THE GLOBAL FINANCIAL crisis or GFC, as it is affectionately referred to in discussions taking place in the boardrooms of multinationals or during Saturday night dinner parties among friends, has left investors shell shocked. A general atmosphere of doom, gloom and uncertainty is pervasive across the investment community and, in sharp contrast to the last decade, new opportunities generate little, if any, excitement. Proponents for the end of capitalism have even found a voice as people experiencing 30 per cent average declines in portfolio values search for answers to the questions ‘what went wrong' and ‘where to next'.
Perhaps somewhat surprisingly given the current environment, growing activity and excitement can be found among the proponents of impact investing. Impact investing – defined as ‘using profit seeking investment to generate social and environmental good' and first coined by investors at a meeting convened by the Rockefeller Foundation in 2007 – has until recently been deemed to be a niche activity for those willing to prioritise social or environment impact over financial return. Evidence is building though to suggest we may be approaching a tipping point for impact investing which will see it move from being on the periphery of global investment activity to being fully integrated into mainstream investment activity.[i] Indeed, the GFC may just be what Malcom Gladwell, the author of The Tipping Point, would term the ‘magic moment' for the development of a new global industry for impact investing. An industry that, if we are able to move beyond the prevailing orthodoxy of financial return as the only measure of value, can harness the power of capitalism to address social and environmental challenges around the world on an unprecedented scale.
An investment utopia do I hear some readers say? In some minds perhaps, but to many, myself included, who have left conventional financial institutions to begin to build the market place for impact investing we see very real opportunity for investors to ‘do well while doing good'. Indeed, we can point to examples of success thus far and are motivated by the hope that a tipping point may be just around the corner.
MY OWN TIPPING POINT came in 2003 when I opted to flee the confines of a conventional financial institution to explore how a ten-plus year investment banking career could be applied to impact investing. Admittedly, when I started my journey the term impact investing was not in my vernacular, I simply believed that the capital markets had the potential to be a powerful instrument for much more than the financing of major infrastructure projects which had been the focus of my career to date. After a journey of some six years which took me to live in the UK and the US and have the privilege of leading the development of the capital market practice of Unitus, Inc – an international not-for-profit organisation – as well as be part of the founding team of Unitus Capital and have the opportunity to work with microfinance institutions (MFIs) in five countries around the world, I was pleasantly surprised at the mention of this journey in Cheryl Kernot's lead essay ‘A quiet revolution' in Griffith REVIEW 24: Participation Society. Kernot spoke about social entrepreneurship and its impact on millions around the world as it reshapes social, economic and political relations. The essay explored an increasing, albeit still small, set of investors that have recognised the connection between the allocation of capital and its social and environmental impact, and the use of the capital markets to solve some of the world's most challenging social and environmental problems. In short, the essay addressed the emerging industry of impact investing or social investment as referred to by Kernot.
My journey has recently led me home to Australia which is exciting on many accounts. On the personal front Australia is home and, as we all know, there is no place like home. On the professional front, shock at the rarity of impact investing quickly gave way to excitement about the challenge and opportunity that lay ahead for impact investing in Australia which is, at best, in the nascent stages of development. There is much to be done to establish opportunity for Australian investors – individual and institutional – to participate in the emerging industry. I am also encouraged by the like minds I find in my colleagues at the Asia Pacific Centre for Social Investment and Philanthropy with whom I am working as the Heloise Waislitz Fellow sponsored by the Pratt Foundation.
Over the past decade impact investing has taken hold in the US and Europe, and is forecast to grow to 1 per cent of total global managed assets to US$500 billion within ten years.[ii]. Many industry pioneers have been hard at work to develop investment opportunities in the areas of microfinance, community development finance and clean energy. More recently there has been increasing experimentation going beyond ‘negative screening' to investing in companies actively doing good.
In December 2008 microfinance investment funds totalled 104 with total estimated assets under management of US$6.5 billion representing an increase of nearly six fold over a four year period from 2002. A recent study by the Consultative Group to Assist the Poor (CGAP) reported that microfinance funds have thus far been relatively unscathed by the GFC with the top ten microfinance investment funds growing by 32 per cent in 2008 as compared to a 20 per cent sell-off in emerging market funds. Moreover, microfinance is one of the few asset classes that recorded a positive net return in 2008 with the average net return for the Euro-denominated microfinance fixed-income funds reaching 5.5 per cent in 2008, a stark contrast to the 12 per cent drop for fixed-income corporate indices in emerging markets (Emerging Markets Bond Index Plus [EMBI+]).[iii]
One of the key successes of microfinance investment funds is that year on year they have attracted increased private investment. Development agencies played a critical role in catalysing the establishment of microfinance investment funds, but this is now eclipsed by private capital from institutional and individual investors. The avenue of entry for private capital is diverse including structured finance vehicles – rated and unrated, private equity funds, holdings of microfinance banks and fixed income funds. The source of capital is also diverse ranging from high-net worth individuals, private bank clients of institutions such as Credit Suisse, pension and mutual funds such as TIAA-CREF and foundations. In 2007, eBay launched MicroPlace, a fully registered broker-dealer that makes it possible for anyone to invest as little as US$100 in the world's poor through an online facility offering investment products from community development financial institutions such as Calvert Social Investment Foundation and Oikocredit.
