Impact Investing – Catalyzing Wealth for Change
At Credit Suisse, we see a growing number of clients interested in impact investing, an investment approach that aims to bring about a measurable social or environmental change while generating financial returns. Julia Balandina Jaquier, an author of Catalyzing Wealth for Change: Guide to Impact Investing, together with Olivier Rousset, Head Impact Investment Specialists at Credit Suisse, shed some light on the topic.
Let's open with some basic definitions. What is the difference between impact investing and sustainable investing?
Julia Balandina Jaquier: Both impact investments and sustainable and responsible investments (SRI) are impact-generating investment strategies. However, there are important differences between them. Many sustainable investment strategies focus on "doing no harm," mostly through screening and engagement. Impact investors move beyond that and aim at creating a specific tangible impact, and try to solve a particular problem. Impact investments use capital as a "force for good." On the financial side, impact investments target a broader range of returns – from simple return of principal to market returns, while SRI focuses only on market returns. Lastly, SRI cover primarily listed strategies, while impact investments span across all asset classes.
Olivier Rousset: Impact investing and sustainable investing both have a positive impact on society or the environment while generating investment returns. They pertain to the same broad investment family. Now, there are some differences. Impacting investing seeks a more specific impact as the investor needs to know exactly where the money is going and what it is used for, and its impact has to be reported back to the investor with specific metrics. In terms of capital, impact investing will typically focus on private equity and private debt while sustainable investing covers all listed asset classes and therefore has a stronger potential to become mainstream. In that sense, sustainable investing looks at the entire portfolio and is increasingly becoming part of the traditional investment process.
Impact investing is about doing good. Why aren't charities enough? They have the know-how gathered over decades, so one could assume it should be easier to make a donation and let charities do their work.
JB: But impact investing does not intend to displace grants; it is a complementary tool. By focusing investment capital on those areas that can have a business model (for example access to education, healthcare, or sanitation), one can help focus scarce philanthropic funds and government budgets on addressing the remaining ones. The excitement about impact investing is that it supports market-based solutions, which are believed to be able to address some of the societal challenges more effectively than charities. For example, access to energy space, initially dominated by NGOs providing free solar lamps to rural off-grid communities in emerging markets, has been transformed by the entry of social enterprises. They have developed affordable products specifically adapted to local conditions and the needs of rural populations and created economic incentives to maintain these systems, improving the lives of millions of people without continuous reliance on grants to fund their work.
OR: There are different needs to be met and both charities' and impact investors' engagement is required. For example, basic needs or emergency situations, such as when a tsunami hits and entire communities are devastated, may require immediate donations and be best tackled by charities. However, in the long-term, impact investing provides lasting and scalable solutions as it generates returns that can be reinvested to scale up the impact. Now, impact investing and charities can also be mutually beneficial to optimize the social impact. For instance, grants can be leveraged as seed capital to launch innovative impact investments. Also, many private companies with an impact mission require both funding and capacity building to strengthen their operations. That's exactly how Credit Suisse Corporate Citizenship and our impact investing business collaborate. For instance, the microfinance institutions we finance also receive grants from our foundation and expertise from employees for capacity building.
Impact investing and charities can also be mutually beneficial to optimize the social impact.
Is impact investing for everyone? What motivates HNW individuals to engage in impact investing?
JB: Motivations vary a lot. Impact investing appeals to private investors and philanthropists who want to support market-based solutions to societal problems and who would like their investment portfolios to reflect their values. Many wealth-holders have seen their impact investments perform strongly, especially during crises, making them view this investment approach as an effective way of managing their wealth. Increasingly, families also use impact investing as a way to reach their strategic objectives, such as strengthening family unity, finding personal fulfillment, preparing children for wealth transfer, or succession within the family business.
OR: At Credit Suisse, we have approximately 5,000 clients across all type of investors: retail, HNWI, Premium Clients, institutionals, foundations, and family offices. It really is for everybody. There are various motivations: investor sensitivity to the cause and impact, the stable return, the portfolio diversification value, etc.
There is growing interest in impact investing, in particular from the younger generations. What should the impact investing industry do to become a more mainstream investment opportunity?
JB: I think we need to make impact investing easier for clients. At the moment, many are overwhelmed by the effort it takes to find and execute good investments. Many NextGens are also struggling with getting a buy-in from the older generations. It does not help that many traditional advisers are not knowledgeable about impact investments and hence are not helping their clients to properly structure their impact investment activities. The mainstreaming will come through better investor education and more efficient intermediation, whereby families can come to their traditional wealth adviser and get help in aligning their investment portfolio with their values.
OR: This year we celebrate the 15 years of impact investing at Credit Suisse! Over the past 15 years, we've seen incremental interest in impact investing across all client segments. The young generations are especially receptive to the thematic and will soon be a key driver to mainstream the industry. We also see more and more institutional investors looking into impact investing opportunities as the industry is building a solid track record. Now to bring on board more institutionals, the key is to adjust to their investment criteria, including a clear asset allocation, a simple structure, some liquidity, etc. It is not that easy to address this in impact investing as today most impact investments relate to private capital. But there are clear efforts from key players to extend impact investing to listed instruments and to make it more mainstream. The risk is that the impact aimed for could be diluted – in a listed company the money goes to the treasury department and they use it as they want. A solution Credit Suisse is currently exploring is to go for small and mid-cap enterprises whose mission is clearly social, e.g. companies active in the healthcare sector conducting research and development on cancer.
