UN Sustainable Development Goals open the door to more impact investing

The UN Sustainable Development Goals (SDGs) agreed in September 2015 are causing an uproar in the world of responsible investment. These are the 17 SDGs that were agreed and adopted by world leaders as the means to mobilise all efforts to end poverty, fight inequalities and climate change while ensuring that no one is left behind. While the goals are not legally binding, governments are expected to take ownership and put in place specific frameworks for their achievement.

One of the stamps of approval to this framing of important social and environmental issues has come from the investment world, including major institutional investors such as Dutch pension funds now proclaiming that a major portion of their assets will require investment returns as well as a direct link to specific SDGs.

Mainstreaming ESG and impact investing

This endorsement by major global investors is laudable. In our view it represents another clear example of the mainstreaming of ESG (environmental, social and governance factors) and impact investing. However, it also presents a direct risk for cynicism by the beneficiaries of their assets if investors dilute the SDGs too much in their approach in order to link their investments to specific outcomes.

Therefore, we applaud and at the same time remain cautious as we look across asset classes and how to best link them to the specific goals identified by the UN. The most tangible asset classes to achieve demonstrable social and environmental outcomes thus far have been in alternatives as evidenced by green real assets or social impact investing in private equity.

Growing investor demand further driven by the SDGs

While impact investing and SDGs are still new on the horizon, investor demand is quickly growing and moving into larger, more liquid asset classes. For example, green bonds have provided larger tickets and liquidity for the measurement of SDGs such as Clean Water (6), Clean Energy (7) and Climate Action (13). The direction of travel is clear and the next phase of responsible investment evolution is impact investing.

The traditional area for ESG investors has been in public equities. For impact investing, it has been in alternatives. The demand for SDGs in public equities is now starting to emerge and will bridge these two worlds. In order to maintain integrity, products and services should be considered that go beyond a simple analysis of a carbon footprint compared to a benchmark. This will become the standard for client expectations, but will not necessarily meet the needs of sincerity around SDG outcomes.

SDGs create a doorway to impact investing in public equities

Two illustrations come to mind in how to make public equities relevant around SDGs and in line with an impact investing philosophy. If we take quantitative equity, one can imagine a portfolio construction process which focuses on holdings that can demonstrate how they are contributing to a lower carbon future through their products and services and business operations. Metrics such as carbon emissions saved and green share of portfolios can be used for this analysis. These are steps to demonstrate that it’s not just business-as-usual portfolio construction, and not just about following a low carbon index. This is active portfolio management towards an SDG outcome while ensuring financial returns.

Kathryn McDonald, Head of Sustainable Investing at AXA IM Rosenberg Equities, commented:  “We believe that publically traded equity investing can act as complement to traditional impact investing. The breadth of the publically traded market, and the capacity offered by quantitative equity investing in particular, allows asset owners to put significant AUM to work to really move the needle on impact goals.

“Looking carefully at several of the SDGs, we believe that we can build targeted, listed equity portfolios that speak directly to specific investor goals. Importantly, compelling financial returns are a must – without those investors will not stick with ‘listed impact’ approaches for long.” Read more →

How the Future of Impact Investing Will Affect Investors

The World Economic Forum has predicted the impact investment market will grow to $500 billion by 2020. Other analysts place the figure closer to $1 trillion. Despite all the enthusiasm surrounding impact investing, some financial advisors remain uninformed. According to a CFA Institute report, 66% of advisors admitted to being unfamiliar with the practice. The continued growth of impact investing will depend on educating financial advisors and investors.

A major reason for this expected growth is the impending transfer of wealth from parents to their children. Millennials and Generation Xers stand to inherit between $30 and $40 trillion dollars from the baby boomer generation. The magnitude of this wealth transfer is unmatched by previous generations. Beyond simply the size of the inheritance, Millennials have different priorities than the generations before them. Younger investors seek investments that yield a social return, as well as a financial one.

When asked about the primary purpose of business, 36% of Millennials selected “Improve Society” as their answer. Other answers included “Enable Progress,” which was chosen by 25% of participants, and “Create Wealth,” which was picked only 15% of the time (Deloitte Survey, 2014).

