enough capital.  How does one address this? 

I like to think about the impact investing market by simplifying it into two categories of investors. At one end are those that are focused on innovation and new business models. They tend to go where markets haven’t gone before, and really help to build things that don’t have much precedent. This usually takes more time, is usually more complicated, and comprises smaller deals.

Related article: When you should seek capital from an impact investor

At the other end of the spectrum, there are scale investors who want things that are tried and true. They’re not necessarily interested in the first version of something; they’d prefer the fourth version of it. They’re not looking for first-time funds, they want the third- or fourth-time fund. These scale investors are also essential because as the innovative businesses grow, they will require far more capital than any early-stage venture fund could give them. 

If we’re going to scale high-impact businesses, we need to make sure that the market can address their capital needs from the seed stage.

If we’re going to scale businesses that have high impact, we need to make sure that we can, as a market, address their capital needs from the seed stage all the way through the scale of being a global company. It is therefore important to have different types of investors involved.

The key is to identify the type of investor that is appropriate for the stage of the company’s growth. Many impact funds believe that they don’t have enough or the right kind of investors to talk to. For example, if there is a fund that’s looking to raise just USD 20 million because they’re looking at a new market in Southeast Asia, and they are considering talking to a big pension fund, it’s highly unlikely that any big pension fund could even process a transaction this small—even if they invested in the whole fund.

INR denomination five coins arranged in a diagonal_Unsplash

If we’re going to scale high impact businesses, we must, as a market, address their capital needs from the seed stage all the way through to scale. | Photo courtesy: Unsplash

Has the entry of mainstream capital changed the nature of impact investing? What are some of the challenges and risks when this kind of money comes into the market?

We are seeing several mainstream investors enter the market and this has the potential to be positive for the sector. However, as we focus on mobilising more capital for impact investing, we need to ensure that we’re bringing in capital with a strong commitment to impact—it’s what we at GIIN call scaling with integrity. It’s not just about scaling the amount of capital, but also scaling the impact that we’re having collectively.

To do this, the GIIN has undertaken two initiatives recently. 

The first was launching the Core Characteristics of Impact Investing. Many of the institutional investors entering the market want to be good impact investors; they want to do it well. And these four core characteristics are designed to set baseline expectations for what good impact investing looks like.  

No one has to sign them, but it’s an expanded definition to establish what we expect of people and institutions who want to claim that they’re making impact investments. 

The Core Characteristics of Impact Investing are as follows:

  1. Set clear intentions upfront about contributing to positive social and environmental impact. This differentiates impact investments from other strategies such as ESG investing, responsible investing, and screening strategies.
  2. Use evidence and data to inform your approach. Make sure that your investments are actually responding to a real problem and need that’s been articulated with data and science. 
  3. Manage impact performance. Integrate impact into the entire investment process including identifying risks and embedding feedback loops through the life of the investments. 
  4. Contribute to the development of the impact investing industry. This is more cultural in nature, but it’s extremely important because our goal as impact investors is not just to move more capital to impact investing, but also to have an impact on the larger investing market overall. 

Related article: The other capital in impact investing

The second initiative was the launch of IRIS+. This was designed to be a comprehensive impact measurement and management system that can help investors translate their impact intentions into real impact results. Not only will it identify what they need to measure, but it can help them go deeper and be smarter about how to achieve that impact.

We need the big mainstream investors to think about impact, front and centre.

We need to move a much greater amount of capital than what’s moving today. The impact investing market is currently sized at USD 502 billion. But we need to set our sights higher if we want to move the needle at a global level. 

We need the big mainstream investors to change the way they’re doing business and we need them to think about impact, front and centre, when they’re thinking about new deals and their portfolio. It has therefore become even more important to safeguard the integrity of the market—we need to make sure that that money is actually having the impact we think it has. 

Have you seen investors exit the impact investment space?

I’m sure there are some examples out there, so I don’t want to be totally definitive, but, the majority—especially the institutional investors that we work with—have all increased their allocations to impact investments over time. So, if the options are to maintain, grow, or scale back, we’ve seen everyone at least maintain their level of investments, but most of them have grown their impact portfolio.

While the overall market has grown exponentially, are there areas that haven’t worked out as well as you would have liked them to? 

Despite the half-a-trillion-dollar market, we haven’t seen much expansion of opportunities for retail investors. There is a huge demand among people all over the world—especially among millennials and women—for investment products that are focused on impact or sustainability. 

As they acquire more control and influence over their personal or their family’s assets, these demographic groups—whether it’s in Asia, North America, or Europe—want their money invested in accordance with their values. They want their money to be put to work to help improve the state of the world, both for themselves and for future generations. 

Millennials want their money to be put to work to help improve the state of the world, both for themselves and for future generations.

But the availability of those products has not changed that much. And we don’t yet have enough opportunities for them to do so. The supply side hasn’t kept pace because it’s too much work for only one firm to do. Making a product available for a retail audience entails a set of fixed costs in terms of addressing regulation, licensing distribution, educating the financial advisors and so on. 

Despite this, we are beginning to see retail opportunities grow in some markets—institutions like Calvert Impact Capital in the U.S. and Triodos Bank in the Netherlands have products for smaller ticket investments—and they are seeing a lot of interest. But it’s not enough. 

Any concluding thoughts?

I’ll note the GIIN’s vision is bigger than impact investing. We believe in a future where impact is a part of every investment and we hope that this will create more inclusive and sustainable financial markets that serve all stakeholders, including people and the planet. 

Amit Bouri was a speaker at the AVPN Annual Conference 2019, and was part of a panel discussion on driving mainstream capital towards impact investing.

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