Grabenwarter's/Liechtenstein's An unconventional perspective on impact investing

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In search of gamma an unconventional perspective on Impact Investing Impact Investing: Just Hype or Default Choice? l Impact Investing: What It Is and What It Is Not l Empirical Evidence: How Different Is Impact Investing? Strategy Matters: Investment Success by Design l The Landscape of Impact Investing: An Attempt at Classification l Impact Investing Is INVESTING: Nothing Less and Sometimes a Bit More l Key Insights and Suggestions for Shaping the Future of Impact Investing l Impact Investing: Quo Vadis? Uli Grabenwarter Heinrich Liechtenstein

description

The notion that the success of an investment shouldbe measured by financial return alone has always beencontested and has been more hotly disputed in thewake of the financial crisis. Specifically, there is agrowing belief in certain financial and political circlesthat investments should be judged by their ability togenerate both a profit and a positive social impact.Clean technologies, such as solar electricity, are oftenheld up as an example of how this new approach toinvesting – known as ‘impact investing’ – can work.This paper summarizes the main findings from newresearch on impact investing supported by IESE BusinessSchool and the Family Office Circle Foundation, basedon interviews with more than 60 dedicated impactinvestors. In it, we define impact investing, identifythe diverse investors and how they have succeeded orfailed and explain why the popular assumption thatimpact investing involves a trade-off between financialgain and social impact is wrong.In fact, one of the most striking findings from ourresearch is that impact investing can only be calledimpact investing if there is a positive correlationbetween the financial return and the social impact.

Transcript of Grabenwarter's/Liechtenstein's An unconventional perspective on impact investing

Page 1: Grabenwarter's/Liechtenstein's An unconventional perspective on impact investing

In search of gammaan unconventional perspective onImpact Investing

Impact Investing: Just Hype or Default Choice? l Impact Investing: What It Is andWhat It Is Not l Empirical Evidence: How Different Is Impact Investing?Strategy Matters: Investment Success by Design l The Landscape of Impact Investing:An Attempt at Classification l Impact Investing Is INVESTING: Nothing Less andSometimes a Bit More l Key Insights and Suggestions for Shaping the Future ofImpact Investing l Impact Investing: Quo Vadis?

Uli GrabenwarterHeinrich Liechtenstein

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In search of gammaan unconventional perspective onImpact InvestingUli GrabenwarterHeinrich Liechtenstein

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ISBN: 978-84-86851-90-3D.L.: 0-0000-0000ALL RIGHTS RESERVED:Except in cases determined by law, any form of production, distribution, public communication or transformation of this work without permission fromthe intellectual property holders is prohibited. Any infringement of these rights constitutes an intellectual property crime

Acknowledgments:

This report was made possible thanks to a generous donation from the Family Office Circle Foundation, along with the specialinterest and support offered by Mr Uwe Feuersenger, who is the founder of this organization. Also, we are very grateful toall our interview partners – most of them very successful business people, investors and pioneers of the impact investingspace. We gained access to these interesting partners with the help of the “Ask the Circle” platform and its impact investingexpert Jay Newmark. Also, we would like to extend thanks to Anna-Marie Harling (IESE MBA 2011) for her valuable intellectualinput, as well as to Viridiana Castillejos for her research. We would like to express our thanks to all IESE staff who helpedin bringing this project forward and in particular to Prof. Miguel Canela from the managerial decision sciences department.

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CONTENTS

Executive Summary

1. Impact Investing: Just Hype or Default Choice?1.1. The Emergence of Impact Investing1.2. Objectives of the Report and Research Sample1.3. Key Messages of the Report

2. Impact Investing: What It Is and What It Is Not2.1. Definition of Impact Investing

a) Profit Orientationb) Social Impact Must Be Intentionalc) Social Impact Must Be Measurabled) Positive Impact on Society

3. Empirical Evidence: How Different Is Impact Investing?3.1. Testing the Market: Our Market Survey Sample3.2. Impact or Financial Return: A Trade-Off That Does Not Exist3.3. Correlating Impact With Financial Return3.4. Defining an Investment’s Expected Return3.5. Investment Styles: Investors’ Attitude Towards Profit Generation

4. Strategy Matters: Investment Success by Design4.1. Identifying the Area of Desired Impact4.2. Clarifying the Correlation Between Impact and Financial Return4.3. Acquiring Market and Sector Knowledge4.4. Implementing a Portfolio Approach

5. The Landscape of Impact Investing: An Attempt at Classification5.1. Double Enhancer5.2. Strategic Benevolents5.3. Death Valley of Good Intentions5.4. Social Business Angels5.5. Strategic Investment Approach: The Hurdle for Success?

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6. Impact Investing Is INVESTING: Nothing Less and Sometimes a Bit More6.1. Investment Process Matrix6.2. Success Factors Within the Investment Process

6.2.1. Access to Privileged Deal Flow: Deal Sourcing and Deal Screening6.2.2. Ability to Coach and Monitor Companies Along the Way6.2.3. Early Definition of the Exit Strategy6.2.4. A Motivated and Aligned Team Makes for Success6.2.5. Performance Analysis: Without Cheating6.2.6. Size Matters

7. Key Insights and Suggestions for Shaping the Future of Impact Investing7.1. The Concept of Market Return Is Redundant for Asset Classes With no Liquid Market7.2. Why Impact Investing Is Done Is Irrelevant as Long as the Achieved Impact Is Intentional7.3. The Challenge of Metrics: Impact Performance Versus Investment Performance7.4. The Gamma Factor in Investment Performance: An Attempt to

Solve the Impact Measurement Debate

8. Impact Investing: Quo Vadis?8.1. Impact Investing and Philanthropy: Are Bill Gates and Muhammad Yunus

Wasting Their Own (and Others’) Money?8.1.1. Philanthropy: The Issue Is Scale8.1.2. Social Businesses by Nobel Prize Winner Muhammad Yunus

Annex: The Gamma Model

Literature

Information About the Authors

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Executive Summary

The notion that the success of an investment shouldbe measured by financial return alone has always beencontested and has been more hotly disputed in thewake of the financial crisis. Specifically, there is agrowing belief in certain financial and political circlesthat investments should be judged by their ability togenerate both a profit and a positive social impact.Clean technologies, such as solar electricity, are oftenheld up as an example of how this new approach toinvesting – known as ‘impact investing’ – can work.

This paper summarizes the main findings from newresearch on impact investing supported by IESE BusinessSchool and the Family Office Circle Foundation, basedon interviews with more than 60 dedicated impactinvestors. In it, we define impact investing, identifythe diverse investors and how they have succeeded orfailed and explain why the popular assumption thatimpact investing involves a trade-off between financialgain and social impact is wrong.

In fact, one of the most striking findings from ourresearch is that impact investing can only be calledimpact investing if there is a positive correlationbetween the financial return and the social impact.Other factors are also required to qualify as an impactinvestment, including the pursuit of profit and anintentional, measurable social impact. However, unlessthis positive correlation is evident, any investmentwith a social goal is simply philanthropy.

Key findings from our research include:

• True impact investing has five key characteristics. Itmust have:- profit as an objective- a positive correlation between the intended

social impact and the financial return of thatinvestment

- an intentional, pre-determined social impact

- a measurable social impact

- a result that produces a net positive change to

society.

• With true impact investing, there is no trade-off

between profit and social impact because the two

elements are positively correlated.

• Any trade-off between profit and social impact is

the investor’s choice, not a function of impact

investing. We identified four key types of impact

investors, each with different approaches and different

expectations of the amount of profits that they chose

to retain or to reinvest in the business.

• Successful impact investing depends on many

traditional factors – such as a strategic approach,

intelligent deal sourcing and building the best team

– but is set apart by a process that continually assesses

impact.

• Impact investing has traditionally been hampered

by inadequate measurement tools – meaning true

impact is disguised by, for example, broad-brush CO2

statistics. However, we believe the Gamma factor

could solve this dilemma.

We hope this report will help clarify some of the

misunderstandings that have surrounded impact

investing and enable investors to capitalize on the full

potential of this emerging asset class.

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1. Impact Investing:Just Hype or DefaultChoice?

In the last few years, fundamental questions have beenasked about how financial markets operate and howthey benefit society. As part of the fallout from thefinancial crisis, the contribution made by financialmarkets and their main players to the prosperity ofsociety has been questioned. Around the globe, newinvestment approaches have been called for that reflectresponsible behaviour and accountability in order tokeep financial markets in tune with the developmentof society.

Some of the main questions that have arisen in thedebate are the following:

- By focusing exclusively on the creation of financialwealth for individuals (i.e. investors), are financialmarkets destroying value for society?

- Has responsibility for the development of societybeen sufficiently reflected in the mechanisms,regulation and governance of financial markets?

- Is social responsibility a component of investmentthat is necessarily detrimental to financial return?

- Should changes be made in the taxation andsupervision of financial transactions to accountfor financial markets’ responsibility to society?

As the debate on these topics progresses, market playershave engaged in a parallel debate to explore howeconomic activity at large can be made compatiblewith the sustainable development of society.

1.1. The Emergence of ImpactInvesting

At the forefront of this debate is the question regardinghow an investment’s benefit (or cost) to society canbe integrated into investment decision processes andbecome a transparent part of the performance of assetmanagers to serve as a selection criterion for investors.

In response to these questions, new investmentstrategies have emerged that look beyond pure financialreturn. Investment approaches whose investmentobjectives go beyond pure financial return have manynames in financial market terminology, includingcorporate social responsibility (CSR) investing,responsible investing, social investing, responsibleinvesting based on environmental, social and corporategovernance standards (ESG), and, finally, impactinvesting, which is the most sophisticated attempt tocombine financial return objectives with an investment’scontribution to the sustainable development of society.

Impact investing includes any for-profit investmentapproach that seeks a financial return, but also attemptsto measure its impact on society.

1.2. Objectives of the Reportand Research Sample

The purpose of this report is to shed light on thecurrent positioning of impact investing in financialmarkets. The insights are based on more than 60interviews with dedicated impact investors.

An important constituency of our market researchsample was made up of large single-family offices(SFOs). SFOs have traditionally played the role ofpioneers in new asset classes. In its developmenttowards an asset class, venture capital benefitedsubstantially from the less risk-averse behaviour offamily offices. The same is true of impact investing asan emerging asset class today.

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The choice of using the activity of family offices as areality check for various impact investing conceptswas also driven by the high affinity SFOs havetraditionally had with investment approaches that gobeyond pure financial return. Family offices are alsotypically free of institutional constraints, a liberty thatallows them to pioneer new investment areas andapproaches with a degree of risk affinity that wouldbe difficult to find in an institutional framework.

However, our report also includes views and conclusionstaken from the experiences of institutional investmentfirms with dedicated activity in the field of impactinvesting, some of which have emerged from familyoffice structures. The views gathered from these marketplayers are of particular relevance for assessing thescalability of this market segment and the mainobstacles it faces on its path to growth.

1.3. Key Messages of the Report

The report seeks to assess the approaches taken toimpact investing by current and past practitioners.

• We seek to identify patterns that affect success andfailure in impact investing.

• We reflect on the challenges of impact investing asan asset class and discuss various approaches tointegrating social and environmental impact in theinvestment decision-making process of impactinvestors.

• We provide evidence to show that, though the coresuccess factors of impact investing are very similarto those of established asset classes, particularly theventure capital and private equity investment space,strategic choices and a structured approach appearto be more influential as factors for success in impactinvesting than in other asset classes.

• We seek to determine what differentiates impactinvesting from other asset classes and conclude that

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there may be fewer differences than the averagemarket observer might assume.

• Based on our findings, we also argue that the conceptof a trade-off between financial return andsocial/environmental impact does not reflect marketreality and is not only meaningless for the purposeof characterising this investment space, but mayeven be its main obstacle for opening up tomainstream markets.

• Finally, we address the issue of impact metrics andthe contribution they can make towards establishingthis industry. This topic has been particularlycontroversial for many years and thus far no approachhas been found that can serve as a foundation formarket consensus or standardisation. In our report,we analyse why this important milestone has notyet been achieved and present a metrics model thatwill hopefully advance this debate.

• For this purpose, in the context of this study weexpand on the concept of the gamma factor ininvestment performance as a complement totraditional two-factor asset pricing models. Thesemodels typically use the alpha and beta factor todetermine measures for risk-commensurate return.The gamma factor, however, expresses the intendednon-financial benefit an investment generates forsociety, also called its social impact. It is a multiplierfactor applied to the financial performance of aninvestment based on social impact objectives thatcan be defined as part of the investment thesis andback-tested in an investment monitoring process.

• We conclude with an overview of impact investingin the private equity space and quoted securitiesmarkets, and seek to define the positioning of thissector with respect to other impact-consciousfunding models, notably the concept of venturephilanthropy.

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2. Impact Investing:What It Is and WhatIt Is Not

Since the capital asset pricing model (CAPM) wasintroduced in portfolio theory and asset managementin the early 1960s, the financial world has focused theassessment of investment performance on two mainindicators, known as alpha and beta. While the betafactor expresses the sensitivity of a given asset to themovement of the market as a whole, the alpha factoris a risk-adjusted measure for the so-called activefinancial return of an investment. The active financialreturn is the return in excess of the compensation forthe risk the investors assumed by making the investmentin a specific asset or portfolio of assets. For half a century,the alpha factor was used to assess the performance ofasset managers across all types of asset classes.

“Any business model in whichevery impact unit has a cost interms of financial return is adisguised form of philanthropy.”However, in the last decade and most certainly sincethe beginning of the current financial crisis, whichstarted with the subprime crisis in 2007, investors haveincreasingly questioned whether traditional models forassessing investment performance are comprehensiveenough. The emerging debate asks whether the exclusivefocus on financial and often short-term measures ofinvestment performance is suitable to express all thedimensions investors want to see reflected in theirinvestment choices.

Within this debate, impact investing has establisheditself as a novel market segment that seeks to take a

IN SEARCH OF GAMMA – AN UNCONVENTIONAL PERSPECTIVE ON IMPACT INVESTING

holistic approach to value creation. It combines thecreation of financial wealth with a concern about howsuch financial value is created and the impact theinvestment has on society.

2.1. Definition of Impact Investing

For the purpose of this report, impact investing is definedas follows:

This definition comprises a number of important featurescommon to other segments of the impact financingmarket, as well as features that differentiate it fromthose segments, especially the space of philanthropicactivity:

a) Profit Orientationb) Correlation Between Impact and Financial Returnc) Intentional Impactd) Measurable Impacte) Positive Effect on Society

a) Profit Orientation

The notion of investment must include a focus on return.While philanthropic activities are a vital segment ofimpact financing activities, they are, in and of themselves,dependent on charitable funding sources and, withoutsuch financial support, cannot be considered self-sustainable. Consequently, they cannot be part of abroader asset allocation strategy based on thecomplementary risk/return profiles of its componentsand cannot reach scale through return-driven growthof assets.

b) Correlation Between Impact and Financial Return

This requirement implies that the financial return driversof funded business models cannot be dissociated from

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impact objectives. If the business model is the means ofachieving the impact objective, by definition there hasto be a positive correlation between the impact objectivesand the business model’s financial return. Any businessmodel in which every unit of social/environmental impacthas a cost in terms of financial return is thereforeinevitably a disguised form of philanthropy.

c) Social Impact Must Be Intentional

The impact generated through impact investing mustbe deliberate and intentional. Most human activitiesand virtually all activities financed through investmentshave some sort of impact on society. However, to beconsidered impact investing, the impact of an investmentactivity must be more than a coincidental or merelytolerated by-product. For this purpose, the social impactmust be tangible: it must be feasible to express socialimpact in a change theory that reflects the delta inducedby the investment compared to a state observable priorto making the investment.

