Report Impact Investing

8/3/2019 Report Impact Investing

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This is Africa37

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From philanthropy to profit :

The evolution of socially

responsible investment

Measuring impact:How industry bodies and

investors are tryingto gauge social return

The full report:Investors remain unconvinced

that social impact enhancesfinancial returns

This is Africa37

IMPACTINVESTING

Special Report

THIS REPORT WASFINANCIALLY SUPPORTEDBY THE ROCKEFELLERFOUNDATION



This is Africa This is Afric

THE BRIDGEBETWEEN

PHILANTHROPY AND PROFIT

Impact investing, which aims to solvesocial or enviromental problems while

generating a proft, is on the rise andstarting to attract institutional investors

rather than “service to the community” or“environmental performance”.

Socially Responsible Investing has alsoentered the mainstream. Initially SRI justinvolved ‘negative screening’, the removingof ‘sin stocks’ like tobacco and pornographyfrom one’s portfolio. Now ‘positive screen-ing’, including companies that promotesocial or environmental sustainability, is becoming more popular. Despite the reces-sion, assets under management by SRI funds

in Europe rose by 41 percent to $107bn inthe 12 months to June this year, accordingto research by Vigeo and Morningstar.

These developments have been in-spired both by a more mainstream ethicalapproach to business and nance, and bysheer pragmatism. The Skoll Foundation,like many, believes “that companies that donot acknowledge and manage their environ-mental, social and governance risks are ata signicant long-term nancial disadvan-tage.”

As resources become scarcer and West-ern consumers more values-driven this view

While announcing his vision fora new ‘creative capitalism’ atthe World Economic Forum in2008, Bill Gates observed that“there are two great forces of human nature: self-interest

and caring for others”. Historically, theseforces, especially when ascribed to nanceand philanthropy, have been considered in-compatible.

The recent rise of impact investing – de-

ploying capital to support enterprises thatgenerate social or environmental impact as well as a nancial return – does however rep-resent a convergence of these once polarisedconcerns.

Over the last few decades, addressingsocial and environmental challenges has be-come progressively more aligned with nan-cial return. Since its emergence in the 1970s,Corporate Social Responsibility, or CSR, has become a household acronym. It is now al-most impossible to nd an annual report of any big international company that justiesthe rm’s existence solely in terms of prot,

is more widely held.Meanwhile, in the international devel-

opment sphere, traditionally regarded asthe domain of governments and charities,the private sector is being asked to take onmore responsibility. Private sector rigourand transparency is also more widespread.

In October Andrew Mitchell, UK Secre-tary of State for International Development,launched “a new DFID culture of private sec-tor-led development”. “I want DFID to learn

from business” he said, and to “inject new, business-savvy DNA into the department.” This trend is also apparent among phi-

lanthropists and foundations. “Market-basedsolutions to poverty” is now a key mantra fororganisations such as the Clinton and GatesFoundations. Former champion of aid SirBob Geldof is trying to raise $1bn for privateequity venture 8 Miles that will focus onagribusinesses, nancial services and tele-communications in sub-Saharan Africa.

Impact investing represents a comingtogether of these shifts in attitude. Accord-ing to the Global Impact Investing Network– “impact investments aim to solve social orenvironmental challenges while generatingnancial prot”. As such they are both amore proactive form of SRI and a more en-trepreneurial, private sector-led approach totackling poverty and other social challenges.

Broadly, investors fall into two catego-ries: Firstly, “Impact rst” investors, whoaim to maximise social and environmentalimpact and are prepared to accept belowmarket-rate returns. These are investors without duciary responsibilities who willoften use non-prot vehicles such as the Acumen Fund, E+Co and Root Capital. Onthe other side, there has been a recent surge

in “Finance First” investors. These tend to becommercial investors who seek investment vehicles that offer market-rate returns whilesecondarily generating social or environ-mental impact.

Investments can range from E+CO investing $270,000 worth of debt in a West African company that manufactures energy-efcient cooking stoves, to TIAA-CREF, a vastUS pension fund, investing $40m into a mi-cronance equity fund.

This form of investing is not essentiallynew. Development nance institutions,such as the IFC and the UK’s CDC have

LEFT: A grocery store inMonrovia, Liberia

P H O T O : C O R B I S

BY PADDY PARTRIDGE

Special Report: Impact investing




3 This is Africa This is Afric

been involved for at least 50 years. They havedemonstrated decent prots through high-risk, development-orientated investmentsin emerging markets. Mohammed Yunusfamously founded the Grameen Bank in late1970s. Clean-tech investments have been at-tracting big money since the Millennium.

What is new, however, is the change inperception towards these kinds of invest-ments and the idea that impact investingnow represents a homogenous industry.

Impact investments are no longer thereserve of philanthropists, governmentsand DFIs. Nate Schaffran, Africa director of Root Capital, a non-prot fund that investsin SMEs in the agriculture sector, says: “Five years ago the industry was dominated byDFIs and foundations. Now we are seeing a

new class of investor: fund managers and wealth managers.”Suddenly with success stories, such as

the IPOs of Compartamos and SKS – two mi-cronance institutions that between themraised over $800m – these kind of invest-ments are starting to attract larger institu-tional investors.

