Filters: Impact Investing

A Small Drop in a Large Bucket

Posted on by MBC Strategic

Abigail Noble, head of the Impact Investing Initiative at the World Economic Forum, talks about why impact investing needs to go mainstream. With their Mainstreaming Impact Investing Initiative, the World Economic Forum is looking at the challenges and constraints that mainstream investors, such as pension funds, venture capital and private equity, are facing in getting engaged with impact investing. Noble says “one thing to keep in mind is that there’s a range of returns. Some investors only make a 0-1 percent return. But if you look at impact private equity funds like Leapfrog, they’re making in the 20 and up percentile in returns. One of the things that I find most encouraging is that we looked at the GIIN ImpactBase survey data, and found that over 70 percent of impact investment funds surveyed target an 11 percent rate of return or higher.”

She mentioned the effects on financial markets of environmental shocks like climate change, or destabilizing events like social unrest related to youth unemployment. “When you have more stable political and social situations, it’s a better business climate, and you have more stable financial returns. Impact investing is a very real way to create a more stable and inclusive market economy, and once we start to adapt that mindset, we can see how you can target both social and financial returns and, over the long run, create the world that we want to see.”

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Investors Pouring More Into Impact Investments

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In this ThinkAdvisor article, Michael Fischer presents highlights from the J.P. Morgan and Global Impact Investing Network (GIIN) 2014 Impact Investor Survey.  Survey participants — 125 fund managers, banks, foundations development finance institutions and pension funds around the world — expected to allocate $12.7 billion this year, and anticipated a 31% increase in the number of deals. The survey found that respondents collectively managed $46 billion in impact investments, 70% of which was invested in emerging markets and 30% in developed markets. Ninety-one percent of investors surveyed reported financial returns above or in line with their expectations, and 99% said the same about social and/or environmental impact. More than half of investors acknowledged they were seeking competitive financial returns from their impact investment commitments.

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How millennials are driving the momentum behind impact investing

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In a post on Thomson Reuters Foundation website, Judith Rodin and Margot Brandenburg discuss how Millennials will continue to drive impact investing forward. A generational shift is happening, and it means only good things for those of us who are working to solve global problems. More individuals, many of them Millennials, bring a strong sense of purpose to how they make their money, how they spend it, and how they invest it.

In the next 40 years, generation X and the Millennials could inherit up to $41 trillion from baby boomers.  In a survey by Deloitte of 5,000 Millennials in 18 countries, 71 percent of respondents saw the desire to “improve society” as the top priority of business. Impact investing is at a tipping point, and Millennial investors who are looking to invest with purpose are poised to push it into the mainstream for good.

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Millennials Will Bring Impact Investing Mainstream

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In this Stanford Social Innovation Review, Jed Emerson and Lindsay Norcott talk about the most recent ImpactAssets issue brief on “The Millennial Perspective: Understanding Preferences of the New Asset Owners.”  According to the blog and the report, “Next Gen”—the approximately 80 million individuals born in the United States between 1980-2000—values, experiences, and preferences are poised to accelerate impact investing, directing billions of dollars towards social benefits. Accenture has estimated that over the next several decades, baby boomers will pass $30 trillion in financial and non-financial assets to their heirs—that’s in North America alone. In another study, Spectrem Group found that 45 percent of wealthy millennials want to use their wealth to help others and consider social responsibility a factor when making investment decisions. The transfer of wealth to this generation presents a compelling opportunity to take impact investing mainstream. 

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More Companies Bow to Investors With a Social Cause

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Shareholders are driving changes in corporate policies and disclosures unthinkable a decade ago, on issues ranging from protecting rain forests to human rights. So far this year, environmental and social issues have accounted for 56% of shareholder proposals, representing a majority for the first time, according to accounting firm Ernst & Young LLP. That is up from about 40% in the previous two years, and means shareholders are increasingly voting on things like greenhouse-gas emissions, political spending and labor rights. 53% of companies in the S&P 500 index now publish sustainability reports, according to the Governance and Accountability Institute, addressing such matters as their energy efficiency and labor standards.

