If you are a financial advisor, you already help your clients find socially responsible public equity investments. Now there’s an opportunity to engage your clients in a conversation about high impact private equity investments.
“Impact investing” is a term being used to describe direct investments in companies and private equity funds that explicitly seek to achieve both financial return and social impact. These investments could be in a variety of high growth and high impact industries from a U.S. sustainable agriculture company to a European clean tech fund or an Emerging Markets fund of funds focused on poverty alleviation.
A November 2010 report by JPMorgan and the Rockefeller Foundation, titled Impact Investments: An Emerging Asset Class, estimates the size of this market opportunity at between $400 billion and $1 trillion. And this only includes investment opportunities in emerging markets across five sectors: housing, rural water delivery, maternal health, primary education, and financial services. JPMorgan estimates the 10-year profit potential from these opportunities alone range between $183 billion and $667 billion. Coming at it from the demand side of the equation, and focused only on U.S. individual investors, a June 2010 Money for Good report from Hope Consulting estimates a demand for impact investments among U.S. high net worth individuals at $120 billion.
The authors of the Money for Good report also found that that the top barriers to making an impact investment cited by potential investors were a lack of available information and advice on the topic. For financial advisors and investment professionals who move early in this marketplace there is clearly an opportunity available. Leaders in this emerging field of impact investing know that investing for impact requires more than marketing materials, it requires measuring impact.
But what tools exist for financial advisors to help facilitate impact investments?
New Opportunities & Organizations
Several new organizations have emerged in the past year – all of which have the goal of helping impact investing grow as an asset class and making it easier for investors to identify impactful investment opportunities and to make investments.
A whole ecosystem is emerging; membership organizations like Aspen Network of Development Entrepreneurs (ANDE) and The Global Impact Investing Network (GIIN) help investors learn from each other’s experiences; angel networks like Investors’ Circle and Toniic provide opportunities for investors to make seed stage investments; directories such as ImpactBase and Impact Assets make it possible to identify venture capital funds making investments in the space, and standards like the Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Rating System (GIIRS) are helping define what it means to be an impact investment.
Never before has it been as easy to find impact investing opportunities.
GIIRS – Making Impact Investing Easier (and Credible)
B Lab, the non-profit that certifies companies as B Corporations [ Article Note #1 ] is launching the Global Impact Investing Rating System (GIIRS) this fall. GIIRS provides social and environmental performance ratings and analytics for both companies and private equity/venture capital and debt funds. GIIRS also provides advisors access to a powerful portfolio management, benchmarking, and due diligence tool called GIIRS Analytics – a database that houses aggregated GIIRS rating and metrics information.
Advisors can use GIIRS Ratings and GIIRS Analytics in a variety of ways to enhance existing services and build assets under management. Advisors can use GIIRS to: identify potential impact investments that have gone through a rigorous third party rating and verification process; supplement due diligence; analyze market trends; benchmark the performance of potential and current investments against peers; create custom reporting tools; and develop proprietary products or advisory services for their clients.
Jessica Matthews, Manager of the Mission Related Investment Group at Cambridge Associates, explains “While we have all of the necessary tools to help clients analyze and track the investment performance of their portfolios, the GIIRS ratings will allow clients to select investments and monitor performance based on the environmental and social impacts of their investments as well. Having a more complete set of data regarding mission investments will increase investors’ comfort level with impact investments, and could lead to more capital flowing to such projects and funds.”
Industry Respected Companies & Funds Lead as GIIRS Pioneers
GIIRS has already rated 200 companies and 25 funds in its beta phase. These GIIRS Pioneer Funds include U.S. funds such as SJF Ventures and RSF Capital Management, and Emerging Market funds like Ignia and E&Co. Collectively these fund managers represent $1.2 billion in assets under management and have investments in more than 200 high impact companies in 30 countries across the U.S., Europe, Latin America, Asia, and Africa.
The Pioneer Funds invest in multiple asset classes and stages including seed, early, growth, and late stage investments. The returns orientation of the rated funds range from impact first to financial first with some funds expecting a return of capital to investors while others expect Internal Rate of Return (IRR) in the 30 percent+ range.
The 200 Pioneer Companies represent a diverse group of companies in respect to their geography, size, and industry area, and social and environmental impacts.
For example:
- Acumen Fund investee, Zigitza HealthCare Limited (also known as 1298 Ambulance), provides ambulance services across India. Its business model combines government support with a sliding pay-per-use model depending on customer ability to pay. To date, the $2.7 million that Acumen invested has enabled 1298 Ambulance to respond to 100,000 calls, of which 15 percent have been subsidized or free for customers too poor to pay.
