Positive Impact Investing

Integrating impact into investment and financial decision making based on the SDGs is a nascent field of research. At the moment, it is mostly practitioners that are driving the impact assessment process and its integration into investment and finance. Some academic research has been done on the consequences of consistent implementation of ESG standards and their value in de-risking assets, managing reputation and preventing damage to communities and environment, finally showing up in a better rating, lower operational risk or a higher good will. While this ex post perspective on consequences of leadership behaviour is useful, it does not provide management with a practical ex ante decision making tool, expanding decision making to integrate impact as a new decision making perspective. The ex ante decision support function of impact in opportunity recognition and scenario modelling has not been researched so far.

Modelling of future fitness and positive impact creation ex ante will be a decisive market advantage in decision making. It is rational to assume that a positive impact driven approach will foster innovation, Yet the market has not entirely captured the upside potential of looking into positive impact creation as a decision making tool. Many authors stay with the ex post outcomes like creation of jobs or new consumption possibilities for customers when researching impact. Integrating impact into decision making is the new leadership tool because governments, charities, philanthropists alone are no longer capable of dealing with the twenty-first century’s social and environmental challenges. Focussing on the act of charitable giving belongs into the mindset of the twentieth century. The dependence on unpredictable funding hindered many charitable organizations from realizing their full potential concerning innovations, effectiveness and scale”. The dominant paradigm in financial markets today is the creation of financial returns solely and within the mindset of the twentieth century eco-social return is seen as sacrificing a certain amount of financial return. Although there is rich research that this trade-off is not true, it may still misalign impact investing with the principal—agent theory that posits that shareholder value is the indicator on how well the agent has managed the capital and ownership rights of the principal. This misinterpretation can be overcome with a growth and innovation mind-set that understands impact creation as an ex ante decision making tool and integrates in in all strategic decision making. This new leadership mind-set will foster not only impact but innovation and growth alongside and transform the logical constructs of mainstream investing and finance. Leadership focus on achieving and actively designing social outcomes as part of the business model aligns with the growth mind-set of the twenty-first century and is explored in this anthology.

Even if social impact finance (SIF) still accounts for an infinitesimal portion of the total assets under management worldwide, experts and academics believe in its potential to contribute in addressing the unprecedented societal challenges of our century. For this reason, during the last 10 years, many research projects, think tanks and specialized networks have reasoned about how to grow SIF market in their countries. They usually have released reports which suggest possible instruments to catalyse the development of the market. First, the arrangement of an enabling legal and regulatory framework is considered a necessary prerequisite, with the establishment of legal entities and certifications systems to lower the information asymmetry in the market and open up new investment opportunities. Second, the creation of specialized intermediaries would enhance the interactions between demand and supply sides and reduce transactional costs. Lastly, they have often acknowledged the usefulness of running pilots to test new financial instruments able to attract a wider spectrum of investors with different risk/return preferences. However, up to date there are sporadic pieces of evidence about how these recommendations have been operationalized in practice. Therefore, the aim of this paper is to investigate which instruments have been used to foster the growth of SIF market. To this aim, we used a qualitative methodology through the thematic analysis of a full set of 77 documents produced by the Global Advocacy Group of G8 SII Taskforce. Based on our cases’ analysis, we draw a taxonomy of employed instruments comparing them with the recommendations found in literature. This work informs interested players about the ongoing practices aimed to develop SIF and could help them to structure SIF initiatives in their countries.

In this article we shed light on the possibility to outperform the market via a 100% impact portfolio. For this, we have a closer look at the existing funds and indexes and analyze their performance over the last few years. We find no over- or underperformance of SRI portfolios. Nevertheless, evidence argues in favour of rather stable returns when compared to conventional products which may allow downside protection during recessions.

Background: Investors’ awareness of climate change has been hastened by the increasing financial and economic impacts of climate change and the growing acknowledgement of most carbon-intensive assets becoming stranded. The call for climate action has also been accelerated by governments and civil society actors interested in and concerned about the environmental consequences of large investors’ climate impact (http://​www.​carbontracker.​org/​report/​carbon-asset-risk-from-rhetoric-to-action/​). The 21st Conference of Parties (COP21) (The international climate conference of all countries in December 2015 in Paris.) ended with the world committing to curb global warming at 2 °C. All these together imply a radical transformation of the world’s economy and therefore investor thinking. Some investments will be at risk while others will benefit.

