Impact Investing – An Opportunity to do “Good

Chris and I are capitalists. If that isn’t completely obvious by now (the name of this site should be a dead giveaway!) then you’re in the wrong place.

However, we aren’t heartless capitalists, greedy capitalists, capitalist pigs or any other derogatory or unethical variety of the species.

When we can invest and back entrepreneurs who are out there trying to bring about positive change, we’ll do it.

So, when I got to know one of our readers, Chip Feiss a bit better, I was intrigued enough to ask him to do an interview on his passion – Impact Investing.

What is this strange term? We’ll answer that in a moment.

First, who is Chip? Well, he’s the CEO of a boutique financial advisory firm, M2 that provides investment advice to corporations, municipalities, individuals and families. He’s also involved in venture capital and private equity.

Chip has been involved since the early days of Socially Responsible Investing (SRI) and the Social Venture Network (SVN). He has been an advisor to a number of venture philanthropy funds, Impact Investing entrepreneurs and businesses (a couple of which are mentioned below) as well as to family offices looking to build a strategy and presence in the Impact Investing space.

He’s also an alumni of the Thunderbird School of Global Management, a Harvard University MPA grad and also a Senior Fellow at the Harvard University Kennedy School of Government, where he worked on for-profit impact investing models to drive economic development and social change.

He formerly wrote a column for the Financial Times which focused on, you guessed it, Impact Investing.
Chip is joining us in Fiji and if I get enough Mai Tai’s in him he may even speak to our Meet Up crowd! Hear that Chip?

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Mark: I’m glad that you took the time to share your views on something you are so passionate about, it means a lot to me.

Chip: Thanks Mark. As one of your long-time readers I am always excited to learn about the new markets and opportunities opening up around the world that you guys are writing about. Places like Myanmar, Nepal and Mongolia.

I believe that this is an incredibly exciting time for investors and entrepreneurs to not only build great wealth and outstanding businesses, but also to help create and shape a “better world”.

As I read your posts I find myself thinking/dreaming of all the great, profitable opportunities to assist people in these countries to rise out of poverty and lead healthier more connected lives. The opportunities are truly massive.

Mark: Obviously we couldn’t agree more. We are amazed at how much opportunity we are seeing, regardless of the pervasive negativity the MSM keeps throwing our way.

Chip: It’s difficult to see the forest through the trees sometimes. Since the financial meltdown of 2008 most of us (with good reason) have been focused on the corruption in our financial system and the destruction that it has wrought around the globe. Is it possible however, that in the wreckage of the system lie the seeds of a much better one? A system that is focused on the needs of communities and is sustainable, rather than one that focuses on the bonuses of bankers?

The modern financial world is comprised of the private for-profit, public (government), and non-profit sectors, and for the most part the lines of each sector were strictly demarcated. Funds and opportunities did not flow across these boundaries with the exception of philanthropic giving. This is now beginning to change.

Today there is a blurring of the lines between these sectors brought on by the development of the burgeoning global movement known as Impact Investing.

Mark: Sounds exciting and at the same time a bit foreboding. So what is it?

Chip: At the moment there are a variety of definitions for Impact Investing. When I utilize this term I am speaking of investments intended to create positive impact in a variety of areas. These investments require the measurement of not only the traditional risk and return metric but also of their social and environmental performance.

The idea behind Impact Investing is not new. In the Western world it goes back at least to the seventeenth century Quakers who aligned their investments with their principles.

More recently in the late 1970’s we experienced the rise of socially responsible investing in which investors used a variety of social screens to help them invest in accordance with their values.

Mark: I know there are a ton of funds and specialized family offices out there that focus on investing in socially responsible businesses. How pervasive is it now?

Chip: Well, amazing but true…by 2007 nearly one out of every nine dollars under professional management in the US was invested using social screens.

Related Impact Investing is different from socially responsible investing. Whereas socially responsible investing is focused on using screens – primarily negative screens (a good example from the early days of SRI was, “did a company do business in South Africa and thus back a pro-aparthied government?”) on publicly traded companies to minimize negative impact.

