Investors are always looking for new opportunities where to allocate their funds across the spectrum of capital. This is in most cases a sophisticated process that includes strategies and many stages to evaluate potential instruments to reach a decision that requires investment management capabilities at several levels. It is normally a challenging ask from a traditional perspective, but when looking at it from a Sustainable & Impact Investing prism it becomes even more challenging to find opportunities as an investor. This goes hand in hand with the difficulty to find role models for best practices as Investment Managers, in order to launch attractive and impactful products that will attract the right value-aligned investors.
To help the transition of capital into Sustainable & Impact Investing, there is a real need to learn more about such best practices, so on Wednesday June 9, 2021, together with Vanina Farber – IMD elea Professor of Social Innovation and Director of elea Center for Social Innovation, and co-author of THE elea WAY – we co-hosted an insightful panel to discuss successful Financial Instruments in Impact Investing. We used the new audio sensation app called @clubhouse, as part of a series inspired by the efforts and initiatives of several of the impact leaders in the community, which is in many ways helping us democratize impact.
The event featured three guest speakers taking a unique approach to impact investing:
The Power Of Long-Term Commitment & Grants
Silvia highlighted the role and importance of larger, longer-term and less restrictive grants to shift organizations beyond a cycle of continuous fundraising for small philanthropic gifts. Co-Impact offers grants between $10-25 million over 10 years that go towards proven solutions that are backed by strong evidence and long track records. She highlighted the role of large grants to enable systemic change and enable organizations to take a longer-term time horizon to ultimately scale and bring in the market mechanism to create lasting change.
Venture Philanthropy & Convertible Equity
Adrian discussed the difficulties of assigning valuations to early-stage social ventures. As a philanthropic impact investor, Adrian mentioned how convertible equity enables elea to become a partner with aligned interests with social ventures. Rather than creating complications by overvaluing and undervaluing a social venture during its early years, convertibles allow social enterprises to focus on executing their business models. The elea Foundation can assist with strategy and once the business gains traction, professional investors can help establish a valuation of the social enterprise during the Series A or Series B. This model enables elea to become long-term partners with such social ventures.
Investors Collaboration & The Missing Middle
Florian described Bamboo’s flexible strategy that enables them to take equity positions at various stages during the early phases of the social entrepreneurial life cycle. Bamboo’s strategy enables them to take the lead on an investment round, typically taking between 20-40% ownership and obtaining a board seat. This strategy enables them to work collaboratively with management and crowd-in other investors and local asset managers. Their approach focuses on what Florian describes as the “missing middle” which is beyond microfinance (and venture philanthropy) but below where local banks would be interested to finance. This enables Bamboo to demonstrate the additionality of their investments.
Environmental, Social & Governance (ESG) and Greenwashing
After the three guest speakers gave an overview of these innovative and proven financial instruments and strategies, other participants joint the “virtual stage” to share their experience raising and receiving financial investments from impact investors and ask questions on how to attract capital, as well as how to overcome hurdles to raising money for innovation solutions to tackle social and environmental challenges, beyond ESG. Several participants also expressed urgency over the 2030 SDGs agenda while also raising concerns over the large inflows to ESG funds, particularly during 2020 and now in 2021, in regards to potential Greenwashing & Swashing – one of the latest terms in relation to Social Greenwashing in particular.
Community And Collaboration Are key
Co-hosts, panelists and participants also discussed how collective and collaborative approaches can help scale and drive transformative change and speed up the rate of change. One participant suggested that the inclusion of end-clients and local communities was also an essential element in the impact investing process that should not be overlooked, calling for a “bottom-up” approach to match the investor-led fund strategies.
Transparency & Reporting
Finally, several calls were made for more transparency on impact management and measurement, including the challenges to formulating the right frameworks and deciding on tools and third party providers, a vital issue that will be addressed in its own, dedicated, future Clubhouse session hosted by the Sustainable Investing club.
There is a A ray of hope
Expect more to come following this first encouraging discussion.
For further information, please reach out or connect directly with the people quoted in this article.
For more insights into Impact Venture Philanthropy and Private Equity, you can listen to my interview with Vanina Farber and the Founder of the elea foundation, Peter Wuffli, and separately with Florian Kemmerich on the IMPACT LEADERS podcast.