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The Future of business. Future of business, future of business.

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It's more global and more decentralised, making sure that enterprises that are a lot more responsible.

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Smart cities. More collaboration. Consumer driven productivity.

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Environmental and social responsibility. Global human centred.

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Purposeful individualised. Automation. Big Data.

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Climate Change. Space Exploration. Renewable Energy.

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Information security. Exciting and digital. Hello and welcome to the Future of Business Podcast.

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I'm your host, Alison McArthur. In this episode we'll be talking about the rise of impact investing.

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Our guest today, only Peyton Power, has been working in the impact investing space since the early days.

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Helping navigate fact from fiction in this fast growing sector.

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We caught up with only in Oxford to learn more about how investors are using their capital to generate both social and financial returns.

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So we thank you very much for joining us on the podcast today.

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So we'll start with a simple or maybe not so simple question.

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What is impact investing? I mean, it seems to be like this hot new chat time that suddenly sprung up from nowhere.

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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?

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So it has existed for a long time. So we can actually go back to the 1600s with the Quakers.

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We're putting money into what we would probably call development finance.

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Now, it essentially was, you know, impact and through to all the way even can go further back to tithing and, you know,

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essentially tied often to religious practices around being able to put money into people or projects that have,

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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,

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Bellagio estate, whatever it is, Bellagio, something that's owned by the Rockefeller Foundation.

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And it was at a meeting of high level individuals.

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And so they coined this term impact investing and and what it refers to as investments

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that have positive social environmental impact as well as financial return.

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And the thing that differentiates impact investors from traditional investors is that they have the intention to create impact,

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and then they measure that impact. So those two things together are what differentiate.

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All investors have impact, positive and negative.

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But without that intentionality and without that measurement, then, you know, it's not really impact investing.

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So our social impact and financial returns in lockstep with impact investing or can they be intention?

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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.

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And there were people that were obviously doing impact investing before 2007 and that and very still,

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we have impact investors that, you know, have been around for 20 years or 30 years.

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In some cases, development financiers have been doing this for 50 or 60 years.

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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.

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So how much social impact can we get for a reduction in how much financial return?

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And I'm embarrassed to say I wrote pieces on this and looked at, you know, what, what would be the trade off?

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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.

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So there's this idea of risk, return and impact.

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And in some ways impact investments can bring things into portfolios that offer differentiation,

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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,

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people that are making decisions that aren't so correlated with the market.

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Things like affordable housing and education that are inversely correlated with the market.

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And so creating portfolios,

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traditional portfolios of any kind require that type of differentiation and that type of diversity within the portfolio to make it resilient.

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And so there's, you know, a real sense to data coming out that shows that companies can do good while doing well.

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In fact, the the data that we're seeing is continually now showing us that companies that

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are focusing on things like sustainability and innovation and gender parity,

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gender equality, whatever you want to call it, and treating their workers well,

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are having fewer shocks to their to their social capital, in their financial capital.

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So, you know, there's there's a variety of studies.

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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.

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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.

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It's a strategy. And what we know, we don't know if it outperforms.

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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?

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Has it grown in popularity? And if so, like. How does that happen?

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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,

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more fair trade, goods service, you know, just you know, people are more aware, I think,

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now about the negative impacts that that consumption habits can have on other people and environment.

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Absolutely. So it's absolutely grown. So the Global Impact Investing Network and originally with Jp morgan,

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has done a survey every year for the past eight years and it's showed about 40% growth still underreported.

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This last year was 228 billion. So probably, you know, somewhere around 350 billion this year.

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It's still a tiny drop in the drop in the bucket.

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It's it's underreported.

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Those are that self-reported numbers in U.S. dollars and very skewed towards kind of Western funds that identify as, in fact, investors.

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But the growing sense.

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So another number there that's quite interesting is actually one in four professionally managed dollars have some sort of SSRI or ESG.

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So environmental, social governance screen or you know, in fact, investing, which is a tiny bit.

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But so in general, funds en masse are moving towards having some recognition of non-financial impact.

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And I think that there is there's the groundswell of consumerism that is a piece of it.

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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.

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Yeah. So for instance, yesterday Lloyd's of London announced that they had another loss and that was their second year of losses.

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And the reason was, is they had their models do not predict the level of catastrophe,

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catastrophic events that are happening in the areas that they essentially insure.

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And so, you know, large insurance companies have built massive.

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Right. Some of the biggest companies in the world around financial models that don't work because of climate change.

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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,

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how they actively change these these situations that are going to no longer be tenable for them.