Defining such a change theory implies defining anexpected impact when the investment is decided upon.Defining an expected impact result that shows a causallink between the investment made and the resultachieved is actually more vital as a criterion for impactinvesting than the actual methodology or type of impactmetrics used.

d) Social Impact Must Be Measurable

Impact Metrics can be overly complex and may, in somecases, provide little added value beyond a theoretical

concept for the investor. However, it is absolutely essentialto formulate impact expectations and objectives in atangible way prior to investing. Such a requirementobviously does not rule out the possibility of developingand/or refining appropriate metrics for impact investingin the course of the investment. This is particularly truefor pioneering impact investing in new investment areas.

"When measuring impact,investors tend to mix outputand outcomes with the impactthey achieve with theirinvestment."

In order to be considered an impact, the results of animpact activity must contribute to a change in thesituation prior to the investment and this resulting changemust be quantifiable. Only if such a change can beformulated as an expectation at the point of investmentcan it form part of an investment objective against whichthe observed impact resulting from the investment caneventually be benchmarked.

The impact investing value chain typically involves fourcomponents:

1. Inputs 3. Outcomes2. Outputs 4. Impacts

The differentiation of the four categories is demonstratedin the flowchart above (see Figure 1):

Inputs Outputs Outcomes Impacts

Resources investedin the activity

(In) direct andtangible productsfrom the activity

Changes resultingfrom the activity

Outcomes adjustedfor what would havehappened anywayand for “collateral

damage”

Figure 1

Source: Authors, inspired by SROI Primer, Foundation of SROI, 2004.

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When measuring the impact of an investment, investorstend to mix output and outcomes with the impact theyachieve with their investments. The output of an activitydoes indeed have a causal link with the investmentactivity financed and possibly even with the veryinvestment analysed. However, not every output actuallystands for an impact. There may be outputs of aninvestment’s funded activity that have no impact oreven a negative impact.

Take the activity of an organisation building educationalinfrastructure in developing countries. As an “impactindicator” in their annual report, they publish the numberof new educational facilities and additional studentplaces made available in the year. The annual reportmentions a new municipal school in a developing countryand makes the happy announcement that 32 places forprimary-school pupils were made available. Actually,of the 32 places, only 8 were filled because the other24 children were kept at home to work on the harvestand do other work that allowed the family to cover itsbasic needs. So, despite the undeniable output of 32new student places, the impact-relevant outcome wasactually only achieved for 8 children.

Equally important is the differentiation between outcomeindicators and impact indicators: while outcome

Beyond Capacity Building: Creating Impact in Education.

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indicators express the difference resulting from a givenactivity, this difference needs to be adjusted for thechange that would have taken place if the investmenthad not been carried out. In the school project examplethis could be expressed as alternative educationalprograms (visiting teachers, open-air classes) that mayhave resulted in lower quality education but possiblyin more widespread education than that achievedthrough a structured schooling system.

e) Positive Effect on Society

Impact investing needs to generate a positive impacton society. In previous sections, we discussed thedefinition and measurement of impact. However, forthe purpose of assessing the impact on society, all theoutcomes of an activity need to be considered and thisis typically done by means of collateral damage analysis.

"True Impact needs to beassessed by means of acollateral damage analysis."In the schooling project discussed above, such anassessment might include the municipality’s recurringexpense for maintaining the building, which will eatinto the resources needed for other vital municipalinfrastructure. In an environment of scarce fundingsources, the trade-off of benefits from the use ofresources may have sizeable impacts on the community.In our school project, spending the municipality’s scarcefinancial resources to maintain a school building thatis basically empty could even effectively mean that thefunded project has a negative social impact.

This example demonstrates that the impact intendedby an investment may be counterproductive when placedin the larger context of negative externalities.

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3. Empirical Evidence:How Different IsImpact Investing?

It is obviously rather trivial to talk about the conceptof impact investing from a theoretical point of view.It is much more appealing to see how impact investingcan be put into practice.

Here many questions arise and most of them continueto be the topic of lively public debate:

Can achieving impact be combined with generatingfinancial return? And if so, must a trade-off be made?How big does the trade-off have to be? Is theinvestment process different? Can impact be quantified?How can impact be made part of an investment process?

3.1. Testing the Market:Our Market Survey Sample

We were privileged to have access to the ChiefInvestment Officers and investment staff of more than60 players in the impact investing space, includinglarge single-family offices, direct investment firmsmanaging funds with an impact investing approach,and fund-of-funds managers and other specialisedasset managers marketing impact investing products.

We analysed their investment approaches with them,based on their defined investment objectives, theselection criteria they applied and how these criteriawere embedded in the investment process, and finallyhow they assessed the performance of their investmentactivity in the impact investing space.

Our findings reflect the great variety of investmentthemes and investment targets in the impact investingspace. They ranged from hardcore clean-tech

investments in the venture capital and private equityspace to the funding of social entrepreneurs in Asiawho combat lack of access to healthcare in rural areas.Equally diversified were the motivations reflected inour sample for conducting impact investing as theircore activity: some addressed this sector with amentality of “giving-back-to-society”, whilst otherssought to do so with a business approach (i.e. generatingfinancial return), but we also found a considerablenumber of players in this field who sought exposureto impact investing because of their expectation thatit would outperform other asset classes in terms offinancial return. This was particularly the case in theclean-tech space.

"Our study was not ableto confirm the existence ofa mandatory trade-offto be made by impactinvestors between pursuedimpact objectives andfinancial return."More generally, we observed that the impactcharacteristics of business models in the underlyinginvestment targets were clearly driven by investors’financial return expectations: the more aggressivereturn expectations shown by investors were typicallytranslated into a higher degree of positive correlationbetween the pursued impact objectives and theinvestment’s profitability drivers.

However, our study was not able to confirm theexistence of a mandatory trade-off made by impactinvestors between pursued impact objectives andfinancial return. The concept of an inevitable trade-off between social impact and financial return andthe hierarchical subordination of societal goals to the

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1 Monitor Institute: Investing for Social and Environmental Impact, 2009

logic of financial markets appears to have becomeredundant in today’s market reality, at least in theform called for in public debate in recent years.

3.2. Impact or Financial Return: A Trade-Off That Does Not Exist

Indeed, virtually all the literature on impact investingpublished to date differentiates in some way between“impact first” and “financial first” investors and “market-based” investing and “mission-based” investing, thussuggesting that investors have to make a choicebetween financial return and the social benefits aninvestment may create1.

This perceived competition between arguablyincompatible investment objectives has been andprobably continues to be one of the most prominentbarriers for impact investing to scale to a recognisedasset class. Whilst financial-return-driven investorshave traditionally associated social or environmentalimpact with a loss in financial return, impact investorswith a clear social or environmental agenda fearedthat the explicit focus on profitability would destroythe noble social cause of their investment.

Since this debate began, investors have looked at eachother like they were on opposite sides of the ironcurtain and with a high degree of mutual suspicionwhen it came to their investment practices.

"Impact investors with a clearsocial or environmentalagenda feared that the explicitfocus on profitability woulddestroy the noble cause oftheir investment."

Only the recent financial crisis has lessened thispolarisation to some extent. Financial-return-driveninvestors have been forced to look at new concepts ofvalue creation and the sustainability of the businessmodels they invest in. Moreover, investors with a socialand/or environmental agenda have discovered thatcapital efficiency is a vital component to theirinvestment success and that this is also true on theimpact front.

In a way, clean technologies paved the way for thisnow fluid communication channel between what usedto be two strictly segregated worlds, simply because,in every successful clean-tech company, the benefitsfor society and financial profitability are so closelyinterwoven in the business model that one cannot beseparated from the other.

3.3. Correlating Impact WithFinancial Return

In segments outside the clean-tech space, the notionthat financial return and social impact can enhanceeach other is less intuitive and has been a point ofdiscussion for years.

Yet what seems to be a contradiction at first sight isnot necessarily one if placed in the context of marketreality beyond preconceived market logic.

As a matter of fact, it is hard to argue that any providerof capital would fund a newly created company purelyfor financial return considerations. Rather, it is a choiceof a business model that is appealing and convincesthe investor that the investment makes sense. Manyconsiderations come into play in such an investmentdecision: risk affinity, the skill set of the entrepreneurwho executes the business model, business risks, andbusiness factors such as the raw materials needed, theowners’ choice of values and many more.

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All these factors come together in a business modelthat ultimately answers two questions: What is thecompany’s business? (i.e. what is the business offeringor what is the company’s product?) and how is it goingto be put into place? One or both of these questionsalso addresses the social impact of the business. Anyproduct that is supposed to find a buyer must havesome form of social impact. The question of how abusiness is run definitely has a social impact, not leastfor its employees. And finally, how the value chain isoperated from product development to production,distribution and after-sales customer/productmanagement definitely has a huge social impact.

"If profit maximisation werethe only overriding objectivewhen setting up a business,most of the businesses andtheir products and serviceswe consume on a daily basiswould not be available."

The maximisation of profit, however, is not an objectiveat the inception of a business model to start a company.If profit maximisation were the only overriding objectivewhen setting up a business, most of the businessesand their products and services we consume on a dailybasis would not be available, or at least not in the wayour economies operate today.

What business objective is pursued and how it is realisedare fundamental parts of a business case, long beforethe question of financial viability or profitability isanswered or even asked. In a way, one can argue thatfinancial viability and profitability are not businessobjectives per se, but are merely means of achievingbusiness objectives that can be broken down into amultitude of dimensions.

Obviously, the investment decision to be put into practiceis tested against an investment’s financial viability byassessing whether, based on the efficient use of capital,such an investment really does make sense. At this stage,an entrepreneur or any potential shareholder of thecompany will search for the most capital-efficient wayto achieve a company’s business objectives, thusmaximising the efficiency of the capital employed, or,in other words, the investment’s financial return.

Financial Return (profit margin or IRR)

Figure 2

Soc

ial/E

nvir

onm

enta

l Im

pact

Social/Environmental Impact Objective

Source: Authors.

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The graph above (Figure 2) demonstrates thisrelationship between financial return and social impactwhile providing for the jumps in fixed costs that arenecessary to meet impact objectives. Not surprisingly,it reflects the same shape as the profitability of aproduction unit with a decreasing per-unit cost ascapacity utilisation is maximised. Such a drop in per-unit cost in a traditional production business resultsin higher per-unit output margins as sales numbersincrease. Assuming a positive correlation betweenimpact units achieved and financial return, the samerelationship holds true for the impact component ina business model and its effect on financial return.

"If impact investing hasthe requirement that socialimpact and financial returnare positively correlated,then the trade off betweenthe two can no longer be adriving factor in theinvestment selection."Therefore, the graph also reflects a number of importantprerequisites to qualify the deployment of capital fora social or environmental purpose as impact investingas opposed to philanthropy and charity-type grants.The most important prerequisite is a causal link betweena business model and the social impact achieved. Theremust be a positive relationship between the scale ofsocial impact pursued and an investment’s ability toachieve financial self-sustainability, its likelihood torecover its investment cost and its likelihood to generatefinancial profit. If there is a negative correlationbetween social impact and a business’ ability to fundits operational activity and organic growth from itsown revenues, we are not talking about impact investing

but rather about a form of philanthropy that needs tobe funded with a sunk-cost mentality.

However, if one accepts the positive correlationbetween the impact to be achieved and the financialsustainability of the underlying business model as aprerequisite for impact investing, the trade-offbetween social impact and financial return can nolonger be the decisive factor in investment selection.

The concepts of market return, cost of impact,subordination of financial return to social impact andthe like are replaced with the simple notion of the“expected return”. The expected return is the returnfor which an investor is ready to financially back abusiness model. The question of whether this returnmatches market return, falls short of it or exceeds itmay be of theoretical value but has no importance inpractice: the sheer existence of enough investors tofund a business model with its business objectives,return expectations and risks involved indicates thatthere is a market for this business model.

3.4. Defining an Investment’sExpected Return

Therefore, with our counterparts in our market sample,we assessed the return patterns on their impact portfolioand inquired how these returns compared to the returnexpectations formulated at the time of investment. Theresults where extremely widespread, ranging from clearoutperformance over other asset classes to extremelypoor performance with substantial financial losses.

In our approach, we first sought to understand thebusiness model and the degree of positive correlationbetween the impact pursued and the financial return.We were interested in determining whether the realisedreturn matched the expected (or planned) return atthe time of investment. As expected, we found clearand significant differences. To our surprise, however,the degree of match or mismatch between expectedand realised financial return was independent of the

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degree of correlation between the impact pursued andthe financial return.

In the group of impact investors who were focusingtheir efforts on selecting impact-driven business models,i.e. where impact was highly correlated with financialreturn, such as clean-tech businesses, we found thatmore than half of the investors comprised in thatgroup were achieving or exceeding the expectedfinancial returns. Surprisingly, within the same spaces,we also found that returns were far below theexpectations of a third of the investors in this group.

It was striking to observe that these proportions werenot significantly different from those observed in thegroup of investors who were targeting investmentswith significantly lower correlation between impactobjectives and financial return. As mentioned above,besides investors who sought financial returns inimpact-focused businesses suitable to outperformother asset classes, our sample included investorslooking for business models addressing social issues inunderprivileged areas. In these investments, there wasstill a clear correlation between the impact pursuedand the revenue model of the underlying investment,but the choice of (geographic and/or sector) deploymentof the investment was clearly driven by the impactobjective pursued by the investor.

One example is Pamoja Capital, founded in 2006 byJohn H McCall MacBain following the sale of Trader

Classified Media. Their investment in a rubber plantationrejuvenation business plus a 35MW power plant underconstruction in Liberia demonstrates a clear positivecorrelation between environmental and social impactand financial return: the social pricing of the electricitythat will be produced by the plant is set at a level thatis affordable for many people who would not otherwisehave had access to electricity. Furthermore, the plantrecycles the non-productive trees from nearby rubberplantations and then replants new trees. When thetrees mature, they will provide the local farmers witha steady income stream from the rubber. Furthermore,because the company pays the farmer for the treesthat it removes, the farmers have the initial capital tohire employees to tend the trees in the interim period.The project seeks to be carbon neutral from beginningto end, and have a positive social, environmental anddevelopment impact. The projects also offeremployment opportunities to more than 700 membersof the local community, which in turn has follow-onbenefits for the development of local businesses. Thebusiness model is self-sustainable and profit generating.The impact objectives were built into the businessmodel through the generation of affordable electricity(without which a power plant in that region wouldvery likely not have made any sense). Obviously, itcould be argued that Pamoja's actual financial returnwas less than what could have been achieved from anenergy investment in any industrialised country.However, Pamoja’s investment objective was to buildan energy plant in an underprivileged area of Liberiathat offered electricity at an affordable price to itstarget customers. At the same time, the business hadto generate a financial return that made the plantsustainable, delivered a return for investors and allowedfor organic growth.

This example nicely demonstrates the optimisationprocess taking place in the impact investing space:Pamoja identified a business model that created socialand environmental benefits that could be tracked aspart of business performance. The objective was thento optimise the business model in a way that maximisedInvesting in Energy for a Social and Enviromental Impact.

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its business objectives under the constraint of havingto remain fundable from a sufficiently large investorbase. The result was an impact-adjusted return figurereflecting the financial return requested by investorsto be ready to fund the project while maximising theinvestment’s social and/or environmental impact againstpredefined impact targets. Here again, we were surprisedto discover that more than a quarter of the samplewhose objectives were to maximise the impact-adjustedreturn of their investments reported that they wereable to exceed their expected financial return. In fact,about half of these outperformers on the investors’expected return were able to outperform benchmarksthat did not.

