Impact investments can help channel enormous amounts of funding to initiatives taken to generate positive, measurable, social, and environmental impact. But who are the impact investors and how do they think? Are these types of investments for all? I met up with Lena Eriksson Åshuvud from Impact Invest to learn more!
- The traditional approach to investment is to maximize the financial return, and then donate to charity to have some kind of positive impact in society, says Lena. This “two-hands & no-communication” approach has started to become questioned, especially when the investments are made by value-driven organizations and investors.
A more sustainable approach to investing
In 2019 one of Sweden’s largest commercial banks, SEB identified impact investing as the area that will define investment over the next 20 years. So what we are seeing is only the beginning. Many types of investors are now entering the impact investing market, especially investors that have a long-term logic; pension funds, insurance companies, NGO's or religious institutions.
- One of the first investors who changed their approach was the Church of Sweden, says Lena. They started to divest their pension funds in businesses that are damaging to our planet, like gas/oil/coal mining/fossil fuel businesses. Divesting means getting rid of stocks, bonds, or investments in a specific industry. The reason for their divestment was primarily moral as their core values don't align with profiting from industries that threaten human and planetary health. But also financial, as the fossil fuel industry risks losing in value since they cannot continue to be extracted if we are to have a livable planet.
Many of the larger actors in the capital markets are now moving into the impact investment space. They realize that if they only focus on short-term maximization of financial return it will be their loss in the longer run. Insurance companies for example; their core businesses are badly hurt from e.g weather-related events caused by climate change. It makes perfect financial sense to them to only invest in businesses that make a positive impact on our climate. Similarly, philanthropists realize that they can achieve even more if they invest in rather than donate to initiatives and organizations that work to address our societal challenges.
The Blended Return spectrum
Lena shows me the Blended Return Spectrum, created by Impact Invest to visualize the continuum from only for-profit to only for-impact, for companies and investors.
If we look at the companies, on the one side we have the companies that produce arms or tobacco, etc. They don't care much about the impact they are creating, but they care about the financial return on their products. And the other extreme is the NGO's that purely focus on the impact return. What we see now, is that organizations are migrating from the two sides and meet in an area that we call blended return. In the blended return space - where businesses or investors looking for both financial and impact return - is where the impact investments happen.
We've got the NGO's that gradually realize that they bring a value that they can charge for. By invoicing for some products or services, they don't get so depending on grants or philanthropy. One example is Stadsmissionen in Sweden or The Big Issue in the UK who are both organizations that are supporting homeless people. I f you look at their revenue generation, it comes from second-hand shops, remake shops, and other activities where they can work with their revenue generation in a more productive way.
From the other side, we've got the traditional companies who realize that impact is a way of navigating towards the future. They want to see an impact and at the same time make a financial profit. They are not in the business to maximize the profit, but they want to have a reasonable financial return while at the same time help to solve a societal challenge. One example is the Swedish Algae factory that grows algae used in solar panels. They have their commercial product, but they also want to grow the algae in water treatment plants that are helping address areas of wastewater at the same time.
Why Impact Investments will be crucial for reaching the SDGs
- The challenges put on the global community by the Agenda 2030/SDGs are huge and need tens of trillion USD/EUR to be realized. There even is one goal (SDG17) that points out the need for partnerships to solve these, says Lena.
Leveraging the enormous amounts invested in the global capital markets to work for societal change is one such partnership. If we can channel more mainstream capital into impact-driven businesses this will have huge implications for our society.
Lena's advice to impact entrepreneurs who are curious about this way of funding their businesses or services
At Impact Invest, Lena works as an advisor for impact enterprises who are in the stage of raising capital. Impact Invest matches investors with entrepreneurs through their angel investor network where they regularly invite impact entrepreneurs to pitch their ideas.
If you come from the more social side of the spectrum: Be clear about your purpose and your expected impact. Create a Theory of Change to show the issue that you are addressing, and the logic behind what you are doing.
Make sure you meet the basics demands in terms of setting up and running a business professionally. Show that you can handle basic financial budgeting or forecasting. If your solution is well suited for being set up as a business, but you lack the business skills - try to get the right support through an incubator, coaching, training, or add a partner/ team member with the right skills.
Review your business model to ensure that it is clear and realistic and provides for financial sustainability. A tool that is commonly used by Impact Invest when we are advising impact entrepreneurs is the Social Business Model Canvas.
Understand the investor's logic. Don’t assume that the person in front of you sees things the same way as you do. Investors are always business people and if you can’t apply business logic to your solution you are not really looking for an impact investor, but rather a philanthropist.
If you are curious about learning more about Impact Investments and their role in creating positive change in society, I recommend the book Capital with purpose, by Ruth Brännvall, who is the founder & CEO of Impact Invest.