Impact Investment

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Text by: Alyona Lis

“Social investment”, “conscious investment”, “ethical and responsible investment”, “impact investment”… All these terms are used to define a new trend in financial investment, which is gaining popularity all over the world. The investors today are ready to get a lower level of income from their financial investment, provided they achieve some positive social changes or improve the environmental situation.

Often what is known as “social investment” means investing in projects and businesses that contribute to environmental protection, ensure consumer and human rights protection, or preserve biodiversity. Some investors use the “negative filter” approach and call themselves social simply because they don’t invest in companies involved in the production of alcohol, weapons, tobacco, fast food, pornography distribution, gambling, etc., while a proactive social investment approach, which directly focuses on positive changes in society, is called “impact investment” and “community investment”.

What is impact investing, and how does it differ from charity?

“Impact investment” means investment in companies and organizations with the goal of achieving a measurable social and (or) environmental impact, while ensuring the return (!) of invested funds. For example, impact investors often invest in startups that develop renewable energy, medicine and education, affordable housing, sustainable agriculture, etc. At the same time, an impact investor only invests money in those companies where solving social or environmental problems is the basis of business, and which offer long-term sustainable solutions. And even though the very concept of investment impact was only developed fairly recently, many entrepreneurs and investors think that it is the future.

Thus, impact investing is NOT charity. Rather, it was created as a response to the inability of charities to provide long-term solutions for important social problems. Despite the steady annual growth in amount of aid, philanthropists have been unable to bring about any major changes the situation in the world, making it safer, the environment cleaner, and people healthier. In many ways, this is because wealthy donors rarely contact vulnerable groups and are largely divorced from the problems of poor people. In addition, they often change their minds about specific activities that, from their point of view, are worthy of support.

It is impossible to achieve things you cannot calculate in advance

Impact investors, on the contrary, aim to provide funds to local entrepreneurs, since they believe that they can better understand the problems of their communities, whether it is about an education system that does not meet the needs and challenges of the time, the need for affordable health care, local products or clean water. The return of their own funds is of primary importance for them, because they themselves are entrepreneurs. Another thing is that the return on such investments can be either within the market value or below it, while the risks are higher. Secondly, investing in something that is not profitable means sponsoring a charity, in other words, mitigating the consequences of the problem for just a year or two, instead of helping to scale up an idea that can actually solve the problem in the long run.

Because of what they do, investors can more efficiently cope with the projections than governments or charitable organizations, which is a big advantage when calculating the social impact. Impact investors love to say that it is impossible to achieve things you cannot calculate in advance. They help social entrepreneurs to grow and develop, scale up their businesses and implement new technological solutions, which require serious upfront investment, while understanding which performance indicators to pursue.

Impact investment has become to actively develop after the 2008 global financial crisis, when the amount of funds available to charity decreased, and the philanthropists preferred to invest the remaining funds into something more sustainable. In 2009,Global Impact Investing Network (GIIN),the world’s largest network of social investment market actors, was established, helping to expand and increase the efficiency of these actions. Together, philanthropists, investors and experts identified four basic conditions for impact investment:

•    social goals, including environmental ones, which are supposed to be achieved, are listed in the business plan;
•    payback (or return on investment) implies a longer return period;
•    return range, or return on investment, can be from 1% to 20% or more, but sometimes it is still 0%. At the same time, institutional investors (banks, pension funds) usually prefer investments with a market level of income, while private investors are more flexible and often prefer more risky investments;
•    and, finally, transparency in assessing social impact and reporting, which are clear criteria for measuring the resulting social impact.

Impact investors can be private individuals, family capital, trust funds, financial institutions (such as banks), pension and charitable foundations, and sometimes religious organizations such as the catholic Church, which took an interest in impact investment under Pope Francis. Here are some examples.

Bridges Ventures Investors company (London, United Kingdom)

This private equity firm, which was founded in 2002, has helped raise some 900 million pounds of investments for projects that have measurable social and environmental benefits. In fact, the company manages impact investments, attracting funds from banks, pension funds, wealthy families and individuals, as well as trust funds. They provide consultation support to business corporations and foundations on how to increase impact, as well as conduct training for the next generation of social investors, and have developed an annual impact investment MBA programme.

The company has created two venture capital funds to support:
•    regeneration projects – businesses located in the most disadvantaged areas of the UK;
•    sustainable businesses – social enterprises created to get a positive social or environmental impact;

In 2007, the Bridges Charity Fund was established for important projects that cannot be supported with financial investment. Today, the fund invests not only in British projects, but also into social enterprises around the world.
2. "Our Future" regional social programmes foundation

The private Russian "Our Future" regional social programmes foundation created by Vagit Alikperov, has organized a “Social Entrepreneur” contest since 2008. It provides social entrepreneurs throughout Russia with interest-free repayable loans of two to forty million Russian rubles (26,000 to 520,000 euros) with a repayment period of up to 10 years. Since the start of the competition, the foundation has provided loans to 197 projects from 52 regions.

A prerequisite for obtaining a loan is the collateral in the form of a pledge or a guarantee, as well as the company’s own contribution of 20 to 50% of the project budget, depending on the total loan amount. Investors want to make sure that the business projects they finance are aimed at solving or mitigating existing problems, improving the quality of life of a particular vulnerable group, the population of a city, a region, or maybe the whole country. The proposed solution should be innovative, have the potential to be replicated and become sustainable after the investment has been repaid. Such a long period is due to the underdeveloped entrepreneurial environment in Russia. The investors’ repayment period in the EU or the Republic of Korea, for example, is 4 years.

The Virgin Money Foundation and Virgin StartUp

The Virgin Money Foundation supports people and organizations who want to change the lives of their communities for the better.

  Richard Branson, founder of Virgin Group

The company’s motto is “big changes start locally”. The foundation, which was founded by the well-known British entrepreneur Richard Branson, has a number of grant programmes for entrepreneurs and community leaders in the UK, offering sustainable solutions for social and environmental issues.

Virgin StartUp’s investement portfolio, which provides money to social projects all over the world, includes a company Auticon”which employs programmers and coders with an autism spectrum disorder and helps them to find customers. Thanks to well-planned work, mentorship and investment, the team has become sustainable, making profits and expanding to the United States.

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Today Auticon is one of Richard Branson’s favourites as a successfully developing start-ups with a lot of customers and  measurable social impact. This unusual IT company has achieved self-sufficiency after 10 years of operating in the market, not least due to long-term investments from the British entrepreneur. In addition to loans with an interest rate of 6% for up to 5 years, the Foundation offers long-term consultation support and acceleration programmes, including a seven-week crowd technologies programme, master classes, networking events, etc.

Community investment

Such investments often consist of small or medium-sized contributions from the residents themselves intended to support the development of what they need, or what the community needs. For example, a thousand citizens can pitch in to organize a coffee shop, a restaurant or any other enterprise generating a stable income, and use the profits to give micro-grants or loans to other people in order to improve the life of the community, create new jobs, art objects, sports centres or children's playgrounds. The decision to invest in a particular sphere or to issue grants is made collectively. Representatives of small and medium-sized businesses can receive grants from such investors not only to open their own business, but also to scale it up if shareholders think that it will bring benefits to the community.
Community investment can also be set up by microcredit organizations, such as Grameen Bank in the USA and Bangladesh (Grameen Bank), credit unions, etc. Such investment can often be provided to low-income communities.
Alyona Lis is an expert in social entrepreneurship, manager of international projects and programmes, head of ODB Brussels, as well as a coach.

Read also:
Impact Investment: How to Measure Social and Environmental Impact of Businesses

ODB Brussels