The Global Impact Investment Network defines impact investments as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.” Few people understand that concept better than Jed Emerson.
A recognized international leader in the field of strategic philanthropy and impact investing, Emerson has spent more than two decades exploring how capital investment strategies may be executed to create multiple returns. Currently, he is Chief Impact Strategist at ImpactAssets, a senior fellow with Heidelberg University’s Center for Social Investing, and a senior advisor to the Sterling Group in Hong Kong. In 2011, he co-authored the book, Impact Investing: Transforming How We Make Money While Making A Difference, the first book published on the topic of impact investing. We caught up with Emerson to discuss how impact investors can help developing market entrepreneurs increase their economic, environmental, and social impacts.
1) If you were in an elevator with a promising developing country environmental entrepreneur, what would be your advice on how to lock-in investment (whether from the traditional or impact investment community)?
The one piece of advice I would offer would be to remember that fortune favors the prepared mind. The “luck” of finding that right investor or the right connection is not simply a function of working hard to be at the right event, conference, or meeting, but rather of being fully prepared to capitalize on the right event, conference, or meeting—and truly understanding exactly who your audience is and what they are capable of doing for you.
I’m always a little surprised (given the amount of information available on how to prepare a proper business case or develop a compelling analysis of a market opportunity) how many entrepreneurs seem to fall back on passion or ambition and are disappointed when their forward momentum is not enough to carry potential investors along with them. You have to kiss a lot of frogs to find the right investor prince, but many entrepreneurs spend a lot of time kissing the wrong types of frogs in their quest for capital. A deeper understanding of an investor would help the entrepreneur understand whether or not there’s a proper fit between the type of capital under someone’s control and the type of venture being offered. In the extreme, one wouldn’t take an early stage start-up to a public pension fund for funding. Too many entrepreneurs are asking the “wrong” asset owners for investments they simply aren’t in a position to make.
2) Your recent report, The Six Dynamics of Impact Investing, talks about the rise of impact investment funds, but notes that challenges persist in generating dealflow, creating product demand, closing deals, working with companies, and managing exit strategies. Do you see a role for business accelerators like New Ventures in helping funds address these challenges?
That report is just the most recent in what will be a number of offerings. (ImpactAssets is joining with InSight at Pacific Community Ventures and Duke University’s Center for the Advancement of Social Entrepreneurship (CASE) to produce a series of reports in partnership with many of the leading impact investment firms around the world). As we reflect upon the positive dynamics of impact investing, supporting the expansion of effective, sustainable companies becomes critical. Therefore, expansion of business accelerators as well as other intermediaries offering support to entrepreneurs will be critical to the long-term success of impact investing. These types of capacity-building entities assist founders and managers in building the operating abilities of companies and getting them to the stage where outside investors can seriously consider financing them.
The “trick” in this, however, is that we should not only be focusing upon expanding the work of accelerators. Rather, we need to look at the larger ecosystem within which individual companies, accelerators, and various types of investors all operate in order to see where gaps exist and resources need to be applied. The Omidyar Network’s recent analysis asks us to take a sector-level approach to our work. While we will all continue to invest in individual entrepreneurs and funds, having that larger perspective—and building sectors as a whole—will also be a part of our future success.
3) The impact investment industry seems to have a stronger focus on social objectives than environmental ones (a case illustrated in the GIIN and JP Morgan’s 2011 report, Insight into the Impact Investment Market). As the world’s population expands and natural resources become increasingly constrained, do you think we’ll see any shift in this balance?
At the risk of sounding like I think this is just a question of semantics, I guess it depends upon how one defines what impact investing is and what falls under that category of investing. For example, my current focus is working with family offices who are “all-in” impact investors—meaning all of their assets will be managed for impact. That means engaging in direct deals, fixed-income vehicles, funds, and sustainable/responsible public equity investing—viewing it all through the impact lens. I think of this as “total portfolio management,” or what has more recently been called “total portfolio activation.” When one takes this approach to understanding the investible universe, you’re looking at a host of opportunities that include a very large number of environmental and sustainable investment strategies. I realize I’m only talking with folks who are interested in the total performance of their portfolios, but I think notions of either social or environmental approaches will fade. Growing numbers of investors will seek to maximize the total, blended value of their portfolio and assess returns on the basis of social and environmental impact—not either or.
4) In the New Ventures publication, Voices of the Entrepreneurs, entrepreneurs spoke about the slow pace of impact investors. Luis Felipe Avella Villegas, founder and CEO of Factoría Quinoa in Colombia, said, “The world of impact investment is so slow compared to the world of traditional investors. And this is not good for creating results and supporting companies like ours…because when the company is in this stage of growth, we need to move quickly with everyone in the chain. The investor can’t say to us, ‘I really like your product, I love your project, but I want to wait maybe one or two years.’ Because that does not work.” If you could respond to Luis Felipe, what would you say?
I would say, “I feel your pain—but I’m dancing as fast as I can!” Challenging investors to mobilize more investment funds in support of solid businesses is a key part of our field’s accountability system. Yet at the same time, we need to recognize that just as “traditional investing” did not emerge whole-cloth, but rather evolved over numerous decades, impact investing must also be given the time to emerge in a way that is effective—not only for moving money, but for moving smart money into the right opportunities. Traditional investors—who know full well how hard making effective direct investments can be—have it easy compared with impact investors in that they are accountable for only one thing: financial performance.
When you’re looking for investment opportunities that actively manage multiple levels of firm performance (financial, environmental, and social aspects of firm value creation) and you don’t have “off-the-shelf” tools to guide you—and must overcome the “finance first” mindset of traditional investors—then we need to understand this is not something that will happen effectively in a matter of months or a few short years. We are still building our tools and practices. It is for this reason I’ve committed to dialing back my time spent talking about impact investing and ramp up my time working with family offices actually doing impact investing. The Luises of this world need not only capital, but smart capital invested on the right terms with a deep understanding of the challenges faced by today’s social entrepreneurs. We will get there—but we need to get there with integrity and a depth of knowledge that limits our failures and has the greatest promise of optimizing our successes.