Examples presented: Investors face different dimensions and levels of climate change-related risk. These risks are conceptually divided into asset level risk (e.g., physical risk, risk related to carbon pricing mechanisms, regulatory and litigation effects) and investor level risk (e.g., risk related to Stranded Assets (http://​www.​ey.​com/​AU/​en/​Services/​Specialty-Services/​Climate-Change-and-Sustainability-Services/​EY-lets-talk-sustainability-issue-4-stranded-assets-from-fact-to-fiction) and a “Carbon Bubble (http://​www.​greenbiz.​com/​article/​carbon-cause-next-financial-crisis-fossil-fuel-stranded-assets)”, financial regulation or reputational risk). Understanding the climate impact of investments, however, can also yield investment opportunities. These opportunities include the financial outperformance of leaders or disruptors (https://​www.​sicm.​com/​docs/​CDP_​SICM_​VF_​page.​pdf) as well as the rise of new—climate-focused or climate-friendly—asset classes such as clean tech or green bonds (http://​www.​mercer.​com/​services/​investments/​investment-opportunities/​responsible-investment/​investing-in-a-time-of-climate-change-report-2015.​html).

Climate change is happening and related risks are of increasing concern to a broad range of stakeholders from the broader public, including regulators and institutional investors.

We need to fund the transition to a low carbon and climate resilient economy. The IEA says that to avoid “catastrophic” global warming and get the world on a 2 °C emissions trajectory requires USD53 trillion in cumulative investment in energy supply and energy efficiency up to 2035 (IEA, Energy and climate change. World Energy Outlook Special Report, 2015; IEA, Energy and climate change. World Energy Outlook Special Briefing for COP21, 2016).

Other studies estimate that USD5–6 trillion per year will be required over the next 15 years solely to invest in infrastructure to support the transition to a low-carbon economy. An estimated 60% of this amount would need to be invested in new infrastructure in developing countries, the remainder replacing existing infrastructure in developed countries (Global Economy and Development (2015), Driving Sustainable Development through better Infrastructure: Key Elements of a Transformation Program.)

Action has been left so late that even with increased mitigation and adaption activity, global warming of 2 °C can be expected.

Trillions in additional finance will be needed to address climate adaptation, and adaption costs are expected to rise over proportionally with a global warming trajectory exceeding 2 °C.

Niche financing solutions will not be sufficient, and neither will public sector funds alone. The USD100 trillion debt capital markets are the dominant global source of capital. Accessing debt markets to fund the transition is essential.

Green bonds can significantly contribute to funding the transition to a low carbon economy and are now widely recognised as a crucial instrument to fund the transition to a low carbon economy.

The first green bond was issued in 2007 by the European Investment Bank (EIB). Since then, the number of issuers from different sectors has increased steadily. Green bonds fund eligible green assets or projects.

Labelling bonds enables investors to discover green investment opportunities that help meet their responsible investment mandates or commitments. They are recognized as one effective tool to mitigate climate related externalities.

After COP21 ratification (http://​unfccc.​int/​paris_​agreement/​items/​9444.​php), institutional investor demand for these types of investments is rapidly rising. The supply side has only been developing gradually, but is expected to be scaled over the years to come on the back of various political, legislative, regulatory and voluntary initiatives of a multitude of stakeholders—increasingly in a consolidated effort. The article looks at the current state of the green/climate bond universe, and investigates recent developments and in and around the labelled green bond space.

In 2013, EMPEA, the global industry association for private capital in emerging markets, established an Impact Investing Council to provide a forum for thought leadership and to play a leading role in professionalizing and scaling the industry, focusing specifically on market-based solutions to major global social and environmental challenges. The Council members were convinced that the skills, intelligence, experience, rigorous, financial discipline and entrepreneurial spirit that have enabled private capital investing in emerging markets to achieve high levels of scale, professionalism and financial performance could be mobilized to advance impact investing. Furthermore, the Council recognized the need for emerging markets impact investors to experiment with bold, new business models and radically low cost technologies, and to unlock new sources of private, philanthropic and public capital that can be combined in innovative and effective financial structures to accelerate development across the entire lifecycle of impact investments.

While acknowledging that charity and grants can help to solve some of society’s serious social and environmental issues, the Council believes that rigorous private capital investing is critical for building scalable, profitable, and sustainable solutions. In particular, the Council has deliberately chosen to focus on those investors seeking market-based financial returns, with institutional quality fund management teams, using cost-effective, practical social and environmental metrics. The Council designates this segment of the industry as Institutional Quality Private Capital (IQPC) Impact Investing, defined below, with descriptions and examples throughout the following text.