After the recession many investors arelooking to impact investments to diversifytheir portfolios. Neil Sandy, COO of Tru-estone Asset Management, says that part of the attraction to institutional investors is the“realisation that these types of investmentscan be relatively uncorrelated to world stockmarkets”. Crucially, many of these invest-ments are also in emerging economies, suchas India and South Africa, which currently boast growth rates up to three to four timesthose in Europe.

It is perhaps no surprise then that GIIN,the major impact investing network, now boasts Morgan Stanley and JPMorgan asmembers, as well as more explicitly socialinvestors Root Capital and Acumen Fund.

As the number and diversity of investorshave increased, so too have the asset classesand sectors involved. Investors are no longer just interested in the traditional impact in-

vestments of equity in clean-tech start-ups ormicronance loans. As Amit Bouri at GIINsays, “African agriculture has a great deal of buzz” and sectors, such as housing, educa-tion and health are beginning to emerge.

This growth in interest is reected by anincrease in the number and scale of fundsinvolved. According to Jacqueline Novogratz,the founder of Acumen Fund, 192 new so-cial impact funds were launched in the lastthree years alone. After the US’s early lead,many of these new funds are European orfrom other emerging markets. This suddensurge in interest has led Monitor Institute to

predict the market size of impact investingcould reach $500bn in just 10 years time –around 1 percent of the world’s total assetsunder management. However, for this tohappen some considerable obstacles willneed to be overcome.

As with most nascent industries thecurrent framework for impact investment

is still very basic and fragmented. There areonly a very limited number of independentthird-party sources of information or invest-ment consultants; there is a complete lackof clearinghouses and syndication facilities;and a common language for impact invest-ment is yet to emerge. All of this makes itdifcult to communicate opportunities,successes and failures and greatly increasestransaction costs for investors.

The lack of a common vocabulary andthe inherent difculties associated withevaluating social and environmental impactmeans that for investors it remains very

difcult to assess how much impact theyget for their money. It is also almost virtu-ally impossible to compare the performanceof funds on any basis other than nancial.Larger pension funds may demand morerigour in this area before they are temptedto join the fray.

Steps are being made to address these

problems. GIIN is trying to create a univer-sal lexicon for impact investing. This wouldhelp standardise what it means when an or-ganisation says they have created new jobsor improved the quality of healthcare in a village.

Similarly B Lab, a US non-prot, has developed a social rating system for funds thatthey hope will be used in a similar way toStandard and Poor’s credit ratings.

As with many forms of investment in developing countries, another problem is thelack of absorptive capacity. At the momentimpact investments rarely offer the chance

to invest the kinds of sums that private eq-uity rms are used to playing with. Simi-larly, there are few businesses with proveninvestable business models. As a result manyinvestors complain they are looking at thesame companies as dozens of other impactinvestors.

Brian Trelstad, chief investment ofcer

at Acumen Fund, says that when the rm began making investments in India and East Africa in 2002, “there was a pent up demandfor investment from social entrepreneurs.Now the availability of capital is outstrip-ping the number of entrepreneurs”. He be-lieves that this balance is gradually beingredressed as the capital starts to attract newentrepreneurs, but this will, of course, taketime.

This problem seems to be more acutein Africa than elsewhere. Funds, such asGron and SEAF, which both invest in SMEsin Africa, have to build substantial capacity

to support entrepreneurs before and aftinvesting with basic business training anstrategic advice. Nate Schaffran also complains of a lack of human capital of mangerial quality. Unlike in South America, hsays, “you will nd very few trained accoutants in places like rural Uganda”.

Liquidity can also be a problem in man

African countries where impact investing becoming more prominent. Often exit oportunities for those who have invested euity are few and far between.

In spite of all of these challenges theis great hope surrounding the industry. represents an exciting new way to nacially engage with developing countries anchannel private funds towards social and e vironmental needs. It is unlikely to replacold fashioned philanthropy but it will, Amit Bouri says, “liberate aid dollars and low them to focus on the areas that needmost”. P

H O T O S : A F P / G E T T Y I M A G E S / C O R B I S

The number of newsocial impact fundslaunched in the lastthree years.Source:Acumen fund

192

QUICK STATS

of assets undermanagement in theUS are in SociallyResponsible Investingfunds.Source:Nelson Information

11%

LEFT: A Gabonese fruit vendorsells her produce at a streetmarket in LibrevilleBELOW: Microsoft founder BillGates

This sudden surgein interest has led Monitor Institute

to predict the

market size of impact investingcould be as big

as $500bn in just 10 years time –

around 1 percent of the world’s

total assets under management





P H O T O S : A F P / G E T T Y I M A G E S

THE DIFFICULTTASK OF

MEASURING IMPACT

Effective methods for measuringimpact are being developed, but a

standardised system remains elusive

gained traction in the impact investmenteld. As with the nancial sector, there is aneed or impact investors to orecast social value, track and evaluate perormance overtime and assess past investments.