Some potential investors shy away from impact investing after the initial interest. Any thoughts why? And how can we help them with their first steps in impact investments?
JB: One issue may be that developing an investment strategy requires a considerable effort, especially if consensus within the family/organization is needed. Another typical situation is that the initial excitement about impact investing pushes a private investor to spontaneously allocate capital to a few direct deals without doing proper due diligence. After losing capital on a first deal, the investor may erroneously conclude that impact investing is too risky or simply not for them. My recommendation is to apply to impact investments the same rigorous approach used with conventional investments, and to start slowly – with small, safer investments, executed jointly with peers or through a credible intermediary, such as a fund or a bank.
OR: It is important to understand why they shy away. Impact investing can be perceived as complex and risky. But the reality is that it's not the case for most investments. It is Credit Suisse's role to raise awareness and change that perception vis-à-vis the mainstream investor community. Now there are specific features that make impact investing a harder sale, including little liquidity, limited track record on most sectors, and a more complex due diligence (not only on the financials and operations but also on the precise social impact). Innovative investment product structuring is a way to circumvent these limitations. Just to take an example, in terms of low liquidity, traders can build a holding in a specific product to create liquidity or at least give investors the option to exit.
My recommendation is to apply to impact investments the same rigorous approach used with conventional investments, and to start slowly.
Julia Balandina Jaquier
An increasing number of bigger corporations are interested in building more impactful businesses. How should they address these challenges and participate in impact investments?
JB: Corporates are a very important player in impact investing. They increasingly see the need to go beyond the CSR strategies and incorporate impact objectives in their core operations, be it by investing in external impact-driven enterprises and investment funds, or by developing internal shared value initiatives. These can range from inclusive sourcing and employment strategies (incorporating disadvantaged populations in the supply chain or workforce), sustainable manu-facturing, to developing new products and services, which meet the needs of low-income populations, or generate another form of societal benefit.
OR: Firstly, they should understand that impact investing goes beyond a CSR strategy or philanthropic activity. They need to understand the business potential of impact investing. For example, some big corporations, in particular with operations in emerging markets, should see that people from the bottom echelon of the wealth pyramid also have certain needs (e.g. access to education, access to healthcare) and these needs, which have to be addressed, are a business opportunity. That is the market side. The other side is their asset management. Here, they could invest all or some of their assets in an impact fund in line with their mission and sector.
Julia, you yourself are a dedicated impact investor. Can you tell us what made you go that route and how it all started?
My personal impact investing journey started in 2003, when, expecting my first child, I asked myself how I would later explain to him what I do at work. At that time, I managed the European private equity business of AIG, and suddenly these legacy considerations made me reassess the definition of a successful career, and to seek a more purposeful job. Having considered various alternatives, the idea of investing in businesses that could improve the world caught my attention – the fit was perfect, as I could use my investment skillset and, at the same time, make a difference through my work. So, I built and managed an impact fund at AIG. Having tried impact investing, there was no way back – the combination of mission drive and the rigor and discipline of traditional investing was really addictive.
Having tried impact investing, there was no way back – the combination of mission drive and the rigor and discipline of traditional investing was really addictive.
Julia Balandina Jaquier
Can you share with us your most memorable experience in connection with impact investing?
JB: There have been so many over the last 13 years – most have to do with site visits to (potential) investees – it is so inspiring to see the impact-driven entrepreneurs and speak with people whose lives they touch. The most recent experience was a visit to India, where I went as part of the Unilever advisory board. We visited a tomato paste manufacturing plant started by a local female entrepreneur and spoke to some of over the five-thousand smallholder farmers, whose income has tripled through being incorporated in the Unilever supply chain.
OR: I definitely agree on the excitement when going to the field and seeing what difference we can make. My function, typical for a bank, also consists of acting as an essential intermediary to narrow the gap between the needs of investees versus the needs of investors. Over the last couple of years, my team has developed a new and innovative area of products, Impact Notes. Impact Notes carry different characteristics than traditional impact funds and make it possible to narrow this gap (e.g. bring daily liquidity through a trader's holdings). Back in 2011, when we launched and placed our first Impact Note with dozens of clients, this was a huge reward for all the team. Since then, we've launched another seven Impact Notes across several sectors (e.g. education, nature conservation).
One final piece of advice for potential impact investors?
JB: Start doing it. Think of a social or environmental issue you are passionate about and talk to your current adviser about your desire to see impact-generating opportunities. Get to know other private impact investors and consider co-investing with them. Allow yourself to experiment and learn, but also do not to wait for a perfect deal before making the first impact investment. Start with low-hanging fruit, moving part of your cash to a responsible bank, investing in a microfinance debt fund with an established track record, moving part of your listed portfolio towards impact-generating thematic strategies.
OR: For investors newly interested in investing for impact, my advice would be to find an easy entry point to the field. Microfinance debt funds, which provide some liquidity and have had a positive track record for more than ten years, are a sound and simple entry point. Once investors feel knowledgeable enough, they could look at less standard structures (e.g. our Impact Notes) and increase their portfolio allocation to include impact investing. Investors with portfolios that are 100 percent impactful across multiple sectors and asset classes would be my ideal world!