3.5. Investment Styles: Investors’ Attitude Towards Profit Generation

Depending on the proportion of their financial returnthey were prepared to (re-)invest to achieve (additional)social impact, players could be classified in a spectrumranging from investors ready to reinvest their entire

proceeds to achieve additional impact on one side toinvestors wanting to extract proceeds from theinvestment in the form of dividends and redirect themto new investments on the other. However, theinvestor’s choice about investment proceeds shouldnot be seen as a trade-off choice in the underlyingbusiness model. It is rather the investor’s choice as tohow to use the financial return of the investment. Justas certain mutual funds investing in bonds give investorsthe choice to accrue and reinvest interest or have itdistributed in cash, based on the offering of an impact-adjusted return, impact investors may choose one ofthe following options:

a) reinvest the financial proceeds from the investmentto scale their investment and generate additionalimpact.

b) keep their investment at a constant level and receiveany distributed financial profits.

c) decrease there investment over time by extractingprofits and eventually selling their shares in the business.

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Case studyJan Sundt: Exploitinga Unique BusinessOpportunity – WithImpact

Do you think of impact investing as a way to spot andexploit business opportunities? This is the case if youinvest in a business model whose core selling propositionis to have a social or environmental impact. In otherwords, the profitability of the investment is based onexploiting an opportunity that only exists because ofthe social or environmental impact it generates. Youmight think that this is the case of renewable energies,microfinance, etc., but what if someone told that youit also applies to SKIING?

That someone is Jan Sundt!

Background

Jan Sundt grew up in a shipping family in Norway. Hereceived a business education in finance and workedas a banker and in the family shipping business. Hesold out of the family shipping business in the mid-1980s and transferred most of the proceeds to thefamily office, where his children were majority owners.The family office was founded to manage these fundswhile Jan Sundt pursued more entrepreneurial activitiesoutside the traditional framework of the family office.

Sustainable Skiing in Oslo: An Impact-DrivenBusiness Model

Jan had always had a passion for skiing and, when hemoved back to Norway ten years ago, he was saddenedto see that, in the country that invented skiing, large

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groups of the population could not afford to practicedownhill skiing and snowboarding. Together withanother family, he purchased two small rundown skiareas; one within the city limits of Oslo and the otherjust outside the city. His impact objectives for theresorts were to:

• Create resorts accessible to all: people who couldnot afford to travel to an Alpine resort, children,immigrants and the disabled.

• Develop positive environmental attitudes among youngpeople through skiing and snowboarding events.

The closeness to the capital, public transport and theaffordable ticket prices made the facilities accessibleand affordable to the majority of Oslo’s population.The number of guests in the facilities doubled, turnoverquadrupled and the larger of the two facilities nowgenerates the fourth highest turnover of a ski resortin Norway.

The risk-return profile of this investment did notcorrespond to the investment portfolio approach ofthe family office, but only an entrepreneurial mindsetcould make this investment opportunity happen. Thedevelopment of the larger facility also requiredconsiderable personal patience because of the lobbyingneeded to get government permits.

Skiing as Impact Investing.

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Furthermore, Jan kept a close eye on the environmentaland social footprint in a business (ski resorts) that,admittedly, not many people would consider aninvestment with a positive impact on the environment.

• The resorts were environmentally certified andconsiderable efforts were made each season toreduce the environmental impact. For example,when the facilities were taken over by the presentowners, electricity usage did not increase, despitethe fact that the capacity was doubled.

• A number of assessments were made of the resort’senvironmental impact, e.g., the CO2 emissionsdifferential of visiting this ski resort as opposedto driving to the mountains.

• A partnership was created with a “healthy” softdrinks supplier. The soft drinks company providedfree snowboarding lessons to disadvantagedcommunities and the facility provided lift ticketsand equipment.

Facilities designed for disabled snowboarders anddownhill skiers are currently under construction.

The Entrepreneur Who Turned His Hobby Into aProfitable, Impactful Business

Jan Sundt was troubled by the fact that far too manyof his compatriots could not enjoy the same hobby ashe did. Skiing was too costly for the majority of thepopulation of Oslo, as the resorts were far away, whichmeant travel and lodging costs. Was this a problem oran opportunity (un-served future clients) for anentrepreneur? To realize this opportunity, a businessmodel that would attract this clientele and define theprices, the service, the processes, etc. had to bedeveloped. A financially sustainable business plan withsocial and environmental impact was created. Therealization of that business model was not the resultof a strategic investment approach (identifying thearea of desired impact, clarifying correlations, etc.),but rather the idea and desire of entrepreneurs topursue a dream – unambiguously a very opportunistic

investment approach. “When I started this venture, Iwas very much aware of the risks involved. It is likestarting any venture were you have many factorscoming into play which you can’t plan with certainty.I knew from the outset that this was not the type ofrisk profile of an investment I could expect the familyoffice to unanimously endorse. But I could afford thistype of risk and I thought it was worth having a go.For me, creating a successful business around theobjective I wanted to pursue was key. As is the casefor a startup business, I knew that in order to get there,more than just money was required. The success ofsuch a venture requires the same input of leadershipand entrepreneurial spirit as a conventional investmentin a startup situation. So, in addition to capital, I amalso providing my time and expertise (for what it isworth) and I believe that the result of this effort is abusiness model that is of more value to society thana philanthropic donation,” said Jan Sundt, who is atypical example of the social business angels in ourlandscape (see page 27, Figure 4).

What Does this Case Prove?

1. Impact investing is about developing andimplementing business models and is thereforenot different from any other business. Impact isjust one more dimension of the business model.

  The fourth largest ski resort in Norway in termsof turnover has been made possible by also servingthe less privileged part of the Oslo population inan environmentally sustainable way.

2. Proving that out-of-the box businesses andindustries are suitable for impact investing requiresthe mind set of a true entrepreneur. We call theseentrepreneurs social business angels. Even familyoffices can be too “structured.”

3. Impact investing can create completely new businessopportunities: if skiing can be the basis for impactinvesting, it seems there are no limits.

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4. Strategy Matters:Investment Successby Design

Once we had established that the (mis-)match betweenexpected financial return and effectively generatedfinancial return was not necessarily correlated with theimpact pursued, we were obviously interested inidentifying patterns that could explain why certaininvestments and certain investors systematically fellshort of their expected return targets. During thisexercise, we discovered that most investors whosereturns were below their expectations were not facedwith this phenomenon because their expectations weretoo high, but because an aspect of their investmentapproach was flawed. The vital question, then, is whatwas flawed? Why are some investors able to achievetheir expected returns while others fail to do so?

From the players who managed to meet their expectedreturn targets, we were able to derive key parametersfrom their investment processes that seemed to havean effect on their investment success. These keyparameters were typically linked to setting up a strategicframework for their impact investing activity.

In our interviews, we identified the following coreelements of this strategic impact investing approach:

4.1. Identifying the Area ofDesired Impact

Investors with a clearly defined investment approachspent significant time and money developing a clearunderstanding of the desired impact. As a consequence,they were able to differentiate between the output,outcome and impact resulting from their investmentactivity (see Chapter 2.1 and Figure 1).

4.2. Clarifying the CorrelationBetween Impact and Financial Return

For these investors, due diligence began by clearlydefining the target business models and understandinghow such models could achieve the desired social impactand financial return. This analysis also included thecorrelation between impact objectives and the financialreturn drivers of the underlying business model. As aresult, from inception they had a clear view of theexcepted scope and scale per deal, which defined thescope and scale of impact.

4.3. Acquiring Market and SectorKnowledge

In most cases, the investors did not have previousexperience in the targeted sector. Acquiring market andsector knowledge became crucial. This meant hiringexternal consultants and spending substantial amountsof money on market and sector intelligence. (The caseof the investment approach of one of the founders ofSAP provides one such example; see case study on page23). Building this sector-specific knowledge and gainingspecialised know-how also gave these investorsadditional benefits. Their know-how became a value-added proposition for the investee company andtherefore improved the quality of the deal flow to theinvestor as the investor’s reputation grew.

4.4. Implementing a PortfolioApproach

A strategic investment approach also means investorsdiversify over a number of companies (to spread risk)while at the same time they focus on sectors wherethey have specific knowledge. Any investment is exposedto a series of risk factors, including default risk.Impact investing is no different. Successful impactinvestors typically define a target-portfolio approach

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to minimise risk while leveraging their acquired marketand sector knowledge.

In summary, a strategic approach to impact investinginvolves a strategic choice of sector; research-driveninvestment target selection with an organised deal funnel;strategic choices in asset allocation and portfolio strategy;and deliberate choices in impact and financial returns.The result is a clear definition of the target businessmodels, i.e. how to produce social impact and financialreturn, and the excepted scope and scale per deal.

Our market research not only showed that the mostsuccessful impact investors complied with the core

success factors mentioned above in their investmentapproaches. We also found that the investors who werethe least successful in achieving their expected financialreturns were also the ones with the biggest shortcomingsin the strategic setup of their investment activity: verylittle or no defined target sectors or interests and noex ante definition of the expected impact and/or financialdrivers/results. These players approached investmentsbased on personal preferences, emotional ties andrelationships with the principal and/or other familymembers, and were often driven by a “give-back-tosociety” mentality. We call this the opportunisticapproach to impact investing.

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Case StudyAeris Capital: StrategicApproach in GameChanging Sectors

The biggest value drivers in business are revenue modelsthat focus on unavoidable and unmet needs of society.Such business models are generally great investmentopportunities. In the midst of these investmentopportunities, is it possible to identify game-changingbusiness models that contribute to the sustainabilityof our society? The family office of Prof. Klaus Tschira– Aeris Capital – is convinced that this is the case!

Background:

Klaus Tschira, a physicist by training, is a co-founderof German software giant SAP. After many years on theboard of directors, he is now a member of the company’ssupervisory board. In addition to setting up Aeris Capitalto manage his wealth, in 1995 he also established theKlaus Tschira Foundation, a Heidelberg-based foundationdedicated to supporting research in informatics, thenatural sciences and mathematics.

A Family Office With a Clear Objective and Strategyfor Success

Aeris is identifying “impact-game-changing” sectorsthat are driven by future environmental and socialtrends. According to Aeris’ assessment, these sectorsprovide the best risk-adjusted and impact-directedresults for investors. By anticipating these trends aheadof the market, Aeris seeks to identify “predictablesurprises” that can help protect and enhance shareholdervalue over the long term. Aeris, as a sustainabilityinvestor, seeks investment opportunities that combinethe key innovations and drivers of tomorrow’s business

environment, which are dictated by social, environmentaland geopolitical trends, while at the same time mitigatingenvironmental, social and governance risks. Aeris’investment strategy is based on 3 themes that shapethe world and are essential to satisfy physiological needsand required for human survival:

1. Sustainable Energy, which is not limited to CleanTech, is global and covers multiple industries andmarkets, such as Materials, Renewable Energy,e-Storage and Energy Efficiency.

2. Aging Population, which focuses not only on thehealth-care needs of a growing, more affluentaging world population, but also its demands forconsumer products, entertainment and media;wellness; and lifestyle and life choices.

3. Agriculture and Forestry, which focuses on Farming,Suppliers, Food Packaging, etc., and Water: filtration,purification, conservation and wastewatertreatment.

The main ideas are summarized in Aeris’ MissionStatement:

• Invest along the supply and value chain in all assetclasses related to the chosen theme (Megatrend).

• Have an impact in specific undervalued orunderdeveloped sectors to generate alpha.

Sustainable Mobility Is one of Aeris Core Investment Sectors.

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• Identify and occupy new segments wherecompetition is low or does not exist and favordominance.

Aeris’ belief is that long-term sustainable investingleads to outperformance in financial terms. It is optimisticfor the future, as in both 2008 and 2009 its impactportfolio outperformed its benchmark comprising asset-management teams without a particular focus onsustainability.

Aeris operates a strategic-investment approach toimpact investing, which includes:

• Acquiring superior knowledge on the chosen sectors:Aeris is not just aware of the potential of a sector;it wants to understand the minutest detail beforeproceeding. For example, its interest in electric carswas based on 3 years of research. This included thereview of 10,000 papers, data analysis by internalanalysts and the hiring of external consultants toverify their own conclusions and investment thesis.This means a – very costly – due diligence on sectorsand their companies before even starting to identifydeal flow.

• Understanding the complete supply and value chain:within the sector, sub-sectors are identified andanalyzed. For example, the value chain of theelectric-car industry could be divided into: electricvehicles, components (e.g., batteries), energysuppliers (e.g., solar or hydro energy companies),energy management and distribution (e.g., chargingstation networks) and waste management.

• Superior Network as a differentiating factor: Aerisalso invests time and money to build a large networkin these issues/sectors of leading experts, investmentbanks and interesting co-investors such as otherfamily offices.

Why Is Impact the Future and Vice-Versa

If a lot of people will face a big problem in the future,there will be a lot of future clients to be served. A large

part of the biggest problems to be solved are relatedto social and environmental issues, and that is whyAeris has chosen 3 impact topics for its overall strategyfor all asset classes.

Take the topic Aging Population: the sheer numbers ofnew elderly people, together with the dynamic demandsof the BRICS nations for a better and more Westernquality of life, will put pressure on health-care systemsto be more efficient and better address the so-calleddiseases of the aged, from diabetes to cardiovascularproblems and cancer. This creates – amongst others –opportunities in the asset classes of private and publicequities. Longer active lives are also creating demandfor new forms of residential living, capable ofaccommodating both an extended work life and greaterinterest in hobbies and non-work activities. This creates– amongst others – opportunities in the asset class ofreal estate.

What Does this Case Prove to Us?

1. Strategic approach pays off – Aeris spent a lot oftime, brainpower and money to indentify sectorsthat enhance financial return and at the same timehave an impact. It is a typical example of a “doubleenhancer” in our landscape chart of impactinvestors (see Figure 4 on page 27).

2. Investing in anticipation of big future trends alwayspays off. As such trends happen to have – basicallyby definition – a large environmental and socialimpact, one can conclude that focusing on bigtrends with a clear understanding of the anticipatedimpacts makes for an ideal approach to impactinvesting.

3. The biggest challenge of impact investing is toaccurately assess the timing of such big trends.Intelligently navigating big future trends requireslarge investments in knowledge, teams andnetworks. This may imply a sizeable upfrontinvestment, but ultimately appears to pay off.

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5. The Landscape ofImpact Investing:An Attempt atClassification

We have summarised the findings of this analysis bymapping our sample according to the approachesidentified (strategic vs opportunistic) on the y axis andthe degree of correlation between pursued impact andfinancial return drivers on the x-axis (see Figure 3).

Furthermore, for each investor we show whether therealised return matched or exceeded the expectedreturn (green) or whether the realised return was belowthe expected return (red). The size of the bubbleindicates the size of the impact investment activities.We only included investors for which we were able toattain sufficient information. Duplications were omitted.

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The graph is based on investors’ self-reported data andits potential biases must therefore be acknowledged.Because of these biases, it is no surprise that we haveless data on realised returns below the expected return.We identified 4 distinct groups of impact investors:

5.1. Double Enhancer (top right)

We call an investor a “double enhancer” if it has strategicallydefined its approach to impact investing by focusing onbusiness models that enhance financial return and impactat the same time (high positive correlation between impactobjectives and financial return drivers). As described above,a clear sector example here is clean-tech. The higher theimpact, the higher the financial return, the higher theimpact, etc. It is a virtuous circle.

Ben Goldsmith and WHEB Partners

Ben’s first forays into the impact investing space werevia several ad hoc investments in small environmentallyfocused companies and funds. To truly achieve impact,he realised that he would need to create a structure

Figure 3: The positive effect of a strategic approach

< S100M< S100M

S500M - S1bn

S100M - S500M

>S1bn

ClassificationSize of Impact Investing Activities:

Success Line

ISI

SFO ISI SFO

SFO

SFO SFO

SFO

SFO

SIFSIF

SIF

VCF

BABA

BA

SFOSFO

SIF

SIFSIF

VCF VCF

SFO: Single Family OfficeSIF: Social Investment FundVCF: Venture Capital FundISI: Institutional Social InvestorBA: Business Angel

Correlation between impact objectives and financial return drivers HighLow

Str

ateg

ic a

ppro

ach

Hig

hLo

w

BA

Source: Authors.