This infux o nancial rigour has ledto an impressive knowledge base and to thedevelopment o more sophisticated systems with which to measure impact. These eortscover a variety o cost-eectiveness and cost- benet analysis.

While the development nance institu-tions, such as the IFC, have paved the wayin recent decades, many new systems haveemerged in the last ew years. T he social ven-ture und Acumen has developed the BACORatio, which quanties investments’ social value and then compares it to other oppor-

tunities in the same sector. Meanwhile, the American philanthropic und REDF has cre-ated the tool SROI, which calculates socialreturn on investments.

In spite o these developments a com-

mon global standard or measuring socialimpact remains elusive. There is still a lacko transparency and consistency in how investors dene, track, compare and report onsocial value. While one organisation mightdene outputs like job creation as any em-ployment opportunity, including seasonal jobs, other organisations might only includeull-time jobs. Problems like these make it very dicult or investors to compare thesocial value perormance o dierent unds.

To address these concerns, a group o leading investors, headed up by the Rock-eeller Foundation, developed IRIS, a com-mon ramework or dening and reportingon social impact. The initiative providesspecic metrics or a number o dierentsectors, including health, energy and edu-

cation. It will also gather social impact datarom its partners and publish benchmark-ing reports allowing investors to compareinvestment opportunities.

I impact investing is to attract the bigpension unds and ot her institutional inves-tors, then it must become easier to compareinvestment opportunities. That is why theGlobal Impact Investing Rating System wasounded. GIIRS is an independent third-party impact rating agency. As Beth Richard-

son, its director, says: “I IRIS is a nancialstandard, GIIRS can be thought o as a ratingsystem like S&P or Moody’s.” So ar, GIIRShas selected 25 und managers, represent-ing $1.2bn in assets under management,

with investments in about 200 companiesin emerging markets. In January 2011 thesepioneer unds will be the rst ones to receivea GIIRS rating.

As impact investing becomes moredened as an industry and a common lan-guage or measuring and rating impactemerges, some big questions will have to beconronted.

The selection and denition o indi-cators is, inevitably, the result o a value judgment. For example, how does one rateresults in healthcare: should treating a pa-tient suering rom HIV/Aids receive a bet-

Antony Bugg-Levine, managing di-rector o the Rockeeller Founda-tion, recognises that “the powero metrics is that it enables us todeploy our marginal dollar to the best problem-solver, not just the

best storyteller”. While this attitude is driv-ing impact investment orward as an indus-try, the road to better evaluation and mea-surement is littered with potential pitalls.

Can all o the benets o an investmentreally t into any simple metric? How doesone rate intangibles such as a stronger eel-ing o security among the women o Sudanas a result o a peace building programme?How can one eectively compare the per-ormance o, say, a healthcare programmein Brazil with a water and sanitation pro-

gramme in Malawi? The challenges can attimes seem insurmountable.Over the past years, nancial sector

perspectives, particularly rom the privateequity and venture capital industries, haveBY ANNE STUBERT

ter rating than treating one suering romalaria?

Standardised measurements will aundoubtedly generate “winners and loserShort-term outputs, such as the numbermicronance loans granted in a village, amuch easier to measure than long-term oucomes, such as the eect that those loahave had on poverty, economic growth aquality o lie in that village. Investmenin sectors in which the results are easier measure, and programmes which generaimpressive short-term results, will probabend up attracting more capital than othe

Quantitative results are easier to cature than qualitative results. Some argmetrics like these “reduce people to nu bers” and ail to capture immeasurable be

ets. What about more intangible outcomlike the empowerment o women? Is thealso a risk that more emphasis on metr would encourage grantees to work towashort-term results, such as building watpumps, without addressing the undamtal goal – sustainable water management

Marie Rosencrantz, monitoring aevaluation expert, emphasises the challeno actually gathering data. Many promisiorganisations and programmes lack the rastructure and the resources to collect suciently robust data to meet reporting stdards. It is thereore crucial that investoand investees agree on a limited numbo metrics, in order to avoid placing an unecessary burden on grantees. As the CEo Acumen Fund Jacqueline Novogratz puit: “The art o measurement is in knowin which measures to select, when to lookthem, and what decisions to make based the data and our experience.”

Despite these diculties, the beneo a global system or measuring impact asignicant. Allowing investors to measuand compare the social impact o diereorganisations would attract more capito the impact investment sector and opup the sector to institutional investors li

pension unds and hedge unds. This clar would also increase the credibility o the stor and strengthen the relationship betwethe investor and the investee, allowing moconsistent d iscussion around perormanc

Possibly the greatest benet o a stadardised system o measuring impact wou be a better understanding o how to increathe social value o investments in develoing countries. In order or the impact invement sector to thrive and address somethe major development challenges in t world, a robust system and inrastructuto absorb and share assessment will be ke

If impact investing is to attract the big pension funds and other

institutional investors, then it must become easier to compare

investment opportunities

Self-empowerment schemesfor women in Nairobi, Kenya





IMPACT INVESTING:EXECUTIVE SUMMARY

Just 18 percent of investors have a policyof actively monitoring the positive socialimpact of their investments and there is nouniform standard by which these impactsare measured. The majority of these inves-tors tend to be state-backed funds whichuse SRI as a tool to promote social changethrough an activist investment approach.