Community development finance facilitated through community development banks, community development credit unions, community development loan funds (including microenterprise loan funds) and community development venture capital companies is another area of impact investing with substantial traction. In 2007, a total of US$26 billion was invested in the US into poor communities through a range of investments including affordable housing, revitalisation of low-income communities, and small business enterprises[iv]. In the UK, the loan portfolio of community development finance as at March 2007 totaled £287 million[v]. Similar to microfinance funds, active private investment is at the heart of the long term success of community development finance with easily accessible investment products available for both institutional and retail investors. Supportive government policy and regulation combined with investment has been integral in generating private investment.
More recent initiatives can be seen in the arenas of clean technology, global health and small and medium enterprises in developing countries. In 2008, US$155 billion was newly invested into clean technology, up 5 per cent from US$148 billion in 2007 despite the unfolding of the global financial crisis[vi]. While much of this funding may be purely profit seeking there are some players such as Generation Investment Management, the investment firm created by Al Gore and his partner David Blood which in 2008 closed a $638 million Climate Solutions Fund, pursuing clean technology for more than financial return. The International Finance Facility for Immunization has issued bonds backed by the long term government pledges that have raised, over a period of three years, US$1.6 billion in cash resources for GAVI immunisation programs. Root Capital has provided $120 million in loans to 235 small and growing businesses that build sustainable livelihoods and transform rural communities in thirty countries around the world.
Initiatives driving the emerging industry of impact investing are wide and varied, and pleasingly there are too many to mention more than a few here to illustrate the efforts being made around the world.
DISAPPOINTINGLY, AUSTRALIAN INITIATIVES or investors are near non-existent. I am not willing to accept that Australians are simply not interested in impact investing or looking at a more holistic approach to harnessing the power of capitalism. Indeed, the terms ‘creative capitalism' as coined by Bill Gates or ‘sustainable capitalism' as definted by Al Gore and David Blood resonate with many. Imagine the sheer potential of channeling even just a small percentage of the $1.17 trillion held in Australian superannuation assets to impact investments. Or if impact investment was just one asset class within a balanced portfolio strategy in the same way diversification is taken across local and international equities, fixed income, property or cash.
So what, if anything, can be done in Australia? A consistent commonality in many early and successful impact investing initiatives is effective collaboration amongst multiple actors which in the traditional finance landscape would be thought to be strange bedfellows. Philanthropists have teamed with investors seeking financial return; banks, private equity funds and venture capitalists have joined forces with non-governmental organisations; and asset managers listening to the calls from their clients to offer more than ethically screened funds have worked hand in hand with community development financial institutions to develop investment product for their clients. Governments have in certain instances also been key actors by providing political support coupled with supportive legislative environment and catalytic investment – directly or through development agencies or multilateral financial institutions – that together works to leverage private investment into creating a more socially cohesive society. A proactive use of government monies that holds a return potential far greater than the recently witnessed multi-billion dollar bailout of banks around the world.
Such collaboration can drive the emergence of impact investment in Australia as an instrument for addressing local social and environmental challenges, and as a way for Australians to participate in addressing these challenges as faced by both near and distant neighbours. While I do not know what the exact path to success will look like, I am confident we can be successful if we are willing to collaborate, are accepting of learning from international experience, and open to moving beyond the prevailing orthodoxy of financial return as the only measure of value.
I am excited about the opportunity ahead albeit aware of the challenges – foreseeable and unforeseeable – of adopting a new approach of investing that expands our definition of value beyond profit to simultaneously capture social and environmental value. Impact investing offers an approach with the potential to yield benefits that far outweigh the risk of not trying. I want to be certain that when GFC II arises – which is near as certain as death and taxes – that everything possible has been done to provide an opportunity for Australians to meaningfully participate in using the power of their investment dollar to create a more economically, socially and environmentally balanced world in which to live.
[i] Monitor Institute (January 2009), Investing for Social & Environmental Impact: A Design For Catalyzing An Emerging Industry
[iii] Reille, X. and J. Glisovic-Mezieres (May 2009), CGAP Briefs: Microfinance Funds Continue to Grow Despite the Crisis
[iv] Monitor Institute, ibid
[v] McGeehan, S and N Goggin (February 2008) Inside Out 2007, Community Development Finance Association, London at http://www.cdfa.org.uk/documents/InsideOut2007_000.pdf
[vi] New Energy Finance (March 2009), Clean Energy League Tables, London at http://www.newenergymatters.com/UserFiles/File/NEF_League_Tables_2009.pdf