- City Light Capital investee ClimaCab, produces an all–electric auxiliary climate control system for trucks designed to provide air conditioning and heating during driver rest periods–without idling the main diesel engine. Trucks with ClimaCab save up to 3,000 gallons of diesel fuel per year, reduce idle times up to 85 percent, and decrease greenhouse gas emissions by approximately 40 tons per truck per year.
- Murex Investments has exited its investment in PayQuik. PayQuick drives down the cost of international wire transfers for immigrant workers around the world. Worldwide remittances represent a more-than-$350-billion market with a strong historic growth rate, according to Murex. With per transaction fees commonly as high as 10 percent for a typical monthly remittance of $200, low-income workers are regularly charged what amounts to a massive “poverty tax.” PayQuik developed low-cost software to allow individuals to transfer money internationally at much lower cost.
A Comprehensive Look at Impact – What you Can Learn from GIIRS Ratings
GIIRS Ratings for companies and funds feature three key elements: verified impact ratings, impact metrics, and disclosure items.
Verified Impact Ratings: GIIRS delivers an overall rating that assesses a company’s social and environmental performance as well as impact area ratings in the areas of governance, workers, the community, and the environment. Fund ratings are based on an assessment of a fund manager’s investment practices and a weighted aggregation of the company scores of the investments in a fund’s portfolio. Questions cover topics such as job creation, carbon footprint reduction, percent of beneficial products and services, and ratio of low to high paid workers.
All GIIRS ratings are comparable across sector, size, and geography. Fund ratings are comparable across asset class, fund stage, and geography. As a financial advisor you can use these ratings to tailor a portfolio that is specific to your clients’ interests as well as track and benchmark the performance of your clients’ portfolio.
GIIRS standards are developed according to best practices: the standards are IRIS-compliant [Article Note #2], transparent, dynamic, and independently governed. Additionally all ratings are reviewed by a third-party service provider – Deloitte – to ensure the credibility of GIIRS Ratings.
Impact Metrics: In addition to ratings information, companies and funds report on outcome oriented metrics as a part of the ratings process (e.g. number of beneficiaries, clients served, full-time employees, low income employees, etc.) There are both standard metrics to ensure comparability and metrics that can be customized by the company, fund, or advisor to a company or fund’s particular mission or an advisor’s needs.
Disclosure: Finally, each ratings report features a section on disclosure of issues typically associated with negative screens. Advisors can use this information to ensure that a potential investment is not involved in an industry or practice that is on a client’s exclusion list.
Getting Started – How can one access GIIRS ratings?
As a Financial advisor you can access GIIRS ratings in three ways:
- Ask a GIIRS rated company or fund to share their ratings report with you.
- Access GIIRS ratings through GIIRS Partners. A number of leading impact investing intermediaries have adopted GIIRS as a listing requirement. GIIRS ratings are featured in investment platforms such as Mission Markets and SVX as well as through angel networks like Investors’ Circle and Toniic.
- Subscribe to GIIRS Analytics. GIIRS Analytics is a Capital IQ for impact investing. Through GIIRS Analytics you can access aggregated ratings and metrics data for benchmarking and analysis as well as search for rated companies and funds that match your clients’ investment interests. Search on hundreds of variables including profitability, target IRR, impact area, geography, asset class, investment stage, and industry to name a few.
In closing, impact investing presents a great opportunity for advisors to engage clients in a new and important conversation – ‘How can you have more impact with your money?’ New tools and intermediaries are coming online to support the advisory community. GIIRS offers advisors verified and comparable ratings, and customizable metrics and reporting tools needed to build trust and loyalty with their clients and turn conversations into catalytic impact.Article by Jay Coen Gilbert, co-founder of B Lab and board member of Investors’ Circle.
ARTICLE NOTES:
[1] The GIIRS rating system is built on the same ratings/advisors platform used to certify B Corporations. B Lab has certified more than 400 B Corps and 1,500 companies are using the rating system as a free tool for impact assessment. In addition, investor groups like Investors’ Circle and investor platforms like Mission Markets, as well as a several business associations and incubators, are using the rating system to qualify membership and access to services. The rating system is transparent and governed by an independent Standards Advisory Council comprised of leaders in the impact investing field.
[2] Whenever possible, GIIRS metrics are compliant with the standard definitions created by the nonprofit Impact Reporting and Investment Standards (IRIS), a part of the nonprofit Global Impact Investing Network (GIIN).