Of the fewer than 30 percent of investors yet to build an exposure to emerging mar-kets, concerns are numerous. These limitedpartners have been deterred by issues relat-ing to poor corporate governance, lack of transparency, corruption and political risk.In conversation, many of these investorsaccepted that a certain element of miscon-ception may lie behind their reluctance toinvest in emerging markets.

However, many stated that they wouldprefer to exercise greater caution in thename of responsibility than to invest whenuncomfortable with the perceived level of risk.

The concept of impact investing wasnot widely understood by respondents, withonly 32 percent having heard of it. As onemight expect, funds investing on behalf of a state with a mandate to encourage socialchange have the greatest understanding of impact investing.

Outside these funds, knowledge was ex-tremely limited and respondents were scep-tical about the merits of such an approach.Investors complained about the data-poorenvironment and the inability to determine whether investing for a developmental or so-cial return could also deliver benchmark -

nancial returns. 25 percent said they would be prepared to accept a lower rate of returnif they could see a proven social return oninvestments.

This report will detail the responses tointerviews with limited partners and tryto provide further insight into the vary-ing degrees of understanding among investors. Identifying where gaps in knowl-edge exist and why they exist, as well ashighlighting concerns from the investorcommunity, we hope to further the debateabout emerging markets and socially re-sponsible investing.

For this report This is Africa surveyed arepresentative sample of Europeanand US limited partners, includingpension funds, insurance compa-nies, endowments and state-backedfunds. Conversations with these in-

vestors focused on ve main areas:• Exposure to emerging markets and senti-

ment towards these markets• The attractiveness of Africa within emerg-ing markets

• Understanding of socially responsible investment and the social impact of invest-ments

• The relationship between socially respon-sible investing and investing for a nan-cial return

• Knowledge of impact investingIt is clear from the ndings of this report

that emerging markets are now an acceptedportfolio diversication tool. Around 65 per-cent of investors interviewed for this reporthave an allocation to emerging markets andover 50 percent expect to, or are consideringincreasing exposure.

What is also clear is that Africa is seen very much as an emerging markets outlier.Less than 30 percent of respondents target Africa-focused funds, and 38 percent of these invest in funds focused only on South Africa. Of those investors in our sampleconsidering building exposure to emergingmarkets, sentiment on Africa is split; half expect to allocate money to Africa and half have no plans to do so.

With regards to SRI issues, there is a wide variance of understanding about its

role and how it is best employed as part of an investment strategy.

61 percent of investors have no mecha-nism for reviewing the social impact of theirinvestments. Only 39 percent of institu-tional investors interviewed for this reportsaid they monitor the social impact of theirinvestments. 60 percent of investors whichclaim to monitor the social impact of invest-ments view SRI as little more than a tick-boxexercise; a negative screening mechanism which simply excludes certain sectors andcompanies in which investment could be viewed as unethical.

P H O T O : B L O O M B E R G / G E T T Y

BY NATHAN WILLIAMS AND

ALEX CARTER

Percentage of investors that maintainexposure to emerging

markets

Percentage of investors that maintain

direct exposureto Africa

Percentage of investors with directexposure to Africa

that are only presentin South Africa

68% 29% 44%

Percentage of investors

consideringbuilding exposur

in Africa

26%

Percentage of investors consideringbuilding exposure inemerging markets

52%

REPORT FINDINGS: QUICK STATS




9 This is Africa This is Africa

ADDED-VALUE Nearly 70 percent of limited partnersdeclared an allocation to emergingmarkets. Over 50 percent expect tobuild on their current exposure.

The increasing appetite for emerging mar-kets investment is reected in our report, with nearly 70 percent of limited partnersdeclaring an allocation to emerging mar-kets and over 50 percent considering orexpecting to build on their current expo-sure. If one spoke to an investor ten yearsago, ‘portfolio diversication’ was usu-ally cited as the main reason for a smallemerging markets exposure. Today, manyinvestors see emerging markets as a corepart of their investment strategy, driven bythe consistent returns these markets havegenerated.

One French pension fund managersaid “we are gradually increasing ourexposure to these markets. Look at returnsover the past ten years; in many years theyhave matched or beaten [returns] on offerin the West. This is a trend we think willcontinue.” The nancial crisis, alongsiderecession and uncertainty in developedmarkets, has sharpened some investorsfocus on emerging markets. “As it becomesharder to get added-value out of developedmarkets you have to look elsewhere,” saidone Swedish pension fund manager.

From interviews for this report, theaverage percentage exposure to emerging

markets is 12 percent. This is ahead of a Bankof America Merrill Lynch survey earlier t his year looking at US institutional investors’allocations to emerging-markets equities, which found the average was between 3percent and 5 percent.

Private equity funds are the mostfavoured way for investors to gain exposureto emerging markets, with 62 percent of respondents favouring private equity funds.

