Impact investing: A win-win alternative?

Impact investing: A win-win alternative?

Jonathan Dean, Head of Impact Investing, breaks down what exactly defines impact investing, why people are talking about it and where these opportunities can be found.

Transcript

JONATHAN DEAN

So, when we’re talking about impact investing I think it’s important to start with a definition. And to frame that definition I think it’s most pertinent to actually first talk about what impact investing is not. For us impact investing is not charity. It’s not philanthropy, it’s not concessionary; we’re looking for market rate financial returns in everything we do. Equally at the other end of the spectrum it’s not simply just ESG linked to environment, social or governance outcomes. For us ESG is used as a risk management tool. But for impact investing we’re really looking at creating a solution to an identified problem which we’ve seen in the market, and then measuring our success about achieving a solution to the problem. We are accountable for that change. So effectively we’re focusing on three areas. We have to be intentional. We have to look for positive change, and those changes need to be measurable. So since we made our first impact investment in 2013 we’ve seen a huge growth in the market from a $50 billion market in 2013 to over $500 billion today.

So we’ve got to ask ourselves the question, what is fuelling this growth? And we’re really seeing this combination of two elements. Firstly, investor demand, which is driven by stakeholders demanding more than just financial returns on their investments. They’re more tuned into social and environmental issues, and they want to see their capital creating solutions to them, alongside delivering market rate return. But on top of this we’re seeing this sweet spot be created, where essentially there is a growth in market opportunities aligned with investor demand. So we’re seeing companies, we’re seeing entrepreneurs, we’re seeing businesses using disruptive business models and technology to innovate, and to be able to actually create solutions to problems which are investible with an impact framework, which is allowing us to achieve, meeting client demand for product with investible solutions in the market.

I think when we’re talking about investor interest and client demand we first need to frame exactly our approach to impact investing and which asset classes we use. The approach that we’ve taken since 2013 has been through the private markets. So we’re talking about long term investments across private equity, private debt and real assets, where we’re aligning our capital to achieving long-term impact solutions. And that needs to be investible for the client base that we’re talking to. So they have to have the appetite to lock up capital over a period of time and align that solution based approach and that accountability for the investments that they are making to the impact outcomes at the end.

So when we’re talking about specific investor types, I think you can start with insurance companies. For insurance companies this is a very natural place for them to be for three main reasons. Firstly as part of their corporate social responsibility programme impact investing is a very important pillar. It allows them to take their place as a global corporate citizen, and show positive activity around statements and around theory. It actually shows that they can be practitioners in this space. Secondly, it’s strategic. If you think about insurance companies and reinsurance companies, and what is their core business model, they’re exposed to risks. They’re exposed to risks linked to climate change, they’re exposed to risks linked to healthcare, and if you can use capital and use an investment programme which can potentially de-risk your core business, your core activities, it’s actually a very attractive solution combining both a positive CSR model and a strategic insight piece for your core business.

So impact investing there is also very relevant from an insurance perspective. But finally and perhaps most importantly, this is a balance sheet investment for insurance companies. They need a yield. They need a target investment return from this type of solution. And that’s where we see the market rate return profile of the private market approach to impact investing; such a good solution for combining balance sheet money with a positive strategic alignment as a business and really a global corporate social responsibility position that you can effectively see this as a win-win-win model for insurance companies in the market. On top of insurance we also at pension funds as an actor that can have a long term view on investments, and increasingly a space which is becoming more and more fluent in ESG and then into impact investment.

So pension funds globally are moving into impact and making commitments in this space. And with their risk appetite and with their long-term approach, and also with their stakeholder demand on outcomes beyond just financial return, they’re a very natural client for us to be talking to. On top of them I would say there is two main additions. One is really private banks. Private banks and their ultra-high net worth client base are very keen to be making positive outcomes with their investment portfolios, and similarly family offices and multi-family offices, where you’re seeing a new generation, and millennial generation sometimes in charge of making investment decisions, and perhaps a more visionary approach to how they’re managing their capital and looking at the long-term effect of their investment decisions today. So between that group I think we’ve got a very blended and a very diverse range of clients that we’re talking to, all of whom are very motivated to be active in impacting investing.