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where he could implement a sufficiently institutionalinvestment process to attract leading people in theirfield. For this purpose, he set up WHEB Partners, whichis based on Ben’s strongly held view that he can achievesuperior returns through an environmental focus.Following the success of the first fund, Ben and hiscolleagues raised a second venture fund and alsoexpanded the investment company’s overall potentialby launching WHEB Asset Management (environmentallyfocused funds for the retail investor) and WHEBInfrastructure Fund (green infrastructure funds targetingfamily-office investors).

All the “double enhancers” interviewed had professionalstructures they used to implement their investmentactivity. These ranged from intermediated investmentapproaches (specialised funds) to investment-company-type structures with dedicated specialised staff. Allthese structures were scalable.

5.2. Strategic Benevolents (top left)

Some investors have made the choice to reinvestthe proceeds from their investment for the sake ofscaling the impact they can achieve. The objectiveof these investors in our sample was to do good ona sustainable basis, i.e. to preserve and recycle themoney available for sustaining and scaling theseimpact activities. Refraining from building financialreserves from profits for the purpose of scaling theimpact reduces the margin of financial resources tocorrect setbacks in the execution of a businessmodel. In order to cope with the risk of increasedvulnerability of the underlying business models,such investors took a portfolio approach that allowedthem to accept that some deals might be write-offs.Therefore, they had well-defined overall returnexpectations per deal and aggregated them to aportfolio model. These investors had defined theirimpact-adjusted financial return expectations, takena strategic approach to the deal flow, outsourcedall activities for which they could not deliver thehighest quality and attracted highly skilled

investment teams. The most popular structure forthis type of investor was the foundation.

5.3. Death Valley of Good Intentions (bottom right)

The only segment of clear negative outliers with realisedreturns far below expectations is in the bottom right-hand corner of our graph: opportunistic approach andhigh correlation between impact and financial return.One of the explanations for these examples of failureis that investors with opportunistic investmentapproaches appear to have limited access to qualitydeal flow due to doubts on the value they can add toinvestee companies and co-investors in a syndicate.They have a lot of money, can pay and attractprofessional staff, but, due to their poorly definedstrategy, are exposed to bad deal flow and have systemicflaws in the quality/structure of the investmentmanagement process, which culminates in not selectingattractive deals.

5.4. Social Business Angels (bottom left)

There is one way to have an opportunistic deal flowapproach in impact investing and still have returns inaccordance with expectations: the business angelapproach of former successful entrepreneurs. Theyhave privileged access to deal flow due to theirperceived value added as former successfulentrepreneurs (which is highly recognised by the targetinvestee companies), a more long-term investmenthorizon and strong involvement of the principal/familymember. This opportunistic hands-on approach by theprincipal, often paired with a high willingness to usegenerated financial return for scaling impact, appearsto be a viable approach to pioneering impact investingareas that institutional investors could not afford forreasons of risk/return considerations. Private investors(family members) that acted with family money orassets of their own in an angel-like manner, often hadbasically no structure, but leveraged the personneland contacts of the existing family office (legal support,support in due diligence, etc.).

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5.5. Strategic Investment Approach: The Hurdle forSuccess?

Based on our market survey, with the exception ofthe angel investor, a strategic investment approachappears vital to achieve the expected return. Allinvestors above the diagonal line (the “success line”in Figure 4) claimed to have had returns that fulfilledtheir expectations. One possible interpretation for this

could be that the higher the positive correlationbetween impact and return, the more investors aremotivated to establish an institutional investmentapproach that includes a high strategic approach. Onthe flipside, it also means that the lower the correlationbetween impact and financial return, the more investorsare tempted not to set their financial expectationshigh enough and not to require a systematic investmentapproach.

Success

Line

HighLow

Str

ateg

ic a

ppro

ach

Hig

hLo

w

Correlation between Impact objectives and financial return drivers

StrategicBenevolents

DoubleEnhancers

SocialBusinessAngels

Death Valleyof Good

Intentions

Figure 4: Segmentation based on the strategic approach

Source: Authors.

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6. Impact Investing IsINVESTING: NothingLess and Sometimesa Bit More

Successful investing follows certain rules of behaviourthat derive from the very nature of the investmentbusiness:

- originating quality deal flow,- applying state-of-the-art due diligence standards

to select deals with superior value propositions, - providing professional support as value-added

investors to maximise value creation,- providing for downside protection in case the

investment “derails”, including monitoring and controlrights to ensure focused execution of value creationstrategies by the management team at investee level,and finally

- acquiring exit rights and options to materialise valuein an exit process.

These investment dimensions are parts of the investmentprocess every sophisticated investor follows one wayor the other. Impact investing is no different in thisrespect and there is no reason why it should be. Ourmarket sample confirms, without exception, theparamount importance of these success factors in theinvestment process, and also in impact investing. Whatdifferentiates impact investing is the fact that, nextto the “traditional” risk/return considerations in eachof the steps of this investment process, the impactinvestor follows an additional track for assessing andmanaging the impact dimension at each step of theinvestment process. This is shown in the figure below:

Due DiligenceDeal Sourcing +

Deal Screening

Value Creation

+ Monitoring

Exit Route

Selection

Contractual

Terms

Screening for:-Risk Profile-Stage focus-Sector focus-Geography-Return expectations-(In) Direct/Co-Investment

Deal Analysis:-Strategic Assessment-Financial-Tax-Legal-Exit Options

Contractual Risk Mitigators:-Milestones-Liquidation Pref.-Tag-/Drag-Along-Ratchet Valuations-Voting rights-Anti Dilution Rights, etc.

Value Creation:-Organic Growth-Acquisitive Growth-Financial Engineering-Cost-control-drivenvalue creation

PermanentMonitoring:-Cash Reach-Growth/ProfitabilityIndicators

Exit management:-M&A vs IPO-Auction processes-Liquidity Constraints(Lock-Up, Liquidity of Shares)

-Warranties-Valuation setting-Payment terms

Screening for:-Excluded Sectors-Priority Sectors forSocial/ Env. Impact

Impact PotentialAssesment:-Environmental ImpactAssessment

-Ethical Screening ofBusiness Processes

-Change Theory Definition-Definition of ImpactTargets in Business Plan

Inpact Investmentdriven terms:-Definition of ExcludedActivities

-Definition of ComplianceObligations with Ethical/Environmental Standards

-Reporting Obligations onImpact Indicators

Impact Management:-Active/ Passive ImpactObjectives Management

-Building/Preserving/Improving Environmental/Social Business standardsand Objectives

Monitoring of:-Impact Indicators (KPIs)

Buyer Selection andObligations:-Selection of Buyer onenvironmental/ethicalbusiness standards

-Commitment of buyerto ethical/environmentalbusiness standards

Figure 5

Source: Authors.

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6.1. Investment Process Matrix:Financial /Risk and ImpactDimension

Many of these points are very intuitive. However, inour interviews, a number of aspects recurrentlyappeared to be closely associated with a successfulcombination of achieving the pursued impact objectiveand meeting expected return targets. These “successfactors” within the investment process are describedbelow.

6.2. Success Factors Within theInvestment Process

6.2.1. Access to Privileged Deal Flow: Deal Sourcingand Deal Screening

In any investment activity it is vital to secure a dealflow that makes it possible to pick the deals that havethe highest potential to deliver the expected returnswith an acceptable risk. In impact investing there isnot only the need to develop an investment case forthe financial-risk-adjusted return, but there is alsothe requirement to pursue a social impact, whichmakes the privileged access to deal flow even morecrucial.

For people relying on opportunistic deal sourcing,“Don’t believe that the deals you are offered areopportunities not to be missed”, was the advice a socialbusiness angel gave for not ending up in the “DeathValley of good intentions”.

For investors not having a seasoned entrepreneur asa driving force and market interface, the strategicapproach to deal flow generation made all thedifference. As mentioned above, a sophisticateddefinition of the right sectors based on in-depthresearch in conjunction with high discipline in executingthe investment strategy appeared to result in superiorquality of investments.

The investors we interviewed who had a clearunderstanding of the scope and scale of their targetdeals were most frequently able to achieve a relevantlevel of the pursued social impact and earn the expectedreturns.

"Successful impact investorsappear to be particularlysensitive to the degree ofcapital efficiency with whichsuch impact can be achieved."It is interesting to note in this context how impactinvestors reason about the scope of their investment.Generally, scope and scale appear to be a concern ofdedicated impact investors. Impact investors seek tofund businesses that address social issues through theirbusiness model. Businesses have a built-in ambitionto grow.

Naturally, impact can be achieved in many ways andat different scales. Successful impact investors appearto be particularly sensitive to the degree of capitalefficiency with which such impact can be achievedand whether the investment, in comparison to thesocial issue addressed, does make a difference. Hence,the achieved impact should not only be assessed inabsolute terms, but in relation to the overall socialissue it seeks to solve. In an epidemic disease, findinga way to help a few hundred patients may be of limitedsocial impact, whilst developing an orphan drug tocure a rare disease can have an incredible impact, evenif the disease will only affect a few hundred patientsa year on a global level: in absolute terms, saving afew hundred lives is the same in both cases. However,the fact that a successful orphan drug addresses thesystemic issue of a disease makes its social impactsuperior to preserving the lives of an equivalent numberof people struck by an epidemic disease without beingable to help people affected by the disease at scale.

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Hence, business models that cannot be scaled are rarelyattractive to impact investors. The potential for scalingappears to be just as important to them as therequirement of a positive correlation between theimpact objective and financial return drivers in thebusiness model. Business models that lack either thepossibility of being scaled or show a negative correlationbetween the impact objectives pursued and thegeneration of financial returns are better suited forphilanthropic activities but do not attract genuineimpact investors.

6.2.2. Ability to Coach and Monitor Companies Alongthe Way

An entrepreneur expects active support to develop thebusiness from a professional lead investor in privatedeals. This also applies to impact investing. Investors’financial know-how, their contacts and all sorts ofadvisory and coaching activities are sought. In the caseof the successful investors in our sample, we noted ahigh degree of involvement of the impact investor,almost in every case in the role of lead investor.However, the most important aspect of all was thecapacity of the investor to coach the entrepreneur/CEOin the main challenge of impact investing: to deliverthe expected return and the desired social impact.Businesses pursuing impact objectives in their businessmodels are frequently even more dependent on a singleindividual, often a charismatic entrepreneur. Thesebusiness leaders often feel like a lonely wolf and seeksparring partners to test their ideas and ambitions todrive their business. Hence, the interaction betweenthe investor and the entrepreneur is often decisive forthe success of the business. Not only do entrepreneursof social businesses frequently require strong supportin the non-impact-related dimensions of their business,but, due to the specific nature of their business idea,they are often much harder to replace. In a way, thesebusinesses very much resemble a technology start-upwith a couple of highly skilled technology-drivenentrepreneurs. It often takes a great deal of hands-onsupport from the VC who funds them to make the

business a success. In our study, a number of investorssaid that such support can only be delivered with closegeographic proximity. One investor based with histeam in London and active in India said that they hadto establish an office in India, as it was impossible todeliver this success factor without being physicallynear.

A vital component of coaching entrepreneurs withimpact-focused business models is tracking the impactachieved. In our interviews, we found that very fewused pre-defined impact indicators as a basis formonitoring impact progress. Although everybody agreedthat this was truly vital for the effectiveness of theinvestor’s coaching activity, few had spent the timeand brainpower to develop these key performanceindicators (KPIs). In many cases, this was not due toa lack of interest in defining and applying such KPIs,but rather because of the difficulty of definingmeaningful indicators. As a matter of fact, whilst socialbusiness angels, due to their close interaction with thesocial entrepreneur, typically do not requiresophisticated reporting tools on the impact achieved,the challenge is different for impact investors thatoperate with delegated/discretionary asset managementservices. Here, the difficulty of defining meaningfulKPIs often arises from the diversity of business modelsfunded within one portfolio, making it a challenge todefine impact measures that are comparable betweeninvestments and that can be aggregated at portfoliolevel.

Nevertheless, the few impact investors we encounteredwho had developed specific KPIs, sometimes withsubstantial upfront effort, were convinced thatappropriate metrics were the basis for improving theimpact dimension of the investment over the years.

6.2.3. Early Definition of the Exit Strategy

Unless they are for evergreen structures relying ondividend income models, investments require an exit ata certain point in time. For the purpose of this report,

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we defined “exit” as a proactively pursued sales processand hence disregarded the damage-limiting liquidationof assets or “exit-by-default”. The exit defines the returnon an investment in both financial and impact terms.

To define and plan for an exit early on is easier in caseswhere impact objectives and financial return driversare highly correlated in the business model. Clean-tech is therefore an ideal sector for impact investingin the private equity space. The success (in financialand impact terms) of many clean-tech funds provesthat social impact is priced at exit for investmentswhere social impact is an integrated part of the financialmodel. Other industries in which this is at least partlytrue are energy and healthcare.

It becomes more complex when there is less correlationbetween the impact objectives and the financial returndrivers. Especially when the business model could bereplicated in or dislocated to (geographic or sector)areas with reduced social impact, there was a distinctrisk that the business was acquired solely for its businessmodel, without specific impact sensitivity from thebuyer. In such cases the investors in our sample voicedtwo main concerns:

1. Social impact is not priced at exit.2. The next owner destroys the impact by focusing

on financial return.

The first point could not be verified due to a lack ofsuitable benchmarks.

However, we found evidence of very diversifiedexperiences of impact investors in which there was arisk that the buyer would “destroy” the impactcomponent of a business and saw how this could bedealt with in a sales process:

1) Some impact investors decided to apply selectioncriteria for potential buyers by requiring that theselected buyer honour the current mission of thecompany.

2) In other cases, even buyers who were not known forbeing impact-conscious businesses were retainedin a sales process because they could make itcredible that they sought to buy an impact-drivenbusiness in order to change. An institutionalisedfamily office, for example, invested in VitaminWater to sell a drink that encouraged people todrink healthily. The company was eventually boughtby Coca-Cola. For the family office, this was notinconsistent with their principles. Coca-Cola had“wised up” to the fact that this was an importantproduct and, by taking the product more“mainstream”, they were transforming their softdrinks business.

3) One example where the social impact initially targetedwas lost was reported by a social business angelinvesting in South Africa. He invested in a companythat collected and refurbished second-handcomputers. Eventually, other investors decided thatSouth Africa was not the right location for thiscompany and relocated it to China, where productivitywas higher and costs were lower. In this case, bymoving the facility, the intended impact in SouthAfrica was lost. This demonstrated that financialconsiderations were stronger than the desire toachieve social impact in a given region.

4) Many of the investors interviewed also used loansas a primary means of overcoming any problematicsituations at exit. “Exiting micro-equity positionsis practically impossible”, as these enterprisesseldom grow large enough to attract interest fromprivate equity players or strategic buyers, and theentrepreneur often lacks the capital for amanagement buyout. To mitigate the exit risk,investors prefer to structure their investments asconvertible debt. (Beyond the “Tradeoff”, Hui WenChan, Vera Makarov and Sarah Thompson, February27, 2010, p. 11.) Obviously, the use of a debtproduct discharges the investor from anyconsiderations of the survival of the business’impact dimension beyond the repayment of the loan.

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6.2.4.A Motivated and Aligned Team Makes forSuccess

The investment process and investing itself are, ofcourse, only as good as the investment team thatexecutes it. Investing is one of the most competitiveemployment markets and it is understood thatattracting high-quality professional staff requiresproviding attractive incentive schemes. This normallymeans that investment team members participate inone way or another in investment performance and,as a newer trend, not only in the upside, but also inthe downside.

In our sample, one investor in the double enhancerquadrant asked all his employees to invest a substantialamount of their personal wealth in the deals theymade for the company. In this case the employeeswere the first people to make or lose money, dependingon the performance of their deals.