Finally, to demystify the myth that to achieve social and environmental benefits it is necessary to sacrifice financial returns (the infamous “tradeoff” argument), the Council members set out to document and communicate quantitative and qualitative evidence demonstrating that not only can investors achieve attractive market-based returns but in some cases can outperform comparable market benchmarks. The results of the research and analysis to date are summarized in this essay and will be part of our plans for further activities.

Investments in fossil fuels are not sustainable—today’s Carbon Bubble will definitely burst. Looking for a responsible and environmentally friendly investment, more and more investors recognize the portfolio risks associated with participations in oil, gas and coal firms and redirect their investments. This process will have an impact on all asset classes—from bank deposits, bonds, equities or private equity to infrastructure and real assets. In addition, a new green industrial revolution is now under way, characterised by ever increasing internet-enabled resource efficiency, competitiveness of renewable energy and electric cars with vehicle to grid charging capabilities. Investments focusing on resource efficiency and renewable energies will gain in importance increasingly.

Switzerland plays a key role in impact investing with strong involvement of specialized asset managers. Currently we see microfinance being the largest field, due to its early emergence on the market, but other topics (i.e. energy) are rapidly gaining importance. In 2015, experts from Swiss-based institutions active in this area, defined a new subcategory of impact investing: “investments for development”. A market study was carried out to benchmark the current status of this segment in Switzerland and to outline the challenges and opportunities for actors in this segment. Results show that institutions in Switzerland represent one third of the global market of investments for development, with 10 billion USD assets under management. The volume is growing fast with a compound annual growth rate of 18.4% in 2015 and market players expecting similar growth for coming years. The regional spread of the investments over 96 countries shows that these types of investments can be widely applied. Market target returns and the clear intention to improve social, environmental and/or economic conditions within developing economies make investments for development attractive for investors.

The Austrian NGO Jugend Eine Welt has been active in the field of impact investing since 2006. Initial steps in this direction originated from fundraising activities for a wide variety of education projects implemented by the Salesians of Don Bosco, one of the three largest Catholic religious orders for men with approximately 15,000 members in 133 countries. During the expansion of the Universidad Politécnica Salesiana (UPS), a private university founded in 1994 by the Salesians of Don Bosco in Ecuador which has social schemes for low-income students, it became clear that a soft loan can have far greater impact than a donation. As a result of this realisation, Jugend Eine Welt was able to convince the former Investkredit Bank AG in Austria of the merits of this project and the first loan, a sum of 5.2 million US dollars, was transferred to the UPS as a classic form of bank financing. In the years that followed, foundations began to show interest in the social undertakings of the order in Ecuador, and besides the UPS two Don Bosco print shops and a programme of microloans were supported with loans.

In 2009, the first Don Bosco Ecuador bond was issued on the Austrian capital market as a private placement. The aim was to make another loan available to the UPS for further extension work. Jugend Eine Welt devised the project in cooperation with Raiffeisen-Landesbank Tirol AG, thus reaching a significant milestone on the way to solving a number of legal difficulties including the problem of prohibited deposit business as defined in § 1 Section 1 Item 1 BWG (Austrian Banking Act). Specifically, by issuing a bond it is legally permissible to collect capital from several investors, a procedure which, outside the context of securities, is permitted solely to banks with the appropriate licence (§ 1 Section 1 Item 3 BWG). Don Bosco Finanzierungs GmbH, a non-profit subsidiary of Jugend Eine Welt also founded in 2009, took on the role of issuing institution for this bond. Raiffeisen-Landesbank Tirol AG participated as lead manager and managed the sale of the bond with a coupon of 3.875% p.a. over 6 years. The primary target group was church investors in Austria, and these contributed a total of 6.3 million euros to the project. The minimum investment was set at 100,000 €. In November 2015 the bond was repaid, marking a successful example of cooperation between the NGO sector, the finance industry and the Roman Catholic church in Austria.

