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Information security. Exciting and digital. Hello and welcome to the Future of Business Podcast.
I'm your host, Alison McArthur. In this episode we'll be talking about the rise of impact investing.
Our guest today, only Peyton Power, has been working in the impact investing space since the early days.
Helping navigate fact from fiction in this fast growing sector.
We caught up with only in Oxford to learn more about how investors are using their capital to generate both social and financial returns.
So we thank you very much for joining us on the podcast today.
So we'll start with a simple or maybe not so simple question.
What is impact investing? I mean, it seems to be like this hot new chat time that suddenly sprung up from nowhere.
But, I mean, is it is it is it something new or is it something that's existed in some form or another for a long time?
So it has existed for a long time. So we can actually go back to the 1600s with the Quakers.
We're putting money into what we would probably call development finance.
Now, it essentially was, you know, impact and through to all the way even can go further back to tithing and, you know,
essentially tied often to religious practices around being able to put money into people or projects that have,
you know, positive social or community impact. The term, as we call it now, originated in 2007 in Bellagio Resort, which is owned by a not resorts,
Bellagio estate, whatever it is, Bellagio, something that's owned by the Rockefeller Foundation.
And it was at a meeting of high level individuals.
And so they coined this term impact investing and and what it refers to as investments
that have positive social environmental impact as well as financial return.
And the thing that differentiates impact investors from traditional investors is that they have the intention to create impact,
and then they measure that impact. So those two things together are what differentiate.
All investors have impact, positive and negative.
But without that intentionality and without that measurement, then, you know, it's not really impact investing.
So our social impact and financial returns in lockstep with impact investing or can they be intention?
So there's always going to be tension. And I think what we found so what we often say is that impact investing 1.0 kind of.
And there were people that were obviously doing impact investing before 2007 and that and very still,
we have impact investors that, you know, have been around for 20 years or 30 years.
In some cases, development financiers have been doing this for 50 or 60 years.
But the kind of 1.0 of impact investing 27 to an undetermined date a few years ago, really we were very concerned with this idea of a trade off.
So how much social impact can we get for a reduction in how much financial return?
And I'm embarrassed to say I wrote pieces on this and looked at, you know, what, what would be the trade off?
And I think where we got to then in kind of impact investing 2.0 and maybe we're even into 3.0 now was that it was much more nuanced.
So there's this idea of risk, return and impact.
And in some ways impact investments can bring things into portfolios that offer differentiation,
often non correlation in kind of traditional financial speak by being able to have access to investments that work with the base of the pyramid,
people that are making decisions that aren't so correlated with the market.
Things like affordable housing and education that are inversely correlated with the market.
And so creating portfolios,
traditional portfolios of any kind require that type of differentiation and that type of diversity within the portfolio to make it resilient.
And so there's, you know, a real sense to data coming out that shows that companies can do good while doing well.
In fact, the the data that we're seeing is continually now showing us that companies that
are focusing on things like sustainability and innovation and gender parity,
gender equality, whatever you want to call it, and treating their workers well,
are having fewer shocks to their to their social capital, in their financial capital.
So, you know, there's there's a variety of studies.
I think what I say, and you as students have probably heard me say, is that impact investing does not make more money than traditional investing.
But you can be a really good impact investor and you can have high returns and you can be a really terrible impact investor and have terrible returns.
It's a strategy. And what we know, we don't know if it outperforms.
We do know that it doesn't inherently underperform. MM So how has it evolved over the past ten years since that time has been coined?
Has it grown in popularity? And if so, like. How does that happen?
Do you think it's something to do with like an increased consumer and investor kind of need for maybe more transparent supply chain processes,
more fair trade, goods service, you know, just you know, people are more aware, I think,
now about the negative impacts that that consumption habits can have on other people and environment.
Absolutely. So it's absolutely grown. So the Global Impact Investing Network and originally with Jp morgan,
has done a survey every year for the past eight years and it's showed about 40% growth still underreported.
This last year was 228 billion. So probably, you know, somewhere around 350 billion this year.
It's still a tiny drop in the drop in the bucket.
It's it's underreported.
Those are that self-reported numbers in U.S. dollars and very skewed towards kind of Western funds that identify as, in fact, investors.
But the growing sense.
So another number there that's quite interesting is actually one in four professionally managed dollars have some sort of SSRI or ESG.
So environmental, social governance screen or you know, in fact, investing, which is a tiny bit.
But so in general, funds en masse are moving towards having some recognition of non-financial impact.
And I think that there is there's the groundswell of consumerism that is a piece of it.
But there is a real understanding at a corporate and at a financier level that disregarding these other indicators is actually at their own peril.
Yeah. So for instance, yesterday Lloyd's of London announced that they had another loss and that was their second year of losses.
And the reason was, is they had their models do not predict the level of catastrophe,
catastrophic events that are happening in the areas that they essentially insure.
And so, you know, large insurance companies have built massive.
Right. Some of the biggest companies in the world around financial models that don't work because of climate change.
And so there is an incentive for a whole portion of the market to all of a sudden try and figure out not just how do they reduce their risk,
how they actively change these these situations that are going to no longer be tenable for them.