According to the Emerging MarketsPrivate Equity Association, investment byprivate equity funds in emerging marketsover the rst six months of 2010 totalled

From 1990 to the beginning of thisdecade foreign direct investmentinto emerging markets grew at anaverage 23 percent per year, driven by the opening up of economiesmanaged by the Soviet Union and

the increasing liberalisation of Asian mar-kets, not least in China. The 1990s were a

record period for FDI globally, which peakedat $1,400bn in 2000 and fell precipitouslythereafter as economies slowed and M&A activity globally dried up. According to Stan-dard & Poor’s, FDI fell by nearly 40 percentin 2001 and hit a seven-year low of $96bn in

$13bn, compared with $8bn in the rst half of 2009, a 55 percent increase. The researchfound that 402 deals were completed inH1 2010, up 44 percent from 280 last year.Brazil is fast becoming the most favouredinvestment destination among privateequity rms, with the country seeing a 53percent jump in investment from 2009levels.

UPPING ALLOCATION The average percentage exposureto emerging markets is 12 percent.

One US pension fund manager said his tar-get was a 50 percent allocation to emerging

markets. “We want to move away from adomestic-heavy portfolio and build expo-sure to around 50 percent of assets undermanagement.” He said they were now com-fortable with the risk-return ratio in emerg-ing markets and condent it would deliverreturns in-line with or better than histori-cal levels.

Fundraising levels for private equityhave also risen in 2010 with $11bn raisedin the rst half of this year against $9bn inthe rst six months of 2009, EMPEA researchindicates. Asian funds make up more thanhalf of the total, the gures show, and one-third of total capital raised in emergingmarkets in the rst half of this year went toChina-dedicated funds.

AFRICA UNCERTAINTY Less than 30 percent of respondentshave exposure to Africa.

While investors are increasingly attractedto emerging market investment, Africaappears to sit outside the denition of an ‘emerging market’ for many investors.Less than 30 percent of respondents have

exposure to Africa and of those, 45 per-cent invest in funds focused only on South Africa. Among investors in our sample thereis little consensus on the prospects for thecontinent; half expect to allocate moneyto Africa and half have no plans to do so. A UK pension fund with investments in fundstargeting emerging markets, when askedif they were considering gaining exposureto Africa said: “We are a cautious investorand Africa is too risky for us at present, but if political problems were resolvedacross the continent we would look again.It’s a very big market with a wealth of

natural resources.”Uncertainty around political stability

and the lack of transparency are concernsfor investors who stated they have no inten-tion of investing in Africa. “Corruption is a big problem. You need to have clarity abouthow you are going to get your money outonce it’s in,” said a French insurance com-pany manager. One UK pension fund asked,rhetorically: “State aid is pulling out of somecountries so why would a pension fund gothere?”

At a conference in London focused on investment in Africa, Patricia Dineen, manag-ing director at US investment house SigulerGuff, listed a number of concerns. She saidthe rm had not invested in Africa to date because of worries over corruption, trans-

parency and the rule of law. She also saidthe rm was not convinced there is enoughdeal ow or manager talent and exit oppor-tunities are scarce. She voiced concerns thatif things go wrong “are there enough like-minded limited partners in a fund that thatcan ght with us?”

Martin Poulsen at the African Develop-ment Bank conceded that “the environmentis data-poor and there is a lack of transpar-ency.” He believes African investors can playan important role in encouraging foreigninvestment. He said that if more Africanpension funds were to invest in private eq-uity funds targeting the continent it would“help foreign investors get comfortable interms of due diligence”. Responding to criti-cism that there is a lack of manager talent, Jasper Persson, senior investment ofcer atthe European Investment Bank said inves-tors should not apply the same criteria toemerging market managers as they do whenselecting GPs in developed markets. “There

is always a pool of fund managers that haa track record but limited partners need look beyond that. Emerging markets arefast-changing environment where track rcord may not be as valid. The key thing is look at the quality of local teams.”

SOUTH AFRICA Of the 29 percent of investors withexposure to Africa, 45 percent investin funds focused only on South Africa

Some investors spoken to for this repo view Africa not as one homogenous enti but a continent where investment risks cdiffer wildly from country to county. A pesion fund manager in the UK said it w“wrong to regard Africa as one place. Ware considering investing in funds focuson Morocco and South Africa where theregreater stability.”

South Africa has been the primary benciary of foreign investment in sub-Sahar Africa over the past few years, claiming percent of total FDI in 2009, around $125m

ahead of Nigeria with 21 percent and $69maccording to the United Nations Conferenon Trade and Development.

This mirrors research for this repo which found that of the 30 percent of invtors with exposure to Africa, 45 percent i vest in funds focused only on South Afric A Finnish pension fund investor said th“Africa is somewhere we are looking to epand to. The continent is undergoing a lof change at the moment and sub-Sahara African in particular is somewhere we acurrently looking at for investment oppotunities.”