Beginning in 2009, the UPS was able to offer places to 7660 additional students. At the start of the 2015/2016 academic year, 23,557 students were enrolled at three sites in Quito, Cuenca and Guayaquil. Since the full capacity has not yet been exhausted, the Salesians of Don Bosco in Ecuador have asked Jugend Eine Welt for further funding assistance for a third phase of expansion. Because the legal and regulatory stipulations were becoming increasingly stringent, Raiffeisen-Landesbank Tirol AG was no longer able to support a further Don Bosco bond as a project partner. In cooperation with Erste Bank Group AG, a leading financial services provider in Central Europe, two new bonds, one in euros and one in US dollars, were issued from 2015, both of which run until 29 June 2021 and carry an annual coupon of 1.5%. With these bonds, Jugend Eine Welt aims to provide 10 million euros for the UPS. Issuer is again Don Bosco Finanzierungs GmbH, although Erste Bank Group AG is not lead manager but paying agent in order to obviate any liability risks.

Despite positive developments such as the introduction of a new Alternative Funding Act in the second half of 2015 to regulate alternative forms of funding for start-ups and SMEs, it is becoming increasingly difficult to place non-rated impact bonds not covered by the securities prospectus requirement and stipulating a minimum investment of 100,000 €. It is indisputable that Don Bosco Finanzierungs GmbH is receiving support from several individuals in Austria and Germany who are interested in the topics of impact investing and ethics and sustainability in the financial sector. Without the committed involvement of individual banks and financial experts it would have been practically impossible for Jugend Eine Welt to achieve this track record going back years. This was an essential pull factor in this process that gained additional momentum following the financial crisis of 2007. On the other hand, there are a number of push factors hampering the progress of impact investing in Austria. These include consultants’ liability which dissuades banks from selling the product, non-investibility in the trust sector which is precluded by law and affects insurance firms, provision funds and other funds, and the high minimum subscription rate because, for reasons of cost and owing to its small volume, it is a private placement. Ultimately the sale is possible only in one segment of qualified private and institutional investors who have genuine faith in Don Bosco as a name and are willing to invest with no financial rating and to bear the risk of default themselves.

This paper presents a discussion of the pull and push factors that accompany this process. It is based on qualitative interviews with five bank and financial experts with connections to Jugend Eine Welt. These interviews give a clear picture of the current situation faced by non-profit organisations wishing to be active in the field of impact investing in Austria in a wide variety of sectors such as development cooperation and social entrepreneurship. There is enormous potential for successful cooperation at this point of contact with the world of finance and business. The international financing system sees itself in a period of transition, and not just because of recent calls for divestment. Some investors have already been incorporating ESG-based approaches into their investment decision-making for years. What impact investing still lacks is an appropriate legislative framework and consequently products wholly acceptable to both institutional and private investors.

The current challenges and opportunities in the European social finance market call for new initiatives. Many social enterprises are not yet investment-ready and strongly rely on grants or bursaries. At the same time, they search for business models that generate revenue streams and attract larger, repayable forms of capital. Funders, on the other hand, are increasingly interested in impact investments but face numerous hurdles. One of them is the absence of an open pipeline of investment opportunities allowing them to directly engage with social enterprises that reached investment readiness. This is why the Financing Agency for Social Entrepreneurship (FASE) was founded: to address the financing gap with new solutions and to mobilize hybrid growth capital across the often rigid boundaries between donors, investors and the public sector.

FASE provides investment readiness and transaction support to social enterprises with outstanding impact. While doing so, it also creates brand new financing models that meet the needs of various parties involved. In order to effectively address gaps in the social finance ecosystem, FASE also engages in: (1) building and expanding a network of potential impact investors across the entire spectrum, from pure philanthropists to traditional financiers, (2) initiating collaborations between different market players to advance the social finance ecosystem, (3) policy initiatives to improve the basic conditions for social enterprise finance, and (4) dissemination of knowledge through best practice examples, case studies and financing model blueprints.

Out of more than 35 completed transactions to date and more than 15 million euros in impact investments channelled to the social finance sector, this contribution to the anthology will use selected case studies to illustrate how (a) a lean, efficient and transparent transaction process can help social enterprises and impact investors to find common ground and partner for social impact, (b) innovative financing models are able to combine the best of several worlds by allowing for hybrid investor coalitions and/or combinations of financing instruments, and (c) lessons learnt and blueprints enable other market players to replicate solutions and to contribute to a thriving ecosystem for social enterprises and impact investors alike.

This article presents a whole new understanding of a healthy evolutionary economy based on the biological principles of living systems. It provides a radically new framework for strategic decision-making, especially for Positive Impact Investors.

First, I briefly summarize current economic and scientific assumptions and highlight their outcomes. In so doing, we recognize how strongly we are tied to a treadmill, constantly creating more sickness and reinforcing the gap between social, ecologic and economic welfare. We will deepen the understanding of the underlying traditional mind-set, which consists of denying the reality of our natural environment and builds on the scientific assumptions of virtually closed and controllable systems.