And so, you know, I think there's that's one portion of the financial market.
And you see corporate survey after survey shows us that almost all CEOs see sustainability as something that is
required for them to exist as opposed to something that's kind of nice for them to have for the shareholders,
especially in the long term, exactly what it would mean now that everyone thinks long term.
So I think we've moved really from the shift of like, oh, there's this nice thing,
I'm going to do some stuff on the side, I'm going to give some money away having to build a school.
I'm going to do this to realising that we have huge amounts of capital that are creating negative harm to planet, to people,
and that cannot be changed through small things on the side that capital and the way in which that is
invested in the way in which that incentivises corporates and companies has to actually fundamentally change.
And I think it's this recognition of market failures and the, you know,
financial crisis 2008 was a great example for us to look and say we don't know how to price risk.
So yeah, so I think I guess the the there's a lot of scepticism at the moment around sort of CSR credit companies using,
you know, sort of greenwashing and marketing as a way to say, oh, we're doing good and it's not actually integral to that.
OPERATIONS So you think this is changing at the moment and it and it will change?
I do. So $30 trillion is going to be passed on from the baby boomers to millennials, more to in between that essentially to the next generations.
And in every survey from, you know, the Harvard Business Review to McKinsey,
millennials think that their investments can have impacts and they think that the company companies themselves should should prioritise impact.
And so, you know, whereas the need to do CSR, which, you know, is an area that I,
I don't really love working in because it's it's not an area that has any accountability within a firm.
So, you know, it's a small and a very precise quarterly doesn't sit within the strategy piece.
So, you know, that ability to make up for all of these kind of bad things that are created
with a small amount of money on the side is is increasingly seen as archaic.
Yeah. So, you know, you're a company that is a a company that's own, for instance, is actually a great example.
There was a large kind of piece in the New York Times about how these traditional fossil fuel families,
the younger the children within them, are all starting renewables companies.
And they're not doing it because they, you know, it's out of the goodness of their heart.
So, like, listen, in 30 years, my company's my family's business is not going to be around.
And we've actually hit there was a report that came out last week that said that we've actually,
in almost all parts of the US, in most parts of the world have hit period.
To the point where in the next five years it will be more expensive to produce fossil with most fossil fuel power as opposed to renewables.
Mm hmm. Yeah. So tell me a little bit more about blended financing.
So who is involved in that? Who are the investors like?
How does that work? Sure. So blended finance or as I call it, innovative finance, which is kind of a bit brighter than traditional.
So the term blended finance really came out of the development finance space,
and that was where you took private capital and you took public capital and
you put it together and then the whole was greater than the sum of the parts.
And so taking that approach and applying it to instead of just developing finance institutions into any institution so,
you know, anyone can be an innovative financier.
Banks impact investors, governments, developing finance institutions, corporate sesame, social enterprises, foundations, I mean, anyone.
And so the real the trick there is starting with an issue and issue area,
it can be an SDG, you know, hopefully it falls somewhere under one of the SDGs.
But something that's really important to a community, a set of communities, you know, a set of individuals,
and then designing what type of funding makes the most sense for to to address that issue.
And, you know, hopefully a lot of that funding will actually go to support people that are working on the ground.
You know, the know how to address that issue. And so the difference between innovative financing and kind of more traditional kind of just pure
impact investment into an SUV is that if you can create funding structures that allow organisations,
individuals initiatives to address these issues in different ways.
So flexible funding structures that are made up potentially of corporates and a foundation and government support.
And there's all different ways you can have guarantees. You could have different types of structures, you can have different types of payment terms.
But, you know, figuring out and saying, listen, farmers in East Africa suffer from not having insurance for their crops.
So how do we put together an insurance policy that makes sense?
That's not going to be using the exact same insurance model that works for large scale farmers in other parts of the world.
And so innovative financing says, well, how do we innovate around that?
To create a product that works for the end users, that solves a problem of theirs, potentially pulls in different players.
So Acre Africa has done this. They've used technology to drastically reduce the cost of insurance by using index insurance,
being able to use satellite imagery to geo locate farmers and be able to to tell
if they've had enough rainfall and automatically pay them if they have not.
And so by reducing the cost and then they sold that to seed companies instead of the farmers, they reduce the cost distribution.
So they've created this, you know, financing mechanism that works for the end consumer and then also solves a problem and uses different types.
So they have and basically it's a bunch of different financial partners in that.
And so saying that there are multiple entities interested in solving problems,
there's a lot of people that are interested in solving health care problems, financial inclusion.
So finding ways in which we can pull them together but create something that works for the
end consumer and continues to be evaluated about how it's working for the end consumer.
And then, you know, not in consumer can be in a semi, it can be an individual, it can be a government.
And that's what's fun and innovative financing. This is huge. It's across all these different sectors.
And it's a it's a very interesting area to work in. And from a retail perspective, would I be able to go and invest in an impact investment?
It's a great question and the answer is yes. So there is.
So the interestingly, the country that kind of came from behind on the front of this is actually the U.S. So there's a kind of you know,
and so wealth or not with Wealthsimple Well gosh, I actually have a poster that I did.
I listed all of these is on LinkedIn.