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And so, you know, I think there's that's one portion of the financial market.

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And you see corporate survey after survey shows us that almost all CEOs see sustainability as something that is

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required for them to exist as opposed to something that's kind of nice for them to have for the shareholders,

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especially in the long term, exactly what it would mean now that everyone thinks long term.

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So I think we've moved really from the shift of like, oh, there's this nice thing,

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I'm going to do some stuff on the side, I'm going to give some money away having to build a school.

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I'm going to do this to realising that we have huge amounts of capital that are creating negative harm to planet, to people,

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and that cannot be changed through small things on the side that capital and the way in which that is

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invested in the way in which that incentivises corporates and companies has to actually fundamentally change.

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And I think it's this recognition of market failures and the, you know,

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financial crisis 2008 was a great example for us to look and say we don't know how to price risk.

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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,

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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.

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OPERATIONS So you think this is changing at the moment and it and it will change?

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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.

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And in every survey from, you know, the Harvard Business Review to McKinsey,

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millennials think that their investments can have impacts and they think that the company companies themselves should should prioritise impact.

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And so, you know, whereas the need to do CSR, which, you know, is an area that I,

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I don't really love working in because it's it's not an area that has any accountability within a firm.

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So, you know, it's a small and a very precise quarterly doesn't sit within the strategy piece.

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So, you know, that ability to make up for all of these kind of bad things that are created

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with a small amount of money on the side is is increasingly seen as archaic.

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Yeah. So, you know, you're a company that is a a company that's own, for instance, is actually a great example.

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There was a large kind of piece in the New York Times about how these traditional fossil fuel families,

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the younger the children within them, are all starting renewables companies.

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And they're not doing it because they, you know, it's out of the goodness of their heart.

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So, like, listen, in 30 years, my company's my family's business is not going to be around.

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And we've actually hit there was a report that came out last week that said that we've actually,

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in almost all parts of the US, in most parts of the world have hit period.

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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.

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Mm hmm. Yeah. So tell me a little bit more about blended financing.

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So who is involved in that? Who are the investors like?

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How does that work? Sure. So blended finance or as I call it, innovative finance, which is kind of a bit brighter than traditional.

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So the term blended finance really came out of the development finance space,

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and that was where you took private capital and you took public capital and

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you put it together and then the whole was greater than the sum of the parts.

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And so taking that approach and applying it to instead of just developing finance institutions into any institution so,

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you know, anyone can be an innovative financier.

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Banks impact investors, governments, developing finance institutions, corporate sesame, social enterprises, foundations, I mean, anyone.

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And so the real the trick there is starting with an issue and issue area,

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it can be an SDG, you know, hopefully it falls somewhere under one of the SDGs.

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But something that's really important to a community, a set of communities, you know, a set of individuals,

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and then designing what type of funding makes the most sense for to to address that issue.

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And, you know, hopefully a lot of that funding will actually go to support people that are working on the ground.

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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

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impact investment into an SUV is that if you can create funding structures that allow organisations,

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individuals initiatives to address these issues in different ways.

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So flexible funding structures that are made up potentially of corporates and a foundation and government support.

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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.

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But, you know, figuring out and saying, listen, farmers in East Africa suffer from not having insurance for their crops.

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So how do we put together an insurance policy that makes sense?

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That's not going to be using the exact same insurance model that works for large scale farmers in other parts of the world.

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And so innovative financing says, well, how do we innovate around that?

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To create a product that works for the end users, that solves a problem of theirs, potentially pulls in different players.

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So Acre Africa has done this. They've used technology to drastically reduce the cost of insurance by using index insurance,

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being able to use satellite imagery to geo locate farmers and be able to to tell

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if they've had enough rainfall and automatically pay them if they have not.

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And so by reducing the cost and then they sold that to seed companies instead of the farmers, they reduce the cost distribution.

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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.

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So they have and basically it's a bunch of different financial partners in that.

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And so saying that there are multiple entities interested in solving problems,

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there's a lot of people that are interested in solving health care problems, financial inclusion.

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So finding ways in which we can pull them together but create something that works for the

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end consumer and continues to be evaluated about how it's working for the end consumer.

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And then, you know, not in consumer can be in a semi, it can be an individual, it can be a government.

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And that's what's fun and innovative financing. This is huge. It's across all these different sectors.

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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?

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It's a great question and the answer is yes. So there is.

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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,

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and so wealth or not with Wealthsimple Well gosh, I actually have a poster that I did.