To date, Impact Investing has been applied primarily in smaller non-publicly traded companies that are pro-actively creating positive financial, social and environmental benefit. As such, even though impact investing is growing it has accounted for a fraction of the investment dollars that SRI has.

I just want to be clear here…when I talk about Impact Investing I am not talking about philanthropy, charity or aid – I am speaking of for-profit investing.

I believe that your pal Doug Casey said something to the effect of, “If its worth doing it can/should be done for a profit.” I don’t fully subscribe to that, but I do believe that the capital markets are arguably the most powerful force for change (both positive and negative) on the planet, and that if you want to create large scale, sustainable economic development and social change then you need to be able to invest on a for-profit basis in enterprises that are working to create that change.

Mark: I would agree with your sentiment there Chip. I’ve heard Doug say that, and I see his point, but I don’t believe that EVERYTHING worth doing needs to be profit-driven. Although if there is no incentive other than the investor getting the warm-fuzzies, the amount of capital those types of opportunities attract will be limited.

Chip: Exactly, if you think about the hierarchy of available capital resources you quickly realize that philanthropic dollars are the most precious because people can only afford to give away so much money no matter how passionate they are about the issue or organization.

If however, those same people could invest in those organizations on a for-profit basis and get a decent return on their investment the allocation of dollars would increase substantially. That is where Impact Investing comes in: it represents the intersection of values and profits.

Mark: So what’s the fuel behind the recent surge in popularity of Impact Investing?

Chip: Well, as I mentioned earlier SRI has grown dramatically over the past 20 years, and over the same period the growth of NGO’s has been literally off the charts. I believe this growth is a direct reflection of many people’s frustrations and disillusionment with traditional business and government.
So there was already the recognition that the current system was failing us prior to the 2008 collapse. The financial meltdown provided more impetus for change. Impact Investing, while still in a nascent stage was a direct beneficiary of the fallout from 2008, as people from literally all corners of the globe began to re-evaluate the financial system, their role in the system and their investments.

The infrastructure of the impact investing sector is being developed. New corporate organizations are being designed such as B Corps and L3C’s which seek to protect both the financial interest of the investor and social mission of the venture. Its an exciting time, new business models are being created, unique funding sources are being developed as well as tools to evaluate social impact.

In addition social enterprise stock exchanges are in the planning stage in a number of countries as well as specialty Impact Investing equity funds, bonds and loan guarantees.

To date probably the best known impact investment is microfinance. Although now mired in controversy over some funds lending procedures and what is perceived to be predatory interest rates, over the past twenty years micro-loans have improved the lives of millions of the poorest people on the planet.

Mark: We tried to get an interview with a well-known French sovereign wealth fund-owned microfinance institution, but it’s founder and CEO had better things to do than explain to us why they charge 30% interest rates to the world’s poorest people.

Like you, I think microfinance can be an excellent tool, but when it’s used solely for profit with no concern for sustainability or outcome, it’s actually a weapon of mass destruction (laughs – but not because it’s funny).

Chip: That’s right. So, while there are many inspiring stories from all over the world, including the more developed OECD countries, the opportunities in the developing nations that you cover in your posts seem to be the easiest to spot.

These countries pretty much need everything and it’s cheaper to start a business there.

The risk is obviously different. The investor/entrepreneur has to consider different work values, levels of education, rule of law, technological sophistication and government support for business in each country. While Impact Investing is challenging and there have been no monster Google-size companies to date, there have been many successes.

A few that come to mind:

  • The cell phone is incredible technology and is being used in a variety of creative ways to tackle difficult issues.

In the belief that connectivity increased productivity, Iqbal Quadir founded Grammen phone in Bangladesh. Over an eight year period he brought 200,000 phones to Bangladesh’s poor rural villages. At one point 400 people were using each of the phones so he had brought connectivity to 80,000,000 people. His initial investors who had invested a total of $1,650,000 sold their stake eight years later for $33,000,000.

  • In India cell phones are currently being used for medical care in rural villages that have no access to physicians or hospitals.

Photographs are taken with the cell phone and those along with a written report are sent via the phone to doctors in places such as the Mayo Clinic for review and diagnosis.