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TriLinc Global Supports High Water Women’s Initiative to Empower Women through Impact Investing

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On April 7th, Joan Trant, TriLinc Global Director of Marketing & Impact, joined a group of senior women from the hedge fund and impact investing industries to assess the impact investing landscape and determine how High Water Women, a New York-based nonprofit dedicated to promoting the social and economic empowerment of women and youth, can increase women’s awareness and participation in impact investing. Women hold a significant amount of wealth globally, and according to Kristan Wojner and Chuck Meek in Women’s Views of Wealth and the Planning Process: It’s Values That Matter, Not Just Value, women are estimated to inherit 70% of the $41 trillion in intergenerational wealth transfer expected over the next 40 years.

Following on its highly acclaimed Investing for Impact Symposium held October 3, 2013, High Water Women is building a strategic process and tools to support women seeking to invest in the impact space. “In addition to speaking at the Symposium, TriLinc Global is delighted to be part of this visionary and dynamic group convened by High Water Women,” said Ms. Trant. “TriLinc Global helps investors recognize the power they have through their investment decisions. Collaborating with High Water Women is an exciting opportunity to support women investors aiming to prove that investments with socioeconomic and environmental benefits also have the potential to achieve competitive returns for their portfolios.”

TriLinc Global CEO Judges for Morgan Stanley Sustainable Investment Challenge

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On April 4th, TriLinc Global CEO Gloria Nelund had the honor of judging the business plans of five exceptional MBA student-teams from various universities around the world at the Morgan Stanley Sustainable Investment Challenge in the firm’s global headquarters in Manhattan. A total of 75 business school teams entered the competition, which filtered down to 10 teams pitching their sustainable finance proposals on Friday morning. The presentations were split between two groups of judges, who after first-round selections together selected the top four teams to present in the finals.

Proposals ranged from financing for solar irrigation projects in India to a fund for LED street-lighting in the United States. The grand prize of $10,000 was awarded to the four-student team from the Kellogg School of Management at Northwestern University, who proposed an investment vehicle to remediate brownfields using popular trees.

The Gender Gap

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According to the IFC Job Study, women comprise 49.6 percent of the world’s population, but make up only 40.8 percent of the formal global labor market.  While globally inequality between men and women in education has been shrinking, women are still less likely to be educated.   These gender imbalances, primarily represented by education and employment, have been coined as “the Gender Gap”.  Before one can address this unfortunate social issue, the magnitude of potential positive change and the barriers to eliminate the issue must be understood.

A research report conducted by Goldman Sachs indicated that if Australia were to reconcile its Gender Gap (hire as many women as men), its GDP could increase by 11 percent.  Conducting the same analysis for other major nations suggests that US GDP could be boosted by as much as 10 percent, Eurozone GDP by 14 percent and Japanese GDP by 21 percent.  These projections are based on women’s contributions as more efficient laborers, as well as a simple increase in laborers.

Empirical evidence indicates that female employment has a positive impact on a company’s productivity and society’s well-being. In a recent case study, Oderbrecht’s, a Brazilian engineering, construction and chemicals group, newly acquired female-led team performed tasks 35 percent faster than teams with a majority of male workers.  Additionally, employed women are more inclined to help their families and communities out of poverty.  According to the IFC Jobs Study, women-headed households were found to reinvest up to 90 percent of their income into their families, compared to 30-40 percent contributed by men.  By investing in their children, women are helping to create a more productive future generation.

The barriers that stand in the way of progress toward reconciling the Gender Gap can be categorized as legislative, cultural and financial.

 

  • Government Difficulties:  In many developing nations, government instability makes implementing new policies and adapting old policies very difficult. Further in 102 of 141 economies, there already exists at least one legal difference between men and women that could hinder women’s economic opportunities – IFC Job Study.
  • Cultural Norms:  Much of the world still holds traditional views when it comes to women’s roles. Some cultures require permission from a husband to work; others don’t allow women to work outside of the home at all – IFC Job Study.
  • Financial Constraints:  Women are more likely to lack access to finance. A study of 34 countries from Western Europe to East Asia showed that women were 5 percent less likely to receive a loan – IFC Job Study.

These barriers provide a clear direction for effectively addressing the seemingly perpetual Gender Gap.  Over time, these barriers will diminish, especially where progress is intentionally encouraged. By supporting organizations and companies that implement gender-diversity hiring practices, as well as increasing awareness of the Gender Gap, we can help to eliminate it.

