Big Impact, Big Business?

Nicholas Neveling in his editorial comment in Real Deals (10 March 2016) commented that "Regulators and lawyers should be able to implement some kind of structure" for enabling social impact, or, more specifically, ensuring that the right firms can access social impact tax reliefs. His focus was, of course on the ability to grow the impact investment market whilst ensuring accountability for the 'social' once it sits alongside the 'profit'. We agree.

Big Impact, Big Business?

In fact, Hogan Lovells social impact practice has been considering this for some time and, together with Big Society Capital (a UK based independent financial institution funded partly by unclaimed bank deposits which are employed in UK social investment) produced a paper (Going for Gold) that we invite you to view. The research looks at how special rights shares might be used to create mission locks in profit making businesses and stop mission creep where investors are looking for an equal measure of market returns. It sparked much debate, from the social impact sector to the commercial mainstream.

In March the UK Cabinet Office released two strategy papers: 

  • a domestic strategy for 2016 looking at the benefits of social innovation in delivering public services and tackling social challenges; and
  • an international strategy looking at how the UK's already strong social economy might be used as a means of encouraging international interest in doing business here – all seen as a means of creating economic growth.

All this points to one thing – that, positive impact can improve economic results. And if that is true, impact investment should now begin to form part of mainstream strategy and no longer be viewed as a sector unable to compete when it comes to market returns.

Of course the double bottom line is not a new concept. The likes of private investment firm Leapfrog Investments have been successfully investing in this way for some time. In the UK, Bridges Ventures have demonstrated that market returns can be achieved alongside measurable impact. And we are not talking about small amounts of money either. Vital Capital is a $350 million fund investing in emerging markets, principally sub-Saharan Africa. In the Netherlands, Triodos Investment Management manages a total of 18 socially responsible and impact investment funds with a value of €3.1 billion. There is no question that the impact investment market remains small compared to global assets under management. However, the 2015 impact investor survey conducted by J.P. Morgan and the Global Impact Investing Network suggests that total assets under management are in the region of US$60 billion.

Perhaps it's the experimentation and the entrepreneurial spirit dominating the impact sector that is driving the interest and success. After all it was a similar sort of creativity and enthusiasm that drove the evolution of private equity back in the 1980s. Impact investment is a strategy not an asset class. Notwithstanding that, there is a dedicated and growing advisory network developing around it. There are, no doubt, some regulatory drivers that are helping achieve a change in mind-set when it comes to impact investment and measurement as a strategy. Managing environmental, social and governance (ESG) within a business is more than just ticking a non-financial reporting box. Getting it right can demonstrate value creation as well as sound risk management. And with LPs keeping a keen eye on ESG, it matters to private equity firms raising funds. 

It's not just asset managers that are showing interest. Corporate venture capital is also being employed in social enterprise. And it's not surprising. After all, given innovation is a key part of the success of the social impact world, there are obvious opportunities for partnering and investment from corporates. Unilever is a great example. They invest directly in projects through their private equity arm, Unilever Ventures, as well as joint venturing on sustainable impact projects through the Unilever Foundation.

Perhaps it's just fashionable to consider impact as a strategy but after an economic downturn and with Millennials demanding much more as consumers, investors and employees it looks like a fashion set to straddle the decades. Rather than being a revolution in solving some of society's most difficult problems, perhaps it's time to consider the idea that there is a third dimension to investment that simply facilitates better business.

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