The following chapter will lead to a new paradigm, based on the scientific theory of biological, living systems. It will show how living systems actively cope with the characteristics of the natural environment: unpredictability, openness, limited resources, emergence and dynamic disequilibrium. Living systems are not only able to survive within these conditions, but to use them proactively to sustainably co-create a maximum of shared value for all stakeholders, with the minimum energy expended, while maintaining their ability to evolve. Healthy living systems constantly use their energy to modify the environment in such a way that they can create more shared value. Their ultimate biological aim is to flourish. Under these conditions, not only the gap between social welfare, environmental sustainability and financial profit dissipates but, like living systems, we create self-reinforcing, autocatalytic, highly innovative and even self-healing dynamics. This is what I call The biological foundation of living systems, or, within our context: The First Law of an Evolutionary Economy. It is the scientific foundation of a radically new economic paradigm. In fact it provides the foundation of a radical new theory of scientific management. Further I will describe how living systems operationalize these conditions into a coherent set of five Generic Principles. This enables us to design a new economic operating system that has strong implications for the necessary organizational culture and management model. Understanding the biological foundations of an evolutionary economy and the required operational and governing principles provides a new comprehensive framework for strategic decision-making, especially for Positive Impact Investors. And there is something more we can learn from living systems: how radical and deep transformation can happen quickly, securely and directly—far beyond any traditional and incremental change management approach and definitely far beyond experimentation.

This chapter is an exploration of an aspirational ethics program for undergraduate students that carries an optimistic set of goals for their potential to act as agents of social change. Ashesi University College is a private not-for-profit, 501(c)3 organization, undergraduate-only university college in Berekuso, Ghana. Founded in 2002, its mission is to train a new generation of ethical, entrepreneurial business leaders in Africa and to nurture excellence in scholarship, leadership and citizenship. Students graduate with degrees in Business Administration, Management Information Systems, Engineering and Computer Science, all based on a liberal arts model. When compared with institutions around the world that offer business and management degrees, there are three main defining aspects that make Ashesi distinct and reflect its commitment to ethical standards. The first is the commitment to gender and economic class diversity: 47% of students are female; 55% of students receive some level of scholarship funding (http://​www.​ashesi.​edu.​gh/​), and 25% receive a full scholarship. Ashesi University is a private liberal arts college in Berekuso, Ghana. Founded in 2002, its mission is to train a new generation of ethical, entrepreneurial business leaders in Africa and to nurture excellence in scholarship, leadership and citizenship. There are three defining aspects to the educational process that make Ashesi distinct. The first is the commitment to diversity in class, gender, religion and nationality; there are equal numbers of female and male students and 25% of students receive full scholarship funding. The second is employment: 96% of its students are employed 3 months post-graduation. The third is the commitment to the honor code, which is unique among African institutions of higher learning. Through qualitative-based research with students, graduates, faculty, and staff, this study focuses on the origin and implementation of the honor code at Ashesi and whether and how the honor code continues to be used by students after graduation. At the time of this research, there was strong evidence that this educational intervention has been effective in influencing post-graduate behavior in the workplace and in wider social interactions.

The current social capital market in the face of the crisis we face in just Climate, Agriculture, WASH. is not fit for purpose and will demonstrably fail all of us with catastrophic consequences. The current governmental funding crisis, growth of inequality, large scale migration, and violence on the streets of Europe are symptoms of a not a cyclical but a structural funding crisis. We need to learn from history where the major turning points of history have always had a financial dimension. We have reached such a turning point—the issue is not innovation, or even money—the question is can all stakeholders in both developed and developing world (Civil Society, Governments, Corporates) collaborate to solve these issues—this paper seeks to give some of those solutions—and opportunities.

When I started Triple Bottom Line Investing (TBLI) nearly 20 years ago, I wanted TBLI Group’s mission to create an inclusive values based economy. The Triple bottom line approach. All investments should provide a financial, social and environmental return, and not only a financial return. Since 1996, the Triple Bottom Line Group (TBLI) has been building the ecosystem for the Impact Investing and Environmental, Social and Corporate Governance (ESG) community, providing advisory, educational services and networking events. One of the star products is the TBLI CONFERENCE, which is the longest-running global forum bringing together investors, asset managers and thought leaders in sustainable finance.