IMPACT INVESTING:THE REPORT

2003. Each year since then has seen an im-provement, with emerging markets at thefore of the post-2003 bounce back.

FDI inows to emerging markets grew by57 percent in 2004 and 26 percent in 2005,reaching a record high of almost $400bn ormore than 40 percent of the global total. FDIinto developed markets fell away in 2007

and 2008, as the global nancial crisis tookhold and in 2009, for the rst time ever, FDIinto emerging markets, at 51.6 percent of the total global share, was higher than indeveloped countries, according to Ernst & Young.

“We are a cautiousinvestor and Africa

is too risky for usat present, but if political problems

were resolved across the continent we would look again”

Percentage of investors

that monitorthe social impact

of theirinvestments

Percentageof investors

that do morethan simply

screen negativeinvestments

42%


19%





SOCIALLY RESPONSIBLEINVESTING Only 39 percent of institutionalinvestors interviewed for this reportsaid they monitor the social impactof their investments.

The universe of funds catering to sociallyresponsible investing has grown expo-nentially over the past decade. As concernabout the po tentially harmful consequenceof investing in funds focused purely onmaking a nancial return has grown, fundmanagers have reacted by creating prod-ucts which offer investors a route towards amore ethical investment approach.

According to corporate social responsi-bility ratings agency Vigeo, the number of SRI retail funds in Europe increased to 879from 683 in the 12 months to June 2010,while assets under management rose 41 per-cent to $107bn from $73bn. According to Eu-rosif, the European Sustainable InvestmentForum, total assets under managementin all SRI products now stand at around$5,000bn. In Asia, the number of funds withan SRI investment remit passed 400 earlierthis year, a massive 70 percent increase onMay 2008 levels, according to research bywebsite Ethical Markets.

While the popularity of SRI productsmay be growing, only 39 percent of institu-tional investors interviewed for this reportsaid they monitor the social impact of theirinvestments. Of this percentage, the majorityhave a passive rather than active monitoringprocess, with 60 percent screening potentialinvestments and excluding those deemedharmful or unethical. One Swedish pensionfund manager said that his fund excludesinvestment in tobacco companies but has noother investment restrictions. The managersaid that in his view this exclusion policy sat-ised the SRI responsibilities of the fund.

ACTIVE MONITORING Just 18 percent of investors have apolicy of actively monitoring the posi-tive social impact of their investments.

Just 18 percent of investors have a policyof actively monitoring the positive socialimpact of their investments and thereis no uniform standard by which theseimpacts are measured. “One of the bigproblems is that investors have differentunderstandings of what SRI is and how it

should inform investment strategy,” saidone investment manager at a state-backedinvestment fund.

Eurosif, the European Sustainable In- vestment Forum, a European lobbying, com-munications and research group, says thatSRI “combines investors’ nancial objectives with their concerns about social, environ-mental, ethical and corporate governanceissues. Some SRI investors refer only to theSEE risks while others refer to Environmen-tal, Social, Governance.” Some prefer not tofocus on an acronym but prefer the term“sustainable investing”. This range of termi-nology echoes the incoherent investmentapproach taken by investors.

In 2009 the German-based consultancyFunds@Work found that out of 56 CentralEuropean investors involved in screening so-cial impact, 19 used different standards fortheir socially responsible investing – rang-ing from the Swiss Ethos Stiftung Chartato the United Nations Principles for Respon-sible Investment and the Eurosif transpar-ency guidelines. 17 eschewed any agreed

standard and dened investing according totheir own rules.

Investors interviewed for this report which do measure the social impact of their investments use a range of standards,ranging from International Labour Organ-isation, UNPRI, the World Bank, the Euro-pean Development Finance Institutions andOECD guidelines. The most comprehensivesovereign funds used a combination of allthese standards. Many funds claimed not toadhere to a prescribed set of rules but anal- ysed investments on a case-by-case basis andexcluded investments deemed unethical.

SRI PERFORMANCE 60 percent of those who do take SRIconsiderations into account prefer apassive screening approach.

With no agreement on how to label theseinvestments, it is hardly surprising thatthere is also no uniform standard for mea-

suring the impact or performance from asocial, environmental or developmentalperspective.

This lack of a uniform performancemeasurement standard has deterred someinstitutional investors, with one London- based pension fund manager complainingthat “there is no hard evidence that takingsocial investment criteria into account willlead to better returns”.

Although lack of sufcient good qual-ity performance information is a regularcomplaint from institutional investors,a number of papers have been published

which suggest that while SRI investing maynot outperform traditional investment ap-proaches, it does not underperform either.In September this year research group Edh-ec-Risk found that SRI funds do not outper-form traditional funds. The group analysedreturns from the best-performing green andSRI-labelled funds between January 2008and December 2009 and found no added value in comparison to traditional funds,

but also no under-performance.

tional investors to think in anything oththan commercial terms. “Our duciary sponsibility is to provide returns for mem bers. We are not here to be philanthrop That’s someone else’s job: governmecharities and foundations, such as the Band Melinda Gates Foundation,” said one Upension fund manager.

