Impact Investing: Making a Financial and Social Return

By
Dr. Harry Hummels

All investments can have a positive impact on society and the environment, but what distinguishes impact investments is their disclosed intention to make a positive impact and the fact that their impact is measured. This is how Dr. Harry Hummels, professor of ethics, organisations, and society at Maastricht University and managing director at SNS Impact Investing, explained impact investing to an attentive audience of investment professionals at the CFA Institute Middle East Investment Conference in Dubai on 20–21 March 2013.

Dr. Hummels stated that impact investments are “made into companies, organisations and funds with the intention to generate measurable social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market to market rate.”

He emphasised that impact investing is not philanthropy; it is about making both a financial return and a positive impact. This is why it is not confined to religious foundations and charities but is also appropriate for institutional investors, like pension funds and insurance companies, seeking competitive returns. Some of the recurring sectors invested in are agriculture, microfinance, renewable energy, small and medium enterprises (SMEs), healthcare, green real estate, and community development. Some of the recurring asset classes are private equity, venture capital, private debt, and real estate. Having said that, he clarified that impact investing is also not confined to any particular investment sector or asset class.

Dr. Hummels’s favourite example of impact investing is the investment made by Bridges Ventures in 2004 in Hackney, a relatively poor part of London, which turned a run-down car park into a luxury hotel, The Hoxton. According to Bridges Ventures, “The exit delivered a return of £13.3m to Bridges Ventures Sustainable Growth Fund I, representing an IRR of 47% and 8.8x the total investment” and “the foundation of The Hoxton played a critical part in the regeneration of Shoreditch and Hackney, which is in the bottom 3% of deprived wards in England and over 70% of The Hoxton Hotel staff live in underserved areas.”

He also gave the example of the profitable International Fund for Health in Africa which invests in improving access to medical care and has been successful in attracting investment from large mainstream investors. He added that SNS Impact Investing, the company that he is associated with, has deployed more than $500 million dollars in microfinance globally and has earned a net 6.3% in microfinance.

In the Middle East and North Africa (MENA), Dr. Hummels believes that impact investing initiatives are at a relatively early stage and he listed Silicon Badia Fund, Willow Impact Investors, and White Nile SME Fund as some regional examples of impact investments.

He told the audience that he views the investment of €600m by the European Investment Bank (EIB) in the subway in Cairo as a possible impact investment. He stressed that “EIB is not a charity” and it is safe to assume that it is seeking a commercially competitive rate of return — but at the same time, the investment is geared towards making a positive impact. To support his view, Dr. Hummels provided a quote from Werner Hoyer, president of EIB, on the Cairo subway investment: “Developing infrastructure, such as ensuring mobility, and fostering business through the Community Development Programme is key to promoting growth and employment.”

Dr. Harry Hummels

Dr. Harry Hummels speaking at the CFA Institute Middle East Investment Conference

Dr. Hummels is of the view that impact investing is an investment philosophy and not an asset class, as it is sometimes presented to be. He believes that impact investing needs patient capital with investment horizons extending from five to 10 years and the resulting illiquidity means that, in its current state of development, impact investing is more suitable to institutional rather than individual investors.

He highlighted that currently most of the impact investors are in the developed world and suggested that there are opportunities for sovereign wealth funds from MENA to engage in impact investing in the region, which is in need of impact investing in areas such as education and healthcare. He believes that public-private partnership, where governments could take measures to reduce the risk of investment, could help foster such investments from the private sector in MENA.

Talking about the challenges facing impact investing, Dr. Hummels said that institutional investors often need relatively large investment opportunities whereas currently impact investment opportunities are much smaller, the management fees and carried interest are at times too high to make sense to commercial investors, and there needs to be credible assurance that the intended positive social and environmental impact will be made.

Dr. Hummels also shared the steps the Global Impact Investing Network (GIIN) is taking to address the challenges faced by impact investing. These include outreach and networking activities, the establishment of the Impact Reporting and Investment Standards, and creation of the ImpactBase database. He commended CFA Institute for covering the new and growing field of impact investing at the Middle East Investment Conference and for bringing this to the attention of investment professionals in the region.

However, he cautioned that impact investing is the “new kid on the block” and it would not serve its cause should it be overly hyped like microfinance once was or turned into another way of “green washing.” He said that it takes time to establish a track record and the body of evidence of financial return and social and environmental impact is still in the making.

Dr. Hummels concluded that impact investing involves the same asset classes as traditional investing and deploys the same professional processes and techniques. Thus the generic risk-return profile of impact investments should be no different from their mainstream counterparts. Some investors may be willing to make a compromise on financial performance to make the desired impact but that it is entirely up to the investors. Ultimately the difference between impact investments and their traditional counterparts lies not in their risk-return profile or the type of investors but in intending a positive impact and measuring it.

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4 Responses to Impact Investing: Making a Financial and Social Return

  1. Ashraf Bava says:

    I think impact investing would also bring the inner satisfaction to the investor when you see the positive social difference which your investment has brought about in the society. I guess most of the investments done by governments would come under this umbrella.

    • Jon says:

      Good point:
      But Maybe impact investing has a far bigger problem. The impact investing I read about in the article above seems to be trying to obtain favorable returns seen in ‘less-than’ impact investments. I’m not saying that it’s impossible to have high-IRR impact investing, but creating high-IRR projects for ‘delux’ groups of people, assuming a trickle-down ‘added value’ to the economy is limiting.

      Real impact investing should not be indirect trickle-down to the community where the majority of the investment satisfies already rich consumers, but direct investments into common institutions.

      I see a lot of big wealthy institutions not bother with smaller investments because it’s not ‘worth their time’ and they wish to focus on larger deals. With that thinking, it puts the head in the sky a little too much.

      • Tom says:

        Your point is 100% valid, Jon. While investments having anciliary or trickle-down social or environmental impact may be beneficial, they are not “impact investments”. An impact investment requirees intentionality and must measure impact outcome. In fact the article addresses this concern in the very first sentence.

        “All investments can have a positive impact on society and the environment, but what distinguishes impact investments is their disclosed intention to make a positive impact and the fact that their impact is measured”

  2. Pingback: Impact Investing: Making a Financial and Social Return | SNS Impact Investing

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