On the other hand, we also identified families activeas strategic benevolents that had the objective ofensuring that their very professional investmentteam got decently wealthy through the packagethey were offered.

Of interest was the correlation between staffingissues and the overall framework set for an impactinvesting activity. Investors with a highlyopportunistic impact investing approach seekingattractive financial returns (the quadrant of the“Death Valley of good intentions”) showed thehighest degree of staff turnover and difficultyattracting staff. This phenomenon was probablylinked to the inability to prove investment successwith such an opportunistic investment approach.

In general, we have noted a distinct increase in theskill set and quality of staff hired in the impactinvesting space over the last years. This may be dueto the new attention impact investing has receivedin financial markets, but may also be a reflection

of increased awareness among newly trainedinvestment professionals that social responsibilityhas increased in the finance industry compared toa few decades ago.

6.2.5. Performance Analysis: Without Cheating

Assessing the performance of an operation is key inany business environment. In the traditional investmentbusiness, performance measures are typically linkedto financial return measures and in many cases arepaired with a deeper analysis of the risks taken.

"Cost transparency inimpact investing activityis a challenge".Besides the dimensions common to traditional assetclasses, impact investing includes a third dimension interms of performance analysis that seeks to assess theimpact achieved. The assessment of these threedimensions is not trivial:

a) Assessing risk is often difficult in impact investing,as these investments are executed in novel investmentareas. Hence, there are no benchmarks for returns,default rates and, consequently, the volatility of returns,which is a measure of the risk assumed by investors.

b) On the return side, cost transparency in impactinvesting activity is a challenge. We met a number ofinvestors who were enthused by new impact investingactivity and, as a result, were de-facto not attributingthe real costs to this activity. Some investors did notinclude what they spent on due diligence in theircalculation of the realised financial return, but attributedit to other activities or overhead. In a way, they wereassessing their impact investing activity on a grossperformance basis, which is obviously not sustainablein the long run. Other forms of cross-subsidising impactinvesting activity can be found in the use of shared

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resources with other activities of the family office. Anangel investor using his family office for legal and othersupport without considering these costs in theprofitability of impact investing deal costs is biasingperformance figures. However, virtually all the successfulplayers in impact investing we interviewed stressed theimportance of a clear definition of what performanceper deal means and what to include when calculatingit. Accountability for results is not only a prerequisitefor achieving a sustainable investment activity; it is alsovital for establishing performance parameters for theteam in order to create incentives and motivate them.Investment team motivation in itself is a success factor.

c) Finally, on the impact investing performance front,the biggest challenges lie in metrics. The successfulplayers in impact investing confirmed the importanceof clarity regarding the impact they wanted to achieve,how it could be integrated in the investment decisionand how it could be monitored. The main challenge herewas the definition of metrics. This specific aspect isdiscussed in Chapters 7.3. and 7.4. and in Appendix I.However, in a number of cases where investors were notvery specific about their impact performance, the issuewas not or not only the lack of available metrics. In anumber of cases, there was also a lack of discipline inconsidering the interaction between pursued impact andexpected financial return, or a lack of awareness of theimpact that was actually pursued by the investment. Themost tangible impact performance assessments werefound in (i) investment models with a very high correlationbetween pursued impact and financial return drivers, (ii)cases of very close involvement of the capital provider(i.e. the case of social business angels) and (iii) cases ofhighly professional investment setups where tangiblereporting on the achieved impact was a requirement tobridge the distance between the capital provider andthe investment activity carried out.

Generally, we found that the structures that workedthe best for assessing the impact of investment activityin its three dimensions of risk, return and impact wereat the extremes of our observed spectrum, i.e. in the

space of highly involved individuals personally executingthe impact investing activity with their own money(social business angels) or sophisticated professionalinvestment structures.

6.2.6. Size Matters

In the context of sustainability mentioned above, oneaspect should not be forgotten: scale. What is therequired size for an impact investment to pay off andbe part of a sustainable investment activity? Again,this is not a phenomenon exclusively relevant to impactinvesting. The VC industry also faces this issue of criticalsize: take the example of a seed investment activity.Technically, a seed fund can operate from a fairlylimited size if it keeps a high investment discipline interms of investment targets, capital intensity and riskdiversification. However, the cost of execution is anissue because, in a sustainable investment business,the operating expenses of the investment businessought to be borne by the returns on investment. Thisrequirement is the reason why small-scale seed fundshave virtually disappeared over the last decade andhave been replaced with business angel activity onone side and public-sector technology transfer programson the other.

In the impact investing space analysed here, thesituation is very similar: there are successful angeldeals, where relatively little money (about €100,000)and the right definition of scale and scope haveachieved the expected impact and the expected return.

However, such small structures only seem to besuccessful in an angel-like setup. The moment thereis a professional team, the costs (team, infrastructure,etc.) of small deals are too high. An example can clarifythis: a small but highly professional team of, say, threepeople with support can cost around €1 million a year,not counting performance-linked remuneration. Let’sassume that the expected investment performancecan cater for a 2% management fee on a sustainablebasis. These parameters result in a minimum “fund”

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size of €50 million. All sorts of assumptions and ratioscan be changed, but even by doing so, a sense of theneed for a certain minimum threshold will not goaway. Still, many impact investors clearly operate belowsuch minimum size. As a consequence, they areunderstaffed or compromise on staff quality. Hence,there is a certain notion of critical size in impactinvesting to sustain best-in-class investment teams.On the other hand, the amount of money to be investedneeds to be in tune with the investment strategy,

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target sectors and the deal-generation capacity of theentire setup. If the combination of requirements onthe investment resources and economic parametersof the intended investment activity cannot be madecompatible, the only solution appears to be outsourcing.Outsourcing investment execution is the way chosenby many investors of subcritical size, not only in impactinvesting, but also in other asset classes such as theprivate equity and venture capital space.

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7. Key Insights andSuggestions forShaping the Futureof Impact Investing

7.1. The Concept of Market ReturnIs Redundant for Asset Classes With no Liquid Market

A leading debate about impact investing has traditionallytried to assess whether impact investing can achievemarket returns. We have presented the insight gainedfrom our research that impact investors seek to realisea business model that delivers a certain social orenvironmental impact as part of its business objectiveswith a given risk profile and an expected return.

Our interaction with impact investors in our researchsample seems to indicate that they do not have tomake a choice between pursued impact and financialreturn. We have taken this reasoning and projected itto asset classes where the common marketunderstanding is that they are clearly return-maximisingasset classes.

The question of interest to us was being able to identifythe features of impact investing that make peoplesuspect that this asset class is trading off financialreturn for additional social and/or environmentalimpact. The frequently raised question as to whetherimpact investing can achieve market return is yetanother widespread attitude based on the belief thatinvestors need to make a trade-off between financialprofitability and social or environmental impact: itsuggests that social impact is always at the expenseof financial return or, in other words, social impact isbought at the expense of financial return.

This assumption goes against the foundation of impactinvesting set out here, namely, that the impact to beachieved is part of the business objectives that positivelycorrelate impact objectives with financial return driversand, hence, is inextricably at the very origin of aninvestment decision.

"The trade-off debateis in contradiction to thefoundation of impactinvesting which is thatimpact objectives are anintegral part of the businessobjectives."Moreover, this assumption of a trade-off is alsocounterintuitive when examined against the veryunderstanding of what is meant by market returns inother asset classes. Indeed, market return is prominentlyused in the capital asset pricing model (CAPM) andreflects the return generated by the market portfolioof investments that one investment forms part of. Assuch, market return implies the existence of a marketfor the type of an envisaged investment. The existenceof a homogeneous market portfolio with componentswith comparable risk/return features shared by allinvestors is already a very brave assumption in quotedmarkets and does not necessarily withstand a realitycheck. However, the concept of market return becomeseven more remote the further one moves away fromliquid and tradable assets or the further one movesaway from regular markets.

Let’s take the example of venture capital and privateequity investments for which only a very illiquid andhighly inhomogeneous secondary market exists, if atall. In such illiquid asset classes, what is the marketreturn for an investment? Is an internal rate of return

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of 30% in a private equity buyout deal a market return,an above-market return or a below-market return?Does it matter what level of leverage is used to achievesuch a return? What is the market return for aninvestment in a company whose sole purpose is todevelop a new molecule as the basis of a drug againstAlzheimer’s disease? 5%? 50%? As much as 500%?Can anybody tell? If judged against the return historyof venture capital as an asset class, one can easilyargue that there are plenty of asset classes that deliverbetter returns than venture capital, especially ifexpressed in comparable measures of public marketequivalent (PME) returns. Yet, there are plenty ofinstitutional investors, family offices and privateindividuals who continue to deploy venture capitaland all these investors are certainly far from beingcharity organisations. The point is that, at least inilliquid asset classes, there is no concept of marketreturn and there is ultimately only a choice driven byinvestor preferences, which combine the purpose ofthe investment with its financial profitability and therisk profile associated with the underlying businessmodel.

Hence, rather than a trade-off that has to be madebetween financial return and social and/orenvironmental impact, the origin of an investmentdecision is the judgement of a business model thathappens to include a given social impact and that, asa whole, appeals to a sufficient number of investorsin order to receive funding.

Admittedly, such a holistic judgment of investmentshas not always been the rule. The assessment of risk-adjusted returns has been rudimentary in the past,especially in illiquid asset classes, mostly because ofthe absence of comparable asset classes and returns.Only with the financial crisis triggered in 2007 hasthe approach to risk-adjusted return assessmentchanged in illiquid asset classes as well. Investors havestarted to look into additional ways to integrate thefull spectrum of risks into the investment decisionprocess, even for investments without market

comparables. If there is now market consensus thatit does not make sense to assess financial return inisolation from the risks taken, the logical consequencewould be to also question the assessment of investmentperformance in isolation from social and environmentalsustainability.

It therefore appears that the question of trade-offbetween financial return and social impact isunfounded, at least in the definition of impact investingused in our study.

This definition implies a positive correlation betweenpursued impact and financial return drivers.

If the argument of the trade-off between financialreturn and non-financial investment objectives is tobe maintained, it must also be applied with the sameconsistency to at least all the asset classes that lacka liquid market and therefore lack comparables formarket return. Yet financial investors appear moreforgiving when it comes to justifying investmentdecisions outside the impact investing space. Thisphenomenon is presumably triggered by the ambitionof impact investing to justify the investment case asa whole, while other asset classes very often limitthemselves to a financial return promise that frequentlyremains just a promise.

However, if the investment decision is based on aholistic assessment of business objectives, includingtheir social and environmental impact, metrics areneeded to give investors the means to back-test theirinvestment assumptions and react accordingly, just asthey would do on their financial return expectations.This is precisely the logic applied by impact investorswhen they seek to come to a common understandingon how to express impact and impact investingperformance in suitable metrics.

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7.2. Why Impact Investing Is DoneIs Irrelevant as Long as theAchieved Impact Is Intentional

Another sizeable debate in the impact investing spacerevolves around the question about whether impactinvesting can be done with the sole purpose of boostingprofits. Just as exclusively financial return-driveninvestors have traditionally questioned the impactcomponent in any investment as value-destroyingredundancy, impact-focused investors have alwaysfelt that the ambition to generate financial returnwith a business model takes away the noble cause ofthe impact objective being pursued.

This perception deeply rooted in the mindset of impactinvestors is the main reason why impact investing hashistorically often been confused with philanthropyand has therefore amplified the assessment ofmainstream markets that social impact objectives inan investment destroy financial value.

"The scope of challengesfacing society today can nolonger be solved with a purelyphilanthropic approach."Yet, for the sake of both their constituencies, the twokinds of investors – hardcore philanthropists andfinancial investors with no particular interest insocial/environmental impact resulting from theirinvesting activity – have to change their perspective:

a) Even in the space of pure philanthropists, theunderstanding is gaining ground that the scope

of the challenges facing society today can nolonger be solved with a purely philanthropicapproach. Capital accessible through fundraisingfor philanthropic activities is in no way sufficientto address all the locl issues in society, let alone

"In the light of thedominance of capitalisticsocioeconomic models in oursocieties and the lack ofalternatives, the challengesof sustainability can only beovercome if they areintegrated into market logic."regional and global challenges. These globalchallenges include the threat of possible climatechange, as well as poverty leading to major

political instability, human rights issues in supply- change management, the scarcity of primary resources, and demographic challenges, to name

just a few that have grown beyond the scale thatcan be solved with traditional approaches of

charities and philanthropic organisations. Hence, in the light of the dominance of capitalistic

socioeconomic models in our societies and thelack of alternatives, these challenges can only

be overcome if they are integrated into market logic.

In such market logic, it is obvious that part of theinvestment community will invest in impact-relevant business models purely for financial returnconsiderations. In the philanthropic space, impact-motivated investors will have to accept that theirown approach must coexist with this marketmentality if they are to effectively address societalissues at the regional or global level. In otherwords, the impact investment community willhave to come to terms with reality and acceptthat the reason impact investing is taking place(whether for pure financial considerations or forthe purpose of achieving a social impact) isultimately irrelevant as long as the social /

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environmental impact is not a coincidental by-product but a deliberate choice in the businessmodel.

b) Likewise, financial investors across the completeinvestment spectrum have started to realise thattheir financial return models are no longersustainable if they do not consider the long-termimpact the underlying business has on society.Independently of the debate on the cut-off linebetween investing and philanthropic activities,the inclusion of social and environmental impactin the definition of business objectives and theway in which they are attained has meanwhiletranslated into financial return implications acrossthe entire spectrum of asset classes. The falloutof the financial crisis has clearly demonstratedthat, as we move forward, value creation in businesswill have to consider the cost of externalities suchas air, water and soil pollution, and the use ofconstraint resources, including the dependencyon fossil-fuel energy, to a much greater extentthan has been done thus far, simply because theseexternalities are no longer free and access toconstraint resources has become an issue ofcompetitiveness.

Social and Environmental Impact: From BusinessRestriction to Response to Business Restrictions

Whilst social and environmental impact may well havebeen perceived in the past as a constraint to financial-return-oriented business models, its active managementhas today become a key driver of financial return.Social and environmental sustainability affects financialreturn through direct cost factors (CO2 footprint,pollution taxes), reputational risks (unethical supply-chain management) and business risks (liability risksfor environmental hazards). These factors translateinto either reduced returns (direct impact on returnexpectations on an investment) or an increase in

investment risks (expressed as greater volatility offinancial returns).

In recent years, a number of large private equity firmshave started considering social and environmentalimpact in their investment risks and have made thempart of their value creation plan in investee companies2.

"The effect of social andenvironmental sustainabilityis undoubtedly thebiggest amplifier of impactconsiderations forinvestments in traditionalasset classes."Awareness of non-financial impact amongst PE fundmanagers has also stepped up through pressure fromlimited partners and the trade buyers PE firms use asexit channels for their investments. Limited partners,especially amongst trade-union-funded institutionsand pension funds, increasingly have expectationsregarding the ethical approach to their investmentactivities. Trade buyers across all industries have becomeselective in their acquisition targets: environmentaland social-responsibility-linked reputational risks makethem either apply sizeable discounts to the sales priceor refrain from acquisition altogether.

The effect of social and environmental sustainabilityis undoubtedly the biggest amplifier of impactconsiderations for investments in traditional assetclasses. Only a few years ago, investor requirementsfor social and environmental responsibility, ethicalinvestment criteria and the like were perceived asinvestment restrictions that were frequently reflected

2 e.g. Doughty Hanson’s ESG approach: http://www.doughtyhanson.com/private-equity/esg-engagement.aspx

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in negative screening approaches applied by assetmanagers. Today, this perspective has changed andproactive management of social and environmentalprofitability has become a way to respond to businessdevelopment constraints dictated by the scarcenessof resources, increasing costs of externalities andconsumer pressure for ethical standards applied in theproduction cycle.