These views are echoed by anothpension fund manager in the UK who sait was not appropriate to mix social issu with investment decisions. According to thmanager of a large company pension funinvestment decisions “should be made a rational basis and to mix politics and pesonal views on social issues [with investmedecisions] can confuse those decisions.”

A US pension fund manager had a simlar view: “If a product happens to be an Sasset and can deliver good returns we wouconsider investing, but we won’t invest omoral grounds only.”

A Danish pension fund manager sathat the fund had considered investing SRI products but decided against it “becauit is lucrative and hard to nd socially respo

sible funds” which can deliver a good retu A pension fund manager in the UK sa

that the investment committee had lookeat investing in SRI funds but had decidagainst it to avoid “limiting our returnsHe comments on the dilemma facing fun which have yet to introduce even a screeing process, arguing that “once a fund hdecided to go down that route it is hato decide where to stop”. He gave tobacproducts as an example, asking whetha fund which stops investing in tobacmanufacturers should also stop investinin supermarkets that sell cigarettes.

SOCIAL RETURNSSCEPTICISM “Our duciary responsibility is toprovide returns for members.We are not here to be philanthropic.That’s someone else’s job: govern-ment, charities and foundations.”

Some investors do not believe it is possibleto make attractive returns at the same timeas promoting social development. “It is onething to screen out unethical companies orsectors; it is another thing entirely to askinstitutional investors to improve the livesof poor people and make good returns forpension fund members at the same time.” This appears to be the over-riding senti-ment of limited partners interviewed forthis report, with 60 percent of those whodo take SRI considerations into account pre-ferring a passive screening approach.

Some argue it is not the role of institu-


“There is no hard evidence that taking

social investment criteria into account

will lead to better returns”

Percentage of investors that

currently have amonitoring systemand would also like

to develop a greater

understanding of thepositive social impactof their investments


Percentage of investors thatwould acceptlower returns

for provensocial return


23%


Percentage of investors that

would be interestedin developing

a greaterunderstanding of the positive social

impact of theirinvestments

69%

Percentage of investors thathave heard of

impact investing

29% 42%





INVESTING FOR SOCIALRETURNS 24 percent of investors said theywould be prepared to accept lowerreturns for a proven social impact.

State-backed funds are at the forefront of investing for a social return. At a conferencein London recently, Tony Bakels at Dutchdevelopment bank FMO said that “thereis a very strong and logical correlationbetween nancial impact and developmen-tal impact”. He argued that if a company iswell run it will create more jobs and oper-

ate more productively, beneting the widerlocal community while also generatinggood returns. Although targeting a com-mercial return, these funds are not set upto maximise returns and as a result havea more exible investment mandate thanmany other investors.

An investment manager at the Danishsovereign fund, IFU, said that the fund willaccept a lower rate of return where they cansee money is supporting social developmentand improving infrastructure, but they arestill a commercial body and need to makepositive returns on investments. Jasper Pers-son at the European Investment Bank pointsout that nancial and developmental aimscan be complementary and is a useful partof an investment pitch. “The science behindSRI continues to evolve. We are always learn-ing what to look for. It can help us tell a com-pelling story to stakeholders and other inves-tors. Only when a business is protable can itcreate jobs and when we generate prots wecan take more risk and be developmental.”

PROVE IT WORKS “The argument in favour of a social

investment approach is persuasive,as a responsible investment approachis a long-term approach and that ismore likely to deliver better returns.”

State-backed funds may be at the vanguardof social investing, but conversations withinvestors for this report suggest that protswill not always trump social considerations.Provided there was evidence to support theimpact of a developmental approach, 24percent of investors said they would be pre-pared to accept lower returns.

A manger at a Finnish pension fund said

that they do accept lower rates of return insome developing markets, and the returnmodel they use assumes investments in developing markets will take longer to mature.He said: “We are comfortable having a lon-ger investment horizon, but returns are ob- viously the ultimate goal and so we need toget [to a benchmark level] eventually.”

In many cases the move towards moreresponsible investment has been prompted by pressure from shareholders and thereputational risk attached to investing in acompany or sector perceived as unethical.One UK pension fund manager said that thefund recently invested in an ethical vehicle“because of pressure from the members who wanted to be able to monitor the socialimpact their money was making.”

Others, however, worry t hat any move totake social criteria into account could harmreturns and would not be perceived by the wider public as an acceptable trade-off. “I would be very careful with this approach. There has been a lot of bad press about poorpension fund returns and I don’t think peo-ple would accept it,” said the manager of alocal council fund in the UK.

For many investors, lack of informationremains the primary obstacle to a moresocially-orientated investment approach. Asone UK pension fund manager explained:“The argument in favour of a social invest-ment approach is persuasive, as a respon-sible investment approach is a long-termapproach and that is more likely to deliver better returns. The problem is nding statis-tics that demonstrate this works in practice.If there was a body of evidence, then that would have a huge impact on our strategy.”

STANDARDISATION “Standardisation is absolutely essentialfor SRI to gain wider credibility withinthe investment community.”

A paucity of information from a sector inits relative infancy is to be expected; themore immediate problem is that accurate

performance gures depend, in large paon a common criterion against which yocan measure what good and bad perfmance might look like.