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I listed all of these is on LinkedIn.

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You can find it on my LinkedIn profile where I went through and did all these different things on retail investing.

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I think that's it all the time. Those are all robo advisors that you're able to then create either individual.

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So there's something you can do individually. There's a company down in South Africa called Sun Exchange that allows you to

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buy portions of solar panels and then you get a return on the solar panels,

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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.

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You can do in the U.K. there's retail charity bonds that you can buy.

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Yeah, great. So so going on from that, what are some of the major challenges and opportunities for the industry at the moment?

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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?

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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,

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or do they have to be tailored to each situation? So both yes.

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The answer and yes, it is very difficult. In fact, measurement is a huge piece of the ability of the industry to go forward.

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So the thing to remember is that it's important for when you're an organisation or a fund

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to collect data to understand how your end user essentially is evaluating your offering.

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And so large technology companies, large companies do that every day.

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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.

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And so in a lot of ways, really good impact data should be the same. So are you improving someone's livelihood?

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Because by doing that, that kind of runs back into your impact thesis,

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whether you're doing financial inclusion or health care, whatever you're doing, you're working with again, farmers.

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I keep talking about agriculture because there's a lot of agriculture an impact.

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But you know, if what you're setting out to do is improve livelihoods, improve access to health care, improve access to finance,

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if you are not doing that, then likely the product or service that you are selling is not useful to your end users.

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If you're selling a water product and people aren't actually using the water,

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then they're not going to buy that product and likely others are not going to buy it.

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So the trick with impact measurement is setting out collectable objective and subjective data.

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So there's a couple of interesting developments here in headquartered out of the UK,

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initially incubated and Bridges Ventures is a initiative called Impact Management Project and they've been

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working on kind of a trying to be somewhat standardised way of thinking about impact across a set of dimensions.

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And they've tried to do that with an industry wide initiative and have really tried to push forward some,

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some ways of thinking that potentially allow us to compare different impact investments and investors.

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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.

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Well, it was and Acumen was actually headquartered here in the UK.

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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,

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you know, thousands, if not millions of consumers and be able to use that data.

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And so there's and then I work with on the blockchain in the AI side,

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multiple companies that are that are actually working to collect objective data

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using Iot Internet of things from devices like clean cookstoves like like PV,

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PV panels, so solar panels, solar PV and other things that can be monitored in that way.

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So I think the shift that's happening, similar to what I said earlier,

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is that we're seeing the value of this data increase and so will it be completely standardised?

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I don't think so. And will we have standard ways, hopefully of collectivity?

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Yes. And then, you know, hopefully reporting on it.

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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

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where IRR internal rate of return was something that was calculated in a standard way.

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So, you know, we're at an early stage of this.

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And I think that being able to show the link of that, those that data points, those that those data points to,

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whether it's return growth sales, etc., also drives the willingness of organisations to collect it.

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And so I think that the use of technology is going to be a huge game changer here and so it will potentially allow

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us to collect much more objective data points and collect them in a way where they are repeatedly query able.

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So you can ask different questions at the data points and get different answers.

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And I think that's going to be important. We're still it's still a tedious process to get there.

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The SDGs have been exceptionally, exceptionally valuable from a framework perspective, so getting people to at least talk about the same things.

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So I think it's still it's still messy and it's not even close to standardised.

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So we still have a ways to go. So, so what's your vision for the industry?

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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.

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So financiers collecting data on gender, on inequality,

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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,

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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.

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And we're looking at the ways in which technology affects people's lives.

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And I think it's going to be both a use of private capital for, you know,

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public impact as well as an understanding of the policy implications required to actually support communities.

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So artificial intelligence is a big piece of this.

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And so thinking about does artificial intelligence displace jobs, particularly in emerging markets where you have 50% unemployment or even,

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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.

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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,

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you know, an enabler of, you know, mobility within, within and communities and countries.

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And so I think that this rise of being able to use private capital and different types of blended capital and corporates

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and all these different players being able to work together towards social outcomes will have larger implications.

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That's a great name to end on only. Thank you so much for joining us.

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Snowden Probably. Thank you so much for joining us today.

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We have a lot of great episodes coming up for this latest season of the Future of Business podcast.

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So do subscribe on iTunes to make sure you get the latest interviews and analysis from Oxford Side Business School.

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If you have any comments or suggestions, then drop us an email at SBC Podcasts at Oxted or AC UK.

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We would love to hear from you. We'll be bringing you a new episode in just a couple of weeks time.

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And until then, goodbye.