From this perspective, environmental and socialsustainability have become business factors that haveto be considered on a par with financial sustainabilityand are woven into the entire product cycle of abusiness, including supply of input factors, productionmanagement and product distribution channels.

What does this new framework of market reality meanto investors? It implies that social and environmentalsustainability are no longer business aspects to beconsidered outside the operating parameters of abusiness. Rather, they directly influence either abusiness’ downside risk or its growth and profitabilitypotential, or both.

However, if social and environmental sustainabilityhave indeed become core business success factors,they also have to be monitored the same way otherbusiness parameters and objectives are monitored andcontrolled. This is where the issue of metrics for social- and environmental-impact key performance indicators(KPIs) comes into play.

7.3. The Challenge of Metrics:Impact Performance Versus Investment Performance

If it is true that virtually every investment has a socialand environmental impact, the only difference betweenimpact investing and traditional investing is in theintentional measurability of non-financial impact.

It is therefore not surprising that impact metrics arethe core topic of debate around impact investing. If

impact investing has not yet become a genuine assetclass, it is primarily because it has failed to define itsindustry standards, and impact metrics are thesestandards’ centre of gravity. However, the absence ofindustry standards for impact investing is far frombeing the result of a lack of ambition. There is consensusthat impact metrics are vital for this industry andnumerous attempts have been made to define themby consultancy firms, members of academia andpractitioners.

If these attempts have all largely failed, it is becauseof the lack of clarity regarding the purpose impactmetrics should actually serve. The answer varies,depending on when this question is asked along theimpact-investing value chain. It has to be differentbecause the information required by individualstakeholders is not the same.

Why Should Social and/or Environmental ImpactBe Measured at all?

The expectations of stakeholders in businessesregarding social and environmental sustainability arewidespread:

• Consumers PAY for transparency on how the productsthey are buying are produced.

• Company managers seek competitive advantage inemployer responsibility to attract and retain talent.

• Company managers seek information on thevulnerability of their business model due to impact-related risks (reputational risks, liabilities forenvironmental/social damage).

• Company managers seek to quantify the competitiveadvantage they can derive from social responsibilityand social/environmental dimensions in the businessmodel.

• Direct investors who invest in companies not onlyfor their product offering, but also because of theway the business model is implemented have aninterest in knowing whether the business model theyare investing in is working and how well.

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• Direct investors strive for proactive management ofbusiness risks that limit sales growth andcompetitiveness.

• Investors want downside risk management for “riskto society”, be it through direct costs related toindemnification or indirect costs (reputational risks).

• Finally, indirect investors (i.e. investors outsourcingtheir investment activity to intermediaries such asprofessional asset managers) want to know howeffective such asset managers are at executingimpact-relevant investment and how successful theyare at meeting the investors’ impact and returnexpectations.

Against such a broad spectrum of expectations onimpact metrics, it is not particularly surprising thatthe debate on impact measures has so far not deliveredany meaningful consensus regarding how such metricsshould be established and what purpose they can serve.The barriers to meaningful impact indicators aremanifold:

1) In the mindset of many market players, social andenvironmental business objectives are stilldissociated from other business objectives (thetrade-off dilemma) and, hence, there isdisagreement as to the purpose of KPIs that servetwo different constituencies of business objectives.

2) As opposed to financial return objectives, whichhave largely dominated financial markets, non-financial performance indicators are of awidespread nature and require differentmeasurement units and scales. These measurementapproaches require effort to be developed andput into place.

3) Given the widespread objectives traced with socialand environmental impact indicators, comparabilityof individual indicators is not naturally given. Suchcomparability needs translation into common,

standardised measures. The dilemma withstandardised measures is that they requireassumptions and simplifications to convergeprecisely to such a uniform standard. Theseassumptions and simplifications, however,potentially destroy the link of the KPI to its initialimpact objective. Hence, there is a severetrade-off between comparability of KPIs and thevalue of information they carry with respect tothe initial investment objective.

4) KPIs for social and environmental impact serve anumber of purposes of many different and oftendiverging stakeholder objectives. For some, theyare an expression of how a business is conducted;for others, they reflect a real impact componentthat is crucial to achieving the business goals; forstill others, they are part of investmentperformance reflecting the contribution to ethicalvalue creation; and for yet another group, theyare used as a selection criterion for service providers(e.g. asset managers). Despite the divergingrequirements of various stakeholders, the focuswhen defining impact metrics has been on one-size-fits-all measures that have introduced moreconfusion than clarity into the debate.

The attempts to come up with standardised, comparableand transparent measures have so far failed becauseof this lack of homogeneity in the expected purposeof metrics for various stakeholders. In order to be ameaningful expression of achieved impact, KPIs needto be closely tied to an individual activity’scharacteristics and a change theory associated withit. Individuality, however, defies comparability of KPIs,which is the expectation of another constituency ofstakeholders, notably investors who seek to compareimpact-related investment performance.

This incompatibility of the simplification necessary forstandardisation purposes with the preservation of thespecificity of KPIs to be relevant measures for theimpact of a business activity has resulted in impact

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figure), an investor would have to conduct a detaileddue diligence, break down the value-creationcomponents in the fund manager’s track record, andanalyse holding periods of investments and value theevolution of individual deals, etc.

Unsophisticated investors in private equity have rarelygone down this road and lack of due diligence maybe at the origin of the absence of Darwinism in thePE industry, the volatility of PE as an asset class andthe sizeable blow the PE industry has taken in thefinancial crisis since 2008. Today, those investors whoremain committed to PE as an asset class and theirintermediaries who continue to attract money for PEinvesting are very much aware of the value creationcomponent underneath the simplified performancemeasures of IRR and multiples on investment cost.

Yet, if the due diligence on the underlying investmentactivity of asset managers results in suitable decisionparameters in traditional asset classes, the solution tomeaningful impact measurement and performanceassessment of asset managers in impact investing mayalso reside in a two-layer approach. Instead ofattempting to express impact performance andinvestment performance in the impact space throughthe same measure, it may be useful to dissociate thesetwo fundamentally different views. A model that usesKPIs for genuine impact objectives merely as an inputfactor for metrics that assess the investment selectionperformance could provide a metrics system thatsatisfies the needs of all stakeholders.

7.4. The Gamma Factor in InvestmentPerformance: An Attempt to Solvethe Impact Measurement Debate

In our empirical study of active impact investors, thedebate on suitable and meaningful impact metrics wasa recurring topic. The spectrum of views on impactmetrics included, “We don’t need it, since we are usingour own money and are personally involved, so we

metrics such as scorecards, social return on investment,CO2 footprint measures and the like that do not satisfyany stakeholder expectations in a meaningful way.

“The job of an asset managerin impact investing is toselect businesses that performbest against impact targets.”A deeper analysis of existing financial performancemeasures in financial markets shows, however, thatthis phenomenon is not specific to the impact investingspace. Standardised measures that do not differentiatehow performance is achieved are also used in financialperformance assessment and, in many cases, they areabused to claim achievements in performance that donot necessarily reflect reality. The flaws built intocommonly used performance measures are not somuch of an issue in public markets with lively andliquid trading activity and solid analyst coverage thatprovide transparency on the risks taken, volatility andcomparable investment opportunities.

The situation is different in the case of illiquid andunquoted investments. Take the example of privateequity transactions where investors are simplisticallyserved with quartiled performance figures withouthaving much of a view on the investment risks takenin individual transactions or portfolios of transactions.An IRR of 25% on a private equity buyout fund maylook attractive, may be top quartile for its vintage yearand may look like a sensible investment compared tostock market investments. However, such informationdoes not reflect the type of leverage taken on averagein such a fund’s portfolio, the capital gain achieved inabsolute terms or the value added by the fund managerin the individual deals.

In order to find out such information (which cannotbe derived from the aggregated IRR performance

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know what’s going on”, “We use scorecards becausethat’s the best way to achieve a common denominator”,and “We use the CO2 footprint across our entireportfolio and calculate direct and indirect impact”.However, none of the market players seemed convincedthat a sufficiently universal approach had been foundto satisfy all potential user groups of these impactmetrics.

At the level of individual investments, four insightswere repeated:

1) Impact measurement was predominantly soughtby investors who were not directly involved ininvestment management. Business-angel-typeinvestors were relaxed about metrics, as they couldsee tangible results on the ground and weresatisfied with that degree of information. Thebigger the degree of delegation of the investmentdecision and management, the greater the desireto have some form of impact metrics in place.

2) There was a high degree of frustration with thelevel of sophistication wanted and needed forimpact metrics. Players frequently eithercompromised on the information value forcomparability reasons (scorecards, uniformstandard measure) or on the comparability of theirmeasures to track real impact components.

3) There was general agreement that it is moreimportant for impact to be measurable than howimpact measurement is actually done.

4) Active impact investors also agreed that impactobjectives need to be clear prior to or, at the latest,at the time of investment to become an integralpart of investment objectives.

From our discussions with active impact investors, itbecame clear that the main challenge of impact metricswas to make them a suitable tool for the variousstakeholders in an investment process.

Defining meaningful impact indicators at the level ofa business is, in itself, challenging. As discussed inChapter 2, it is of utmost importance to distinguishbetween output, outcome and impact indicators andascertain whether such indicators are trulyrepresentative for the impact component in the businessmodel.

Indicators at the level of the business model serve thepurpose of tracking the impact obtained through thecompany’s activity. Such impact indicators can andactually must be very individualised and specific tothe company’s business model. Just as it is meaninglessto analyse overall working capital ratios in the financialstatements of a company without differentiatingbetween trade account receivables and trade accountpayables, it is meaningless to track impact performanceindicators that do not place the individual values inthe context of the business.

However, this is precisely what frequently happenswith impact indicators. For the sake of comparability,impact indicators at business plan level (e.g. the tonnesof a certain plastic substance that previously couldnot be recycled but now can be processed using a newtechnology) are translated into general indicators (e.g.the amount of CO2 saved by not incinerating thesetonnes of plastic) to be compared with otherinvestments and aggregated at portfolio level. Thequestion as to whether the CO2 footprint expressesthe genuine social/environmental impact remainsunanswered (the CO2 footprint resulting from theincineration of this substance may not have been thebiggest issue; it might have been the tiny quantitiesof dioxin gases that presented a much greater threat).Also missing in such indicators is the impact of thesolution found in terms of the scale of the issue to besolved: impact not only needs to be evaluated inabsolute terms, but also in relation to the size of theproblem that an impact investment is supposed tosolve. In our example, the question is whether theinnovative recycling procedure for this plastic materialcan provide a sustainable long-term solution without

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other significant negative side effects and whether itcan be applied at scale to the quantities of plasticwaste involved. All these questions are sacrificed forthe sake of the comparability and aggregation ofimpact indicators at portfolio level.

All this inevitably leads to the question as to whyexactly we are sacrificing the information value ofimpact indicators at business level for the sake ofcomparability and aggregation?

"IMPACT performanceindicators and impactINVESTMENT performanceindicators actually serve twodifferent purposes thatcannot be made compatiblein one measure ."The answer very likely lies in capital providers’communication requirements for impact investingregarding impact achievements. Such investors wantto know what impact has effectively been achievedwith their capital. And they want to compare theimpact achieved by one asset manager (e.g. a fundmanager, fund-of-funds manager, etc.) with that ofanother. It is admittedly a very different view on impactindicators compared to entrepreneurs who use themto gauge the competitiveness of their technology, themarket share they can capture and the scale of thesolution they bring to a social problem as part of theirselling proposition.

And this is precisely the dilemma created by impactindicators. The abstraction made in the informationprovided by impact indicators for the sake of servingthe INVESTMENT performance analysis of impactinvestors sacrifices their value as measures of IMPACT

performance. Paradoxically, the resulting compromisedoes not serve any of the parties:

i) Such aggregated indictors have becomemeaningless to run the underlying business. Howis the entrepreneur of the plastic recycling facilitygoing to derive any useful information forconducting the business based on the reductionof the global CO2 footprint achieved?

ii) For the investor who has been investing in therecycling business through a fund or a fund-of-funds manager, the information is hardly anymore valuable. What does it mean if a businessmodel has managed to save a few hundredthousand tonnes of CO2? At what cost? And is itreally relevant which of two asset managers hassaved more tonnes of CO2 in absolute terms? Isn’tit more important to ask which asset managerused the capital more efficiently to address asocial or environmental issue?

Intuitively, it is easy to understand that an entrepreneuris dependent on the information indicators provideon the IMPACT performance of a business model, whileinvestors who are trying to assess the services of anintermediary are actually interested in impactINVESTMENT performance. However, in the absenceof better alternatives, the entire industry is now usingIMPACT indicators as impact INVESTMENT indicatorsin their reporting to investors. How can this beacceptable to investors?

Part of the answer lies in the lack of investorsophistication. Even for financial investmentperformance, there are still many investors in themarket who uncritically compare financial returnfigures between funds (e.g. IRRs) without assessingthe risk they are running in the underlying investmentmodels. The same is true for impact investmentperformance. For investors who merely require ajustification to classify an investment as an impactinvestment, a nice round figure expressing some kind

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or reduction in society’s CO2 footprint may very welldo the trick. And as long as such a poor level ofsophistication satisfies a sufficiently large share of themarket to be successful in fundraising, asset managerswill hardly make the effort to come up with a moresophisticated approach, especially when the path togreater sophistication is not an easy one.

"The purpose of the proposedmodel is to help establishan integrated measure forfinancial and impactperformance at portfoliolevel while maintainingmeaningful KPIs at businessmodel level."However, there is a growing community of impactinvestors out there in the market who are no longersatisfied with the current fig-leaf approach and whoseek real performance indicators to measure theinvestment performance of their asset managers. Asa contribution to this intellectual debate betweendedicated impact investors and asset managers whoare keen to develop standards for their industry, thefollowing paragraphs describe a novel approach forimpact measurement at the level of business modelsand asset managers (see Annex for more details). Atthe core of the model is the idea that IMPACTperformance indicators and impact INVESTMENTperformance indicators serve two different purposesthat cannot be made compatible in one measure.However, IMPACT performance indicators can serve asinput factors for the impact INVESTMENT performanceindicators in a model that bridges the two dimensions.The purpose of the proposed model is to help establish

an integrated measure for financial and impactinvesting performance at portfolio level whilemaintaining the freedom for meaningful KPIs at thelevel of individual business models. The basic idea ofthe concept is to divide impact metrics into a two-layer approach in which:

a) one layer expresses the impact objectives atinvestment level in indicators (KPIs) that can befreely defined and tailored to a specific investment’sneeds and features.

b) a second layer assesses and expresses theperformance of an investment manager or assetmanager in terms of an “impact-adjusted return”.

The gamma factor is proposed as an extension to thecapital asset pricing model (CAPM) that serves thepurpose of determining the expected return of a giveninvestment under the assumption of a given risk profilecompared to a market portfolio.

With the help of the gamma factor, the expectedfinancial return, rai, for an investment derived fromthe CAPM

rai = rf + ß*(rm-rf)

where rf is the risk-free return rate and rm is themarket return for the underlying asset, can be translatedinto an impact-adjusted return. At realisation, theexpected return on an investment, rai, becomes therealised return on an investment, rei. By applying thegamma factor, this return can be translated into animpact-adjusted return, rIA, as follows:

rIA = rei* s3

where rei is the ultimately realised return on aninvestment and s is the standardised gamma andexpresses the impact achieved as a ratio of the overallimpact level observed at a given point in time after

3 Source: U. Grabenwarter (2010) Impact Measurement - What's the point?

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the investment to the impact level set at base 100 atthe time of investment.

The resulting multiplier is

a) greater than 1 if the established impact objectiveis exceeded

b) equal to 1 if the established impact objective is met

c) less than 1 if the investment falls short of itsimpact objective

The multiplier is then applied to the expected (and laterobserved) financial return of the investment in orderto derive the impact-adjusted (expected/realised) return.