The chief investment ofcer at a Sweish pension fund said that “standardisatiois absolutely essential for SRI to gain widcredibility within the investment commnity.” A UK-based pension fund managplaced the emphasis in the investor community “to do more to educate peopabout the nancial benets of SRI. If wcan’t decide what it is, how are we going tconvince people?”

In an interview with the FinanciTimes earlier this year, Rainer Jakubowsof BVV, a $25.6bn pension fund for thnancial services industry in Germansaid: “a minimum standardisation woustrongly facilitate investors’ orientation the jungle of sustainable products” anmake it a viable investment opportunity last.

Tony Bakels at the FMO said: “Investoand investees see the benet of ESG. Invetors see it more and more as an integral paof their own investment strategy.” This m be true, but if the majority of investors co

tinue to view ESG considerations on a pasive basis by taking a binary approach whicsimply excludes investments, it will be dcult to make the case that a proactive aproach can deliver good returns.

There is evidence that investors are moing towards a more active approach to montoring. One large US pension fund investstated that it is going to end negative screeing procedures and replace them fully wia positive screening process, enabling theto pick out assets that will allow for thmaximum “social or environmental returnto “nancial return” ratio.

“There is a very strong and logical

correlation betweenfinancial impact

and developmental impact”


Percentage of investors that do

not engage insocially responsible

investmentproducts

52%

Averagepercentage of AUM engagedin emerging

markets

23%




15 This is Africa

THE CENTRAL ROLEOF INVESTORS

Corporate responsibility and the principles which underpin it are well-established indeveloped markets, but at a less advancedstage in many emerging markets. By deni-tion, companies in emerging markets lagthose in developed markets, but as thesemarkets graduate to “emerged” status,improved infrastructure and governanceshould usher in greater transparency anddisclosure on the part of companies andinvestors. Indeed, improved corporate gover-nance and a focus on corporate responsibil-ity should be a pre-requisite for a country or

region wishing to label itself “developed”. There is, however, nothing inevitableabout this process. The danger, in fact, isthat investors view emerging markets asgood investment destinations because of their under-developed corporate governancestructures, rather than in spite of them. Re-sponsible investment practices in emergingmarkets will only be driven by pressure frominvestors, especially those in developed re-gions of the world.

More than 18 percent of investors willneed to have a policy of active monitoringin place to improve performance data andencourage others to take a more engaged ap-

proach to SRI.One pension fund manager in Norway

who does actively monitor the social impactof its fund investments said: “Investors com-plain about not having good information,

but it is up to them to commit to under-standing more about socially responsible in-

vestment. Greater commitment, and moremoney [for these funds], is the only way we’llget more robust performance data.”

CONCLUSIONS

Emerging markets have matured to theextent that they are now a central compo-nent of many limited partners’ investment

strategies, with nearly 70 percent commit-ted and 50 percent expecting to or con-sidering building on this exposure. If theeconomic recovery in developed marketsremains protracted, it is likely that inves-tors will devote increasing amounts of timeand money to emerging markets.

Africa is yet to benet from this uptickin investor sentiment towards emergingmarkets, with only 29 percent of those sur-

veyed having committed capital to fundsinvesting in Africa. Many are discouraged

by a lack of transparency and general un-certainty about the business and political

environment. South Africa is the country which enjoys the greatest degree of con-dence, with 44 percent of those with expo-sure to Africa investing only in South Africa.

Tackling transparency issues and ensuringthe proper infrastructure is in place wouldappear essential to boosting investor con-dence and encouraging greater investment.

Investors are largely wedded to a passiveapproach to SRI and have yet to be convincedthere is great merit in monitoring the socialimpact of investment. Few investors believeinvesting for a social impact can deliver re-turns comparable to traditional investment

styles and understanding of developmentalimpact is low. The main barrier to progressin this area appears to be the lack of, or per-ceived lack of, convincing data which mea-sures the social impact of investments.

Just 18 percent of investors actively mon-itor the social impacts of their investors; for

the majority of limited partners, returns areparamount. Although it is mildly encourag-ing that 23 percent said they would considera lower rate of return for a proven socialimpact, most pointed to their duciary re-sponsibility to maximise returns for inves-tors. That said, only 29 percent had heard of impact investing and 42 percent are inter-ested in developing a greater understandingor SRI and social impacts. This suggests thatthere are a substantial number of investors

with the desire to contribute more fully inthis area, given the resources.

Standardisation in the SRI space to en-

able investors to compare social impacts of different managers against common crite-ria would be a big step towards helping LPsmake more informed investment decisions.However, investors themselves need to be atthe forefront of this push for a standard re-gime. Furthering understanding in this areais likely to encourage greater investment.

The Rockeeller Foundation provided nan-cial support or this research. The research

was conducted independently by This is Arica and without input or infuence romthe unding body or any third party


P H O T O : C O R B I S

“Investors complain

about not havinggood information,but it is up to

them to commit to understanding

more about socially responsible

investment”

Report Impact Investing

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