You can find it on my LinkedIn profile where I went through and did all these different things on retail investing.
I think that's it all the time. Those are all robo advisors that you're able to then create either individual.
So there's something you can do individually. There's a company down in South Africa called Sun Exchange that allows you to
buy portions of solar panels and then you get a return on the solar panels,
like little pieces you to buy a little solar panel and it gets installed. So so yes is the answer, but it's not enough yet.
You can do in the U.K. there's retail charity bonds that you can buy.
Yeah, great. So so going on from that, what are some of the major challenges and opportunities for the industry at the moment?
I know there's been a lot of talk about impact measurement. I just want you to tell us a bit about, you know, how what why is important?
Who is it? Who is it for? Is it. The time and the effort and is it possible to create a standard etc. measurement similar to accounting standards,
or do they have to be tailored to each situation? So both yes.
The answer and yes, it is very difficult. In fact, measurement is a huge piece of the ability of the industry to go forward.
So the thing to remember is that it's important for when you're an organisation or a fund
to collect data to understand how your end user essentially is evaluating your offering.
And so large technology companies, large companies do that every day.
They understand how we use things, how we consume. They want to know what we're doing to be able to better tailor their products.
And so in a lot of ways, really good impact data should be the same. So are you improving someone's livelihood?
Because by doing that, that kind of runs back into your impact thesis,
whether you're doing financial inclusion or health care, whatever you're doing, you're working with again, farmers.
I keep talking about agriculture because there's a lot of agriculture an impact.
But you know, if what you're setting out to do is improve livelihoods, improve access to health care, improve access to finance,
if you are not doing that, then likely the product or service that you are selling is not useful to your end users.
If you're selling a water product and people aren't actually using the water,
then they're not going to buy that product and likely others are not going to buy it.
So the trick with impact measurement is setting out collectable objective and subjective data.
So there's a couple of interesting developments here in headquartered out of the UK,
initially incubated and Bridges Ventures is a initiative called Impact Management Project and they've been
working on kind of a trying to be somewhat standardised way of thinking about impact across a set of dimensions.
And they've tried to do that with an industry wide initiative and have really tried to push forward some,
some ways of thinking that potentially allow us to compare different impact investments and investors.
Another interesting organisation and there's plenty, is a company that's spinning out of Acumen called Lean Data, and it was called Lean Data.
Well, it was and Acumen was actually headquartered here in the UK.
And what they're doing is they're doing surveys, cell phone surveys, and they're able to push out and actually collect data from,
you know, thousands, if not millions of consumers and be able to use that data.
And so there's and then I work with on the blockchain in the AI side,
multiple companies that are that are actually working to collect objective data
using Iot Internet of things from devices like clean cookstoves like like PV,
PV panels, so solar panels, solar PV and other things that can be monitored in that way.
So I think the shift that's happening, similar to what I said earlier,
is that we're seeing the value of this data increase and so will it be completely standardised?
I don't think so. And will we have standard ways, hopefully of collectivity?
Yes. And then, you know, hopefully reporting on it.
And I think we're moving in that direction. It's important to remember that financial markets took hundreds of years to get to the point
where IRR internal rate of return was something that was calculated in a standard way.
So, you know, we're at an early stage of this.
And I think that being able to show the link of that, those that data points, those that those data points to,
whether it's return growth sales, etc., also drives the willingness of organisations to collect it.
And so I think that the use of technology is going to be a huge game changer here and so it will potentially allow
us to collect much more objective data points and collect them in a way where they are repeatedly query able.
So you can ask different questions at the data points and get different answers.
And I think that's going to be important. We're still it's still a tedious process to get there.
The SDGs have been exceptionally, exceptionally valuable from a framework perspective, so getting people to at least talk about the same things.
So I think it's still it's still messy and it's not even close to standardised.
So we still have a ways to go. So, so what's your vision for the industry?
Where do you hope to see it in ten, 20 years time? So like on a broader scale, we want or I want an impact finance to be finance.
So financiers collecting data on gender, on inequality,
on access to affordable housing and energy being part of how they look at the whether they're looking at investors or at the LPs,
looking at the actual funds. But I think where we're going in the next kind of that time period is where we go into the fourth industrial revolution.
And we're looking at the ways in which technology affects people's lives.
And I think it's going to be both a use of private capital for, you know,
public impact as well as an understanding of the policy implications required to actually support communities.
So artificial intelligence is a big piece of this.
And so thinking about does artificial intelligence displace jobs, particularly in emerging markets where you have 50% unemployment or even,
you know, parts of Europe where you had 50% unemployment, you know, creating automation and the ability of a few individuals to own that automation.
So I think there's a broader conversation happening here around market failures and the the sense of traditional capitalist markets being able to be,
you know, an enabler of, you know, mobility within, within and communities and countries.
And so I think that this rise of being able to use private capital and different types of blended capital and corporates
and all these different players being able to work together towards social outcomes will have larger implications.
That's a great name to end on only. Thank you so much for joining us.
Snowden Probably. Thank you so much for joining us today.
We have a lot of great episodes coming up for this latest season of the Future of Business podcast.
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And until then, goodbye.