The benefit of this measure is that it dissociates theimpact quantification at individual investment levelfrom the impact performance assessment at portfoliolevel or at the fund manager’s track record level.

It has the advantage of allowing for an individualiseddefinition of impact KPIs at investment level withoutcompromising on the comparability of impactperformance at investment management level.

As such, both requirements on impact measures, i.e.their comparability and their meaningfulness for theimpact objective pursued, can be satisfied withoutcompromising on either of them.

The challenge that remains is in the degree ofsophistication and ambition reflected in the impactKPIs at individual investment level. Theoretically, anasset manager or impact investor could set easy-to-achieve impact targets in order to boost its impactperformance. Such behaviour would have to be detectedin a due diligence process on the investment managerby analysing its (impact) investing track record. Whilethis may seem like an additional effort to undertakeby investors, it is no different from a due diligencerequirement for achieving an informed investmentdecision, e.g. in a private equity fund investment.

It also appears considerably simpler to submit thequality-of-impact objectives established by aninvestment or asset manager to an objective ratingexercise than to achieve comparability of impact KPIsat the level of individual transactions that haveabsolutely no features in common.

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Case StudyA Principled Approachto Investing: CapricornInvestment Group

Jeff Skoll grew up in Montreal and Toronto and studiedfor a BA in electrical engineering. Before heading toStanford University for an MBA, he ran a computer-rental company in Toronto. At Stanford he met PierreOmidyar, with whom he founded what was to becomeeBay. In 1998, eBay went public, and the followingyear Skoll, the company's president and first full-timeemployee, became Canada's youngest billionaire. Heleft eBay in 2000, retiring at the age of 35 with anestimated $2 billion and a determination to continuechanging the world.

A Family Office Dedicated to Impact – a Networkof Companies

Jeff Skoll is said to have wanted to change the worldsince he was 14. This mission did not change followinghis success as an entrepreneur. Aware that socialchallenges and change happen at many levels and inmany dimensions that do not fit one standardizedapproach, he created a series of ventures and initiativesto trigger social change. His movie company ParticipantMedia is based on the belief that films are a powerfulmedium to build awareness and reach the number ofpeople necessary to trigger social change on a largescale. He sponsors the Skoll Centre for SocialEntrepreneurship at Oxford University’s Said BusinessSchool to educate tomorrow’s leaders with a vision ofhow to address social challenges. His foundation runsthe Skoll Forum, the world’s largest annual gatheringof leading thinkers in the area of social entrepreneurship.He has also launched the internet platform TakePart.com,which offers people additional ways to engage withimportant issues in society.

"My objective was to establish aninvestment approach that delivered,across all asset classes, strong financialoutperformance together with positiveimpacts. My investment programshares the same DNA with myphilanthropic, media and other efforts.While it must generate strong returnsto fuel my other endeavors,it may also produce positive socialand environmental outcomes."Jeff Skoll

Jeff Skoll’s Investment Approach

In 2001, Jeff Skoll created Capricorn, an investmentfirm to serve as the financial engine driving his otheractivities. Capricorn seeks to generate the financialresources necessary to support those activities that,due to their particular social mission, cannot be runin a self-sustainable way. But unlike other personalitiesactive in the philanthropic space who fund their socialactivities through a for-profit investment portfoliowithout restrictions, Jeff Skoll seeks to run all of hisinvestment activities on the basis of a shared set ofvalues. Capricorn calls its investment approach “aprincipled and responsible investment approach.”

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Operating a Principled Investment Approach

• This approach reflects the view that, “achievingsuperior investment returns does not preclude aprincipled approach, but rather is enhanced byincorporating ethical, social and environmentalfactors on a total, integrated basis.” (Stephen George, Chief Investment Officer).

• For the investment approach sought by Jeff Skoll,principled investing means that their people,processes and investments seek to be ofuncompromising quality, deeply aligned, objective,ethical, fair and not directly harmful to the worldor people.

• Incorporating these aspects into their investmentprocesses, they believe, can better control riskwhile taking advantage of investment strategiesthat incorporate long-term sustainability elementsand thus enhance returns.

• Capricorn’s investment approach integrates itssocial impact from the moment it defines itsinvestment strategy. It defines what sectors,industries and types of business models the firmwants to engage in and subsequently assesseseach investment against these standards.

• The alignment of the business models Capricorninvests in with the social impact they bring aboutis the core focus for selecting investments thatcombine financial returns with social change.

• Assessment of social impact is therefore reflectedin the strategic choices of Capricorn’s investmentapproach rather than through impact metrics atan individual-deal level.

To reinforce Capricorn’s philosophy, these principlesare not only present in the investment process, butalso in “softer” aspects:

• Hiring people who “fit” with this investmentphilosophy.

• Treating employees in a manner that reflects theprinciples, thereby reinforcing those principlesfrom the ground up.

• Sharing office space with the Skoll Foundation toencourage interaction and exchange of ideas.

This not only offers a “feel good factor” to employees,but also results in tangible investment opportunities.For example, engagement with a sustainable salmonfarm in Scotland began within the Foundation and, asthe project developed, became an attractive investmentprospect for the Capricorn portfolio.

Focus on Social Impact Translated Into FinancialSuccess

Capricorn has a sufficiently long history to show ameaningful track record for its investment activities.Since 2003, Capricorn has invested several hundredmillion US dollars in companies with business modelsthat address social or environmental challenges orobjectives. Since 2003, Capricorn has consistently out-performed the pooled vintage year multiple of theCambridge Associates Private Equity and VentureCapital benchmark and situates itself comfortably inthe top quartile of funds included in that benchmarkin six of the seven vintage years under review. Thisperformance affirms Capricorn’s ambition to provethat social and environmental objectives in no waycontradict the aim of achieving attractive financialreturns.

Any indices and other financial benchmarks shown/discussed are providedfor illustrative purposes only, are unmanaged, reflect reinvestment ofincome and dividends and do not reflect the impact of advisory fees.Investors cannot invest directly in an index. Comparisons to indexes havelimitations because indexes have volatility and other material characteristicsthat may differ from a particular fund. For example, a fund may typicallyhold substantially fewer securities than are contained in an index. Indicesalso may contain securities or types of securities that are not comparableto those traded by a fund.

Therefore, a fund's performance may differ substantially from theperformance of an index. Because of these differences, indices should notbe relied upon as an accurate measure of comparison. In addition, dataused in the benchmarks are obtained from sources considered to be reliable,but Capricorn makes no representations or guarantees with regard to theaccuracy of such data and makes no assurance of the investment returns

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8. Impact Investing:Quo Vadis?

Undeniably, impact investing has received a lot ofattention in recent years, certainly since the financialcrisis began in 2008. Whether the current momentumwill be sufficient to establish impact investing as aseparate asset class and then as an integrated part offinancial markets will depend on the standards impactinvestors are able to establish, agree upon and adhere to.

Private equity markets and microfinance will play avital role in this process. Historically, the dynamics ofsocially responsible investing have predominantly comefrom public markets. In public markets the limitationsinvestors face quickly become apparent when it comesto influencing the conduct of business. It is not trivialto influence the way a business is run as a shareholderwho holds a few percentage points in the share capital.These limitations quickly translate into very simplisticimpact-investing tools that rarely go beyond a formof negative or positive screening or scorecard model.

The potential is much greater in the private equityspace because the level of influence a private equityplayer acquires in a portfolio company is normally acontrolling one, either alone or in a syndicate of like-minded investors. This level of control allows for amuch higher degree of influence on the strategicobjectives within a business model, including social-and environmental-impact components.

In general, any part in the impact-investing valuechain can only claim the results it can directly influence.That is why the publication by asset managers of suchmeasures as tonnes of CO2 emissions saved is not verymeaningful. It is not the job and hence not the valueadded of an asset manager to save CO2 emissions. Thejob of an asset manager is to select businesses (andbusiness managers) that perform best against impact

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targets. Asset managers who take part in impactinvesting are paid to assess impact targets in sectorsand business models, select companies and managersthat are the most likely to achieve these targets andensure that the impact objectives are pursued in acapital-efficient way (financial return component).Hence, it is not the number of CO2 tonnes saved in afund manager’s portfolio that counts, but:

i) the relevance of CO2 emissions in the businessmodel of the investee company and the potentialdamage they cause to society.

ii) the level of ambition reflected in the CO2 reductiontargets put forward by the company.

iii) the capital efficiency of achieving such CO2

reductions.iv) the level of accomplishment of such CO2 reductions.

Asset managers in impact investing can and must takea view on these four dimensions. By doing so, theyprovide value added to the investor.

"What were once soft-factorsin business decisions havesuddenly started to becomefinancial return drivers."Intuitively, the smaller the stake held in a companyand the more remote an asset manager is from thetarget investee, the harder it is to influence its conductof business. It is therefore logical that activelyinfluencing the business conduct of a publicly quotedcompany is much harder than in the case of privateequity. Social responsibility as approached by assetmanagers in public markets has therefore frequentlybeen reduced to screening approaches (negativescreening resulting in deselection, positive screeningfor capital allocation to best-in-class companies) ratherthan proactively influencing the pursuit of specificimpact objectives at company level.

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However, the importance of social impact is also in aprocess of change in public markets. Through activeshareholdership programs, investors pool the interestof like-minded investors to obtain the level of influencenecessary to engage in a dialogue on equal terms withbusiness management on strategic, impact and financialtargets.

As a result, company managers have started to realisethat the non-financial aspects of their businessperformance have become an increasingly importantfactor in the value expectations of investors and hencein the value creation of businesses. What were oncesoft-factor aspects in business decisions have suddenlystarted to become financial return drivers and toconquer territory previously dominated exclusively byshort-term profitability ratios.

This will eventually result in a transparent approachtaken by quoted companies when establishing theirbusiness targets for social/environmental impact,sustainability and social responsibility. Once thesetargets form part of standard communication betweenbusiness managers and shareholders, asset managerscan base their investment selections on them and bejudged for the quality of these investment decisionsby their own investors.

8.1. Impact Investing and Philanthropy:Are Bill Gates and MuhammadYunus Wasting Their own(and Others’) Money?

With the definition of impact investing and the mindsetwe have described with the aim of embedding it intothe landscape of financial markets, one burning questionobviously arises: What effect does the approach toimpact investing analysed and presented here have onother approaches of funding for impact-relevantinitiatives around the globe?

Does the fact that an investment approach confinedto business models that are not only profit seeking butalso require a positive correlation between impactobjectives and financial return drivers mean that anyother approach to pursuing impact is necessarily awaste of money?

The answer is no. The spectrum of impact-relevantsources of finance ranges from charity to the traditionalasset classes of mainstream markets.

These target areas of mission-related finance clearlyinclude activities whose funding will never be compatible

Source: U. Grabenwarter (2009) The boundaries of the mission-related investment universe.

Figure 6: Segmentation of the “Mission-Related” Funding Spectrum

Charity/Philanthropy

PhilanthropyInvestors with or without

social-and/or environmentalinvestment objectives

Exclusively Financial-Return-Oriented Investors

GrantMoney

DependentCost

Recovering“Coincidental”Financial return

Financial ReturnBecause of

SocialUSP

Pos. correlationenv./socialimpact and

financial return

Socially/PolicyNeutral

Business Models

Neg.correlationenv./socialimpact and

financial return

Impact Investing

Environmental / Social Impact-Benefits

Financial-Return-Benefits

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with market mechanisms and logic. Bringing basichealthcare and educational services to regions wherethe purchasing power of the target population is zerocannot be funded with plain-vanilla market instruments.

Such areas have historically always depended and willcontinue to depend on charitable activities andphilanthropic organisations. The big problemphilanthropy has always faced when tackling socialissues is a question of scale: the needs of populationsand activities dependent on philanthropic fundinghave always been much greater than available fundingsources can provide

"Society's sustainabilitydepends crucially on thesuccess of taking impactinvesting into mainstreammarkets."The mismatch between the need for philanthropicfunding and its availability is actually one of thedominant reasons why society’s sustainability dependsso crucially on the success of taking impact investinginto mainstream markets. If mainstream markets takeresponsibility for social and environmental impact,not only will the required scale be provided to tackleglobal issues, such as climate change and themanagement of natural resources, but philanthropicfunding sources will be freed up to respond to areaswhere they are needed, i.e. those that cannot befunded with market logic.

8.1.1. Philanthropy: The Issue Is Scale

Philanthropic sources have always been at odds withthe gap between what ought to be done and whatcould be done given the financial resources available.A major part of charitable and philanthropic activitiescontinues to be directed towards fundraising. The focus

of charitable funding is also very often confined tolocal social issues because of the lack of funding. Yet,many of the projects pursued by philanthropicorganisations are at least regional, if not global (e.g.human trafficking).

The initiative launched by Warren Buffet and BillGates called the Giving Pledge proposed a conceptfor the first time that overcame the constraints ofscale. Together with his wife, Bill Gates dedicated$58 billion of his own wealth to set up the Bill andMelinda Gates Foundation, thus making Bill Gatesthe creator of the biggest philanthropic organisationin the world.

His example has been followed by a large number ofvery wealthy individuals, who have pushed the amountof money made available through the Giving Pledgeinitiative far beyond the $100-billion mark.

On this scale, philanthropic initiatives are able toaddress regional and even global issues and can proposetrue solutions and become a much-needed complementto philanthropic initiatives that cannot extend theiractivity beyond local reach due to the lack of funding.

8.1.2. Social Businesses by Nobel Prize WinnerMuhammad Yunus

Another method now being widely discussed in publicis 2006 Nobel Peace Prize winner Muhammad Yunus’Building Social Business approach.

This approach aims to create an alternative type ofbusiness run by or devoted to helping underprivilegedpeople. In this concept, businesses are run in the sameway as for-profit businesses with the aim of beingcapital efficient and profitable like their mainstreambusiness peers. However, unlike traditional for-profitbusinesses, these companies do not pay dividends totheir shareholders but reinvest their surpluses toexpand their humanitarian efforts and benefits forsociety.

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At first sight, this concept appears to be a hybrid modelbetween philanthropy and impact investing as describedin this paper. On the one hand, it requires investorswho see their investment as a philanthropic giveawaywithout the expectation of any return (on the nominalamount or any interest earned on it). On the otherhand, however, these businesses are expected to berun in a way that makes them fully self-sustainableand able to expand their reach without furtherdependency on philanthropic funding.

"The requirement of impactinvesting to be for-profitrefers to the correlationbetween impact objectivesand financial return and hasnothing to do with thedividend policy of a company."

When examined more closely, however, this type ofbusiness can be considered an outright form of impactinvesting very similar to the “strategic benevolents”described earlier in this report. To be considered impactinvestment, the requirement we have defined does notrelate to the company’s dividend policy, but merely

states that the company should be run with a for-profit mindset with a positive correlation betweenpursued impact and financial return drivers.

The company’s dividend behaviour is not a feature thatdetermines whether or not a business is an impactbusiness. It is a feature of the investment product orinstrument used to fund the business.

As in traditional companies, there are often differentshare classes that confer privileged dividend rights tocertain types of shareholders. In this case, shareholderswaive their right to dividends through the terms andconditions attached to their shares.

This flexibility when defining shareholder rights actuallyoffers many opportunities for funding social businesses,as it provides access to all types of investor mindsetsand combines them in a diversified group ofshareholders. Investors can subscribe to a commonimpact objective pursued by the funded business buthave different financial-return features reflected bythe terms of the financial instruments they invest in.

Ultimately, these different perspectives of impactinvestors can be brought together in a common stockmarket where the type of shareholders MuhammadYunus envisages in his Social Business model can coexistwith ordinary shareholders just as traditional ordinaryshareholders coexist with bondholders in financialmarkets today.