  • In Africa cell phones using a Vodafone mobile banking application are used to provide mobile banking services in areas where people have no access to banks.
  • In Latin America a cell phone application to solve unemployment issues is being tested.

The phone is being utilized as a job bulletin board for both short term and long term jobs.
Aside from the use of cell phones there are numerous other inspiring stories:

  • In 2005, Mumbai, a city of almost 15,000,000 people (today about 20,000,000) did not have an adequate and reliable EMS and ambulance service.

That year Dial 1298 For Ambulance in Mumbai was launched with $400,000 of investor funds and one ambulance. By 2010 Dial 1298 For Ambulance had 240 ambulances and $80 million in government contracts to expand the service outside of Mumbai.

  • Until recently many subsistence farmers in Africa have had to sell their produce the day they harvested it due to lack of storage facilities.

Investor funds are being used to build warehouses and form agricultural co-ops. This will give the farmers more control over their business. It allows them to choose when they want to sell their crops and enables them to negotiate for a better price.

  • In the USA and UK impact investment dollars are going into low income housing development and feeding school children nutritious meals.

Impact investing presents the opportunity to do both well and good. The message is appealing to many as can be seen on college campuses across the country where social enterprise courses are the amongst the most popular.

This popularity is by no means limited to college students. A banker at JP Morgan decided to start a social finance unit at the bank and within a week had received 1,000 calls and emails from others at the bank wanting to get involved.

Mark: I think people are inherently good, and they want to help. Like you said earlier, making money is not the be-all-end-all. It’s not really fun, the fun part is making a difference, contributing, changing things, leaving your mark.

Chip: Right! Look, Impact Investing is not easy. As Larry Summers wrote, “It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should to.”

While I also believe that it is hard to do well/and or good, I am encouraged by Impact Investing, which appeals to a larger part of the human spirit and experience than some of the traditional business models. It is not easy but the rewards in terms of financial gain as well as the satisfaction derived from investing in something you feel is important can be great.

Today, Impact Investing is not meant to replace traditional investing but it is starting to influence it. A number of the large traditional investment banks are looking at allocating capital to Impact Investing funds, and Carlyle, the giant private equity firm, has established a sustainable investment practice. Can Impact Investing be a source of not only great profitable investment and or companies but serve as driving force a better future?

Mark: I hope, and I think so! Go to a place like Myanmar. Walk the streets and look at the people, look at the children and tell me who could come out of there NOT wanting to help in some way. We are all human beings.

These people are striving to improve their lives, and what seems like the smallest thing to us, those who have not had to be denied, is life-changing in these places. Doing good in these places will have multiple benefits, financial and otherwise, I’m sure of it.

Chip: As Wayne Gretzky famously said, “I skate to where the puck will be not where it is.” By the same token we can choose to work in the world the way it is or in a way that fosters our vision of where we would like it to be.

Mark: I love that quote. It’s what we are trying to do with our own investing, by focusing on Frontier Markets where our capital can make the biggest difference.

It’s also why we are so focused on Fiji as a destination for our version of a sustainable and resilient community. In a place like that we can REALLY impact people’s lives. It’s such a small place that you can see your impact almost immediately. It’s awesome!

We’re very happy by the way that you have decided to join us in November!

Chip: I wouldn’t miss it. Meanwhile Mark, if any of your readers are involved in an impact investment or are thinking of starting one and would like to talk, I would be happy to do so and they should feel free to contact me.

Mark: Thanks Chip, see you soon.

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Chip has been a great confidant and sounding board for me over the last several months. Getting to know him a bit has been a pleasure.

It’s why we’ve welcomed him on as the first member of our outside Board of Advisors. We want to surround ourselves with people like Chip: smart, ethical, conscience-driven capitalists that have a bigger vision.

If you want to pick Chip’s brain or just get his thoughts on an idea, drop me a note and I’ll put you in touch with him directly.

- Mark

This is the basis for the most important critique of microfinance. The poor are not entrepreneurs. The idea that more than a few will turn tiny loans into a viable business is simply unrealistic.” - Ian Smillie

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