The Missing Middle

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     Big business often dominates the financial headlines every day, as journalists, investors and politicians seemingly track every single movement of the stock and bond markets. Yet when it comes to the U.S. economy, big business is only part of the story. One infrequently hears about businesses with less than 500 employees, yet in the U.S. they represent 99.7 percent of employer firms, have created over 65 percent of net new jobs from 1994 to 2009, and account for over half of nonfarm private GDP. These smaller businesses are often considered the lifeblood of the American economy, accounting for a good portion of innovation and often helping to give rise to the next generation of industry leaders. They have been a major driver of the economic growth of the U.S., as well as almost every major developed economy.

     In developing economies, the story is somewhat different. Historically, a lack of investment capital and poor economic policies have generally suppressed the growth of these small and medium enterprises (“SMEs”). Their business owners are just like business owners in the United States – willing to work hard to expand their businesses, create real value for their economies, accept accountability for results and ultimately help contribute toward a better future for their families and communities. Unfortunately, they have historically had a number of obstacles hindering their growth, the most common of which is a lack of access to financing.

     SMEs are the backbone of most economies, and have come to be known by many names in financial markets. “Small business,” “small-cap,” “middle market,” are some of the terms used to describe those firms that typically are profitable enough to have grown past the start-up phase, but yet not big enough to finance themselves in the debt capital markets. The definition of what qualifies as an SME can vary greatly from country to country, depending on the relative size of the economy and the sector under consideration. In the United States, the Small Business Administration (SBA) defines small business broadly as those businesses with 5 to 500 employees, a definition adopted for TriLinc Global.

     The “missing middle” is a term generally used by economists to describe the lack of financing available to this vital portion of the global economy. It describes the typical situation in developing economies: the largest businesses typically dominate bank financing. Microbusinesses are primarily funded by microfinance institutions, which have helped this business segment grow over the last 20 years. Unfortunately, those small and medium-sized businesses in the middle often have a harder time accessing finance, with five out of six SMEs worldwide claiming a lack of access to sufficient capital, thus making up the “missing middle” of finance.

 

What is the Difference Between Impact Investing and Socially Responsible Investing?

Posted on by MBC Strategic

When many investors first become aware of impact investing, they wonder if it is the same as Socially Responsible Investing. It is not. In this blog post, we seek to uncover the difference between impact investing and socially responsible investing.

So what is the difference between impact investing and socially responsible investing? Impact investing is distinctly different from socially responsible investing in that socially responsible investing typically applies a set of negative or positive screens to a group of publicly listed securities – for example, a mutual fund that avoids investments in tobacco, alcohol and firearms. Impact investing goes beyond a passive screen by actively seeking to invest in companies or projects that have the potential to create positive economic, social and/or environmental. Where socially responsible investing fund managers are generally passive and adopt a “do no harm” approach, impact investing funds typically not only seek to create positive impact, but measure and report their impact in a transparent way.

Beyond the impact investing objective, impact investing also typically targets progress on environmental, social and governance (ESG) matters relevant to a company’s strategy and operations. In impact investing the ESG analysis, which takes into account the effect that a company’s operations has on its market, community and environment, has become more mainstream in recent years, as analyses have determined that it can both drive long-term value and reduce brand and reputational risks. The UN Principles for Responsible Investment (like impact investing), which detail best practices in ESG investing, have been signed by nearly 700 investment managers and over 250 asset owners around the world, including Blackrock, Fidelity, KKR and CALPERS.

It is not enough for impact investing managers to merely intend to make a positive difference – managers and investors must track their social and environmental performance (the impact). In 2009, a group of impact investing stakeholders including investment managers, the Rockefeller Foundation, and the U.S. government, began to create a common set of social and environmental impact metrics that would increase the transparency and credibility of impact reporting. This led to the creation of the IRIS framework, which applies across sectors and geographies to give investors a standardized measure of the non-financial impact of their investments, ranging from average employee wages to metric tons of greenhouse gas offset. With leading impact investing funds and investors utilizing IRIS metrics to track and report their social and environmental results, investors will increasingly be able to compare and benchmark non-financial performance across managers and strategies.