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Annex: The GammaModel

Many studies and investment approaches developedto consider non-financial performance elements inimpact investing try to distinguish between “impact-first” and “financial-first” investors. The 2009 Monitorreport on impact investing defines impact-first investorsas investors who seek to optimise social orenvironmental impact with a floor for financial returns,and financial-first investors as investors who seek tooptimise financial returns with a floor for social orenvironmental impact4.

While such definitions intuitively make sense, theymiss the point in the for-profit impact investing space.Ultimately, the debate on impact-first or financial-first investors is relevant when describing the spectrumof investment mentalities in the market, but is not ameaningful categorisation tool when it comes toexploring how social and environmental impact canbe integrated into an individual’s or institution’sinvestment decision process.

For the reasons set out in chapter 2 above, for-profitimpact investments must have financial returnexpectations and social impact expectations from theoutset, as well as a positive correlation between thepursued impact and the funded business model’sfinancial return drivers. The impact and financial returnexpectations for the funded business model musttherefore be compatible at the inception of aninvestment: there must be a thesis on how the socialimpact can be achieved with a financially viable businessplan. Otherwise, the investment decision is flawedfrom the outset. An impact objective pursued througha business model in which every impact unit achievedhas a direct cost through loss of financial return is notpart of impact investing. It is a different form of

4 Investing for Social and Environmental Impact, Monitor Institute, 20095 Concept developed by Imprint, US.

philanthropy. So if the investment fails on either ofthe two (sets of) objectives, it is a failed investment.Whether the social impact is sacrificed for the sake ofpreserving financial value (shifting the company’sbusiness activity) or financial value is sacrificed topreserve the social impact (converting the businessinto a grant-dependent activity) is merely a questionof taking a damage-limitation approach, but is notpart of an impact-investing approach.

That being said, it is also true that impact investinghas always suffered from the challenge of integratingthe value assessment of an investment’s impactcontribution into its overall investment performancemeasure.

Whilst it intuitively appears relatively easy to defineand compare financial return figures because of marketconsensus on return measures such as TWR, IRR andinvestment multiples, such comparability is not yetavailable in impact investing. Many attempts havebeen made to define impact measures that convergean individual investment’s impact performance into aquantifiable, summable and comparable indicator. Themost sophisticated approaches developed to dateinclude the concept of social return on investmentand various models that converge impact measuresinto one aggregate indicator such as CO2 equivalents.However, none of these approaches has yielded a wayto measure social or environmental impact in a waythat has evolved towards a market standard. Instead,market players continue to:

• struggle with the subordination of social impactto financial return or vice versa.

• debate on mission-led versus market-led5

investment concepts.• rely on measures that provide ex-post reporting

on frequently over-sophisticated key performanceindicators rather than serving as an investmentdecision tool.

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The crucial question when developing impact measuresis actually determining the purpose such measuresshould serve. As in financial investment decisions inwhich the expected financial return serves as a decisioncomponent for investors to assess whether, based ona given return, they are ready to take the amount ofrisk they associate with the investment, an impactmeasure for an investment should also make it possibleto formulate an investment objective.

A lot of attention has been paid recently to attemptsto come up with impact metrics that can be aggregatedacross asset classes, instruments and market segments.However, no one seems to wonder what purpose suchimpact metrics could have.

In general, the more aggregation there is in impactmetrics, the less metrics can be tailored to the specificcharacteristics of an investment. This undeniably leadsto a loss of information that can be derived fromsuch metrics. Take the example of the CO2 footprintthat for a long time has served as such a universalimpact measure. Investors analysed an underlyinginvestment’s contribution to directly and indirectlyalleviate society’s CO2 footprint and, in a second step,aggregated this CO2 savings across their portfolio,which resulted in a CO2-reduction figure that couldprovide for reporting and other purposes.

However, exactly what information can be derived fromsuch a measure? If, say, 500,000 tonnes of CO2 emissionsis saved a year through an investment, what exactlydoes that mean for the impact performance of suchinvestment? Without further information on the pursuedimpact and the business model used to achieve it, nobodycan actually determine whether a saving of 500,000tonnes of CO2 in a year is a sizeable number or not. I tis not even possible to decide which benchmark to use.

In the absence of a benchmark that links the impacttarget to some measure of how efficient capital isemployed to achieve a given impact, any impact metricscannot be much more than cosmetics in a “feel-good”investment approach.

Genuine impact investing is built around four corequestions:

1) What is the intended impact to be achieved?2) At what financial return can the targeted impact

be achieved?3) Does the underlying business model have the

characteristics in terms of impact relevance,financial return expectations and associated risksto attract sufficient capital to fund it?

4) How and when can the impact and financial returnachieved from the investment be back-tested?

This decision framework is more complex than thoseused for purely financial-return-driven investments,but is conceptually not very different from asset classesthat have to cope with a great deal of informationdeficiency and uncertainty, such as private equity andventure capital. In such asset classes, assessinginvestments from a purely financial-return perspectiveis challenging, as parameters on the risk componentsinvolved are subject to substantial debate. Adding thedimension of impact exponentially escalates theinsufficiency of information provided by a mono-dimensional financial-return indicator.

It would therefore appear useful to walk new avenuesto set standards for impact metrics if they are to makesense in financial market logic. The following proposalprovides a framework for impact measurement basedon the capital asset pricing model (CAPM) for holisticinvestment performance assessment.

The model reflects the fact that IMPACT performanceindicators and impact INVESTMENT performanceindicators actually serve two different purposes thatcannot be made compatible in one measure. However,IMPACT performance indicators can serve as inputfactors for impact INVESTMENT performance indicatorsin a model that bridges the two dimensions. The goalof the proposed model is to provide an integratedmeasure for financial and impact-investing performanceat portfolio level without contesting the freedom formeaningful KPIs at the level of individual business

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models. The proposed concept divides impact metricsinto two layers:

a) The first layer expresses the impact objectives atinvestment level as indicators (KPIs) that can befreely defined and tailored to a specific investment’sneeds and features.

b) The second layer assesses the performance ofinvestment managers and asset managers andexpresses it in terms of an “impact-adjusted return”.

With such an approach, the information needs ofseveral groups of stakeholders in impact investing canbe satisfied:

• Players requiring information to steer IMPACTperformance will be able to work with impact-related KPIs closely tied to the underlying businessmodel.

• Players requiring information on INVESTMENTperformance based on impact achievements willbe able to work with performance indicators

that express the realised impact against the benchmark of impact expectations at the time

of investment.

Whilst impact indicators at business level are a feed-in to investment performance indicators, the indicatorseffectively used operate at different levels of theinvestment value chain. At company level, KPIs expressperformance with respect to business objectives. Atinvestment level (i.e. from the asset manager’s pointof view), impact metrics express the quality ofinvestment selection decisions with respect to impactperformance.

The Theoretical Basis of the Model

For investment decisions that exclusively look at therisk/return relationship of a financial instrument, thecapital asset pricing model (CAPM) provides a

framework to assess an investment’s expected returnagainst its volatility compared to the market reference:

ra= rf + ß*(rm – rf)

where ra is the expected return,rf is the risk-free rate of return,and rm is the return of the market rate of return.

The ß factor in the CAPM indicates the risk of aninvestment by giving a measure of the volatility ofits return if compared to the market return andderiving the asset’s expected excess return over therisk-free return. In doing so, investors agree on a risk-adjusted return for an asset that reflects theequilibrium price of this investment in the market.The brave assumption behind this formula is thatinvestors all agree on the beta, which obviously is notthe case. Hence, the model remains fairly theoreticalin nature. Nevertheless, it is used to price assets infinancial markets and to gauge financial returnexpectations for an investment.

As such, it is also useful as a basis for integrating theconcept of social and/or environmental impact intoan investment’s overall return equation.

Indeed, just as beta is used in the above formula tointroduce an investment’s risk, i.e. to introduce itsvolatility compared to the market into the assessmentof its return potential, the gamma factor proposed inthis paper can be used to assess the value created interms of social or environmental impact in order todetermine an investment’s overall value creation.

Let it be the impact level at the point of investment,Ia the expected or targeted impact level at the pointof investment and Ie the impact level at the point ofexit. Gamma can then be derived as follows:

The target impact, I, equals:

I= Ia – It

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6 Source: U. Grabenwarter (2010) Impact Measurement - What's the point?7 Source: U. Grabenwarter (2010) Impact Measurement - What's the point?

The actual impact achieved equals:

I = Ie – It

Then the expected gamma factor is determined as

a = Ia/It

and the realised gamma factor as

e = Ie/It

For the purpose of comparability, it is useful to rely onthe expected standardised gamma, which is set at 1

sa = 1

This measure can then be compared to the realisedstandardised gamma, which is calculated as the ratioof the realised impact level to the expected impact level

se = Ie/Ia

And, consequently,

rai = (rf + ß*(rm – rf)) * sa6

where rai stands for the financial return for which aninvestor is ready to fund the business model, whichincludes the pursued impact objectives and, further:

rIA= (rf + ß*(rm – rf)) * se7

where rIA stands for the realised impact-adjusted return and

if se < 1, the investment has fallen short of its impactexpectations and, consequently, the impact-adjustedfinancial return has decreased.

If, however, se > 1, the impact achieved outpaces theanticipated impact and the overall performance of the

investment in terms of its impact-adjusted return, rIA,has improved.

If se = 1, the investment has met its impactexpectations.

In the performance analysis of an investment, it isimportant to consider the interaction between thegamma factor and the achieved financial return.Overall performance is expressed as the impact-adjusted return, rIA. If rIA differs from ra, suchoutperformance can result from outperformance orunderperformance of the social impact objective, asit can result from a shortfall or outperformance inthe financial return of the investment. In other words,an investment that shows a return, rIA, that is greaterthan the initially expected financial return, ra, mayhave fallen short of its social impact objectives buthave performed financially so well that the impact ofthe reduced standardised gamma factor isovercompensated by the financial outperformance ofthe investment.

In order to properly assess the over-performance ofan investment, it is therefore important to dissociatethe two components of investment performance.

For financial performance, this is again relatively simpleby using IRR or multiple measures on the capitalinvested.

For social or environmental impact performance, it isuseful to analyse the standardised and non-standardisedgamma.

The standardised gamma expresses the overall socialimpact performance of an investment or a portfolioof investments and indicates whether the establishedimpact objectives have been met, exceeded or notreached. Due to its standardised nature, this measurecan be aggregated across a portfolio of investments

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and used as an impact-performance measure of anasset manager.

The non-standardised gamma factor allows for moredetailed analysis of the individual impact performanceindicators used for an investment. Such indicators canbe expressed as more common measures such as CO2

emissions, but also as more sophisticated measuressuch as revenue growth for a disadvantaged targetpopulation as a result of an educational program orthe reduction in healthcare costs from a novel treatmentof a specific disease.

The gamma factor therefore allows for standardisedanalysis of an investor’s impact-investing track recordthat can complement financial track record analysisand result in an overall investment judgement.

The Value of the Gamma Modelin Impact Metrics

1) The gamma factor avoids aggregation of impactparameters that become meaningless throughsimplification and standardisation. Instead, thegamma factor only assesses performance on impactindicators and assesses achievements against pre-defined targets.

2) The gamma factor takes into account the emergingconsensus in the market that the question whichmeasure for impact is actually used is not asimportant as:

a. using a measure for impact that is consistentand traceable.

b. defining impact objectives ex-ante in theinvestment process.

c. back-testing the results achieved against thedefined objectives.

3) The gamma factor gives absolute freedom in thedefinition of impact performance measures. Itavoids establishing artificial impact KPIs thatrequire making numerous assumptions that mayor may not hold true in reality.

4) Impact indicators tailored to an investment maybe easier to capture, data requirements can betailored to the situation, and tracking and reportingof these indicators will generally be less costlyand work intensive than measures that areartificially maintained for impact performancepurposes without having a natural tie to theinvestment’s underlying business model.

5) The gamma factor allows the overall performanceof an impact investment to be aggregated in oneparameter, the impact-adjusted return, andhighlights the fact that the two factors cannotbe dissociated because they are both deliberateand equally important investment objectives.

6) The gamma factor expresses the impactINVESTMENT performance without compromisingon the freedom of defining impact KPIs at

company level. The gamma factor can be the aggregate of as many impact KPIs as is deemed useful in the context of a specific investment in one impact INVESTMENT performance parameter

that is obtained by multiplying the gamma factors derived from the various individual impact KPIs.

7) The gamma factor provides for the transparencyof impact objectives in the investment process.Investors take a deliberate decision on the businessmodel they invest in and its impact objectives inorder to achieve a financial return.

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Potential Challenges to the GammaFactor and why They are not Valid

Critics will quickly identify obvious challenges to thismetrics model, notably the following:1) It could be highly tempting in this model to

establish easy-to-achieve impact targets so aninvestment will outperform and provide anupward-bias to the impact-adjusted return, rIA.

2) The financial impact can compensate for a shortfallin performance on impact objectives, thusmisleading the investor to believe that aninvestment has been successful while it actuallymay have performed on only one of its two valuecomponents.

These two factors are undeniable challenges to thisimpact metrics model, but they are not very specificto impact metrics and are not very specific to impactinvesting. Transparency on investment objectives shouldbe a concern for investors in any asset class, particularlyin venture capital and private equity, to assess whetherthe reported return figures are commensurate withthe risk taken.

Likewise, any investor should know what the mainconstituting elements of investment performance are,regardless of the asset class. In private equity, asophisticated investor wants to know whether therealised investment performance was based on valuecreation through i) leverage, ii) organic growth,operational efficiency and strategic business

development, or iii) multiple trading in a cyclical marketenvironment. Identifying the source of value creationwill require thorough due diligence from the investor.

Precisely the same approach is needed wheninterpreting the impact metrics suggested in this model.In a due diligence process, an investor will have toassess the level of ambition reflected in the impactindicators used in the underlying business models. Overtime, assessing the quality of KPIs at business levelcould also be done by specialist advisory firms andrating agencies.

For the interpretation of realised investment results,it is obviously not enough to look at the impact-adjusted return, rIA, just as it does not make sense tolook at an IRR figure without looking at the underlyingrisk profile of a private equity investment. Analysis ofthe gamma factor will provide the necessary insighton the impact behaviour of the investment and itsimportance in the overall impact-adjusted return. Forsuch analysis, the investor will look at the standardisedimpact-adjusted return (expressing an outperformanceor a shortfall compared to an established impact target)and the absolute gamma ratio, which is based on theincrease/shortfall of the impact achieved over theimpact-relevant benchmark value at the time ofinvestment.

With the analysis of the impact-adjusted return, thestandardised gamma and the non-standardised gamma,the investor should have a comprehensive view of theinvestment manager’s performance in both financialand impact terms.

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Information About the Authors

Uli Grabenwarter is currently on temporary leave from European Investment Fund for conducting research on impactinvesting and responsible investing in private equity and venture capital. Until recently Uli Grabenwarter was Head, EquityFund Investments at the European Investment Fund (EIF), one of the largest pan-European fund-of-funds investors inPrivate Equity and Venture Capital. Prior to EIF, he worked for several years at the European Investment Bank and atPriceWaterhouseCoopers in corporate finance, project finance, finance consulting and audit. He shared many of his thoughtsand observations on the private equity and venture capital industry in the bestselling Euromoney book, Exposed to theJ-curve - Understanding and Managing Private Equity Fund Investments, as well as in numerous articles and white paperson risk and return dynamics in private equity and venture capital investments.

Professor Liechtenstein holds a Ph.D. in Managerial Science and Applied Economics from The Economics School of Vienna,Austria, a Master’s degree in Business Administration from IESE Business School, and a BSc in Business Economics fromthe University of Graz. Professor Liechtenstein specializes in entrepreneurial finance and the management of wealth. Heis co-author on several publications on private equity and angel investing. His ongoing research in this field focuses onoperational value creation in private equity.

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