In the past, investments in emerging or non-traditional markets were viewed as exceedingly risky. A lack of transparency and available information discouraged investors from exploring opportunities abroad. The digital age has changed that. Enhanced connectivity now makes it possible for investors to act wisely when investing in emerging markets. Moreover, the credit ratings in many developing nations—such as Mexico and Brazil—have improved as governments exercise greater fiscal responsibility. This development creates more opportunity for impact investing.

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‘Investing for Good’ Gains Appeal Amid Rocky Tech Startup Market

VCs see risk in emerging markets, but they should also be seeing huge potential profits.

As valuations flounder for Silicon Valley startups once worth billions of dollars, investor interest is on the rise in startups with both financial and social benefits, such as healthcare software for poor communities or low cost solar panels for homes.

So-called “impact investing” rose to $15.2 billion globally last year from $10.6 billion in 2014, according to a recent report by the Global Impact Investing Network. The figure includes several types of investment, from funds to foundations, which intend to generate social and financial returns.

The group expects a 16% rise in 2016. The change reflects investor concern with current valuations of more mainstream technology startups, a desire to help by some investors and a broadening definition of social-good startups. There is also growing sentiment that the rise of mobile technology will allow for profitable upstarts in parts of the world relatively untouched by Silicon Valley.

Earlier this year Union Square Ventures Partner Fred Wilson called the developing world “the next whitespace” for venture capital, pointing to 2.5 billion people poised to adopt smartphones.

Altruism and Profits for Kickstarter the Public Benefit Corporation

Big financial institutions such as Bank of America  BAC -7.34%  and JPMorgan Chase  JPM -6.95%  are investing, seeing rural communities and emerging markets as potential customers for financial services.

The drop in valuations for tech industry darlings that do “things my mom used to do for me” was a “pivotal wake up” for investors, said Doug Galen, chief executive of RippleWorks, which provides advisers for entrepreneurs in the developing world.

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Nordea Bank launches crowdfunding platform in Finland

The Nordic financial services group offers a technology bringing together investors and startup businesses

The Finnish arm of Sweden’s Nordea Bank will be the first Nordic bank to offer businesses access to the crowdfunding market by launching a technology platform in the summer of 2016.

The technology will enable investors to provide capital for growing businesses through automated processes – a major change for a bank as it will not be providing the capital but enabling other organisations or individuals to do so.

Startup businesses are increasingly turning to crowds for financing – the European crowdfunding market topped €6bn in 2015.

“Digitisation is transforming the banking industry and we want to be part of that transformation,” Topi Manner, CEO of Nordea Bank Finland, told Computer Weekly. “We will offer startups and growth companies the chance to find funding through a digital platform and bring together investors and companies in need of financing.”

The New Reality of Venture Capital

Disconnect between value creation and capture

The venture capital industry creates value that far outweighs the dollars allocated to it. But ten year returns to investors haven’t reflected that fact.

Innovation presents opportunities to solve customer problems more effectively and efficiently. But creating solutions that don’t yet exist involves a high degree of uncertainty. Usually, you need to spend a considerable amount of time and money before you know your efforts are going to pan out. That’s where risk capital comes into play; private investors invest money with the hopes of earning outsized returns to account for the level of risk they’re taking

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Source: PricewaterhouseCoopers/National Venture Capital Association

Venture Capital is one of the most important sources of risk capital around. Limited Partners (LPs) commit money to venture capital funds managed by General Partners (GPs). In aggregate, US GPs put roughly $25 billion to work every year. That might sound like a lot of money, but it’s less than 0.2% of US GDP.

Yet that 0.2% has been key in creating companies that account for 21% of the US GDP, and over 11% of private sector jobs (read the report). A tiny fraction of GDP invested by venture firms every year has been instrumental in creating more than one-fifth of the value in our economy.

Of course, venture financing isn’t the only funding source most of these successful companies have used to get where they are. After getting their venture dollars, many have taken in money from banks, mezzanine funds, and public offerings. But for most of these companies, it was venture financing that made them big; by the time they qualify for later-stage funding events, their valuations are often huge.

Clearly, venture capital investing results in tremendous asset value creation, particularly when compared to the dollar inputs.

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