So for us it’s really leveraging on the activity that we have done since inception of our programme. So as I mentioned we’ve been investing actively in impact, investing across private markets since 2013. In that time we’ve launched three vehicles. We have contributed to over 450 underlying projects or companies across 71 countries. On top of that we’ve worked in multiple sectors. We’ve worked across financial inclusion, healthcare, education, resilience to climate change, protecting natural capital, circular economy. Essentially what I’m saying is we’ve worked across multiple impact themes in multiple geographies. We now manage over $600 million.

So how do we source activities today is really from what we have done already? We are very active in these markets. We’ve got a huge global network. AXA IM has a brand about how we approach impact investing. We walk our talk, let’s say, because we have put capital at work. We are an active practitioner, it’s not just theory. So deals are being shown to us, opportunities are being shown to us, and we are also creating opportunities from the over 450 activities that we already have in place.

I think possibly the biggest opportunity that we’re seeing going forward in terms of delivering a market rate financial return alongside really scalable impact is on the financial inclusion and healthcare opportunity set in the emerging markets. We’re really focusing on addressing the basic needs of the emerging consumer specifically through financial inclusion and healthcare. That is where we have seen the depth and breadth of opportunities historically delivering both impact and financial outcomes, but most importantly we’ve seen this huge inequality. This huge problem has been identified, and we believe that our capital can be a solution to that. But these investments have to match a very high bar. We have to go through a very rigorous investment process to get comfortable, which really has three pillars.

Firstly is the financial underwriting. We need to be comfortable with the financial return profile of these assets. We need to be comfortable that there is a market rate expectation attached to the activity that we’re looking at. In parallel we need to be comfortable of the impact solution we’re looking for. Is it intention, how do we measure it, how is it sustained, how do we look at it post exit? All of the impact questions that we look at through our process are fully integrated into what we do. It’s not a checklist post-investment where we have to satisfy criteria; it’s really the question we ask our self at the start, middle and at the end and throughout our monitoring period. And finally there are non-investment risks we have to take into consideration.

So that is where operational due diligence is so important. We’re making long-term investments in multiple countries across multiple sector using multiple asset classes. So we have a specialised team that are dedicated to looking at non-investment risks, and each one of these teams is involved in the investment process, and each one of these teams needs to be comfortable. And that’s essentially how we can get from this global opportunity set, and we can filter it into investible opportunities per sector, per region, that really reach our bar of delivering market rate financial return alongside intentional and measurable impact outcomes.

So I think the best way to talk about an impact investment is to walk through a case study. And to frame that case study let’s use the UN sustainable development goals, the 17 SDGs that were created in 2015 to basically highlight inequalities across global themes. We can talk about these as our impact themes. And if you look at a specific examples, let’s talk about SDG3, good health and wellbeing, there are around 1.6 billion people still at risk of neglected tropical diseases. And if we pick up on that specific element, tropical disease, you can look at a potential problem that has been really acute in areas of natural disaster or conflict zones, which is the cholera disease and cholera outbreaks, there has always been an incumbent cholera vaccine which is available to the market, and effectively we’ve found a solution through our partners which allows us to displace the incumbent vaccine, which allows us to create a solution which has a high efficacy rate, which has a lower cost of manufacturing, which can be delivered and the outcome be delivered in a lower dosage amount. And really through that process the World Health Organisation really identified that if this could be manufactured at scale to a high standard and high quality, and the efficacy improvement could be tested, then they would list it onto their programme as the second cholera vaccine which can be distributed to these areas of natural disaster or conflict.

So through our investment we were able to scale up this investment, this manufacturing facility; we were able to scale up the delivery of this vaccine globally. The World Health Organisation accredited it onto their platform for distribution. And that has led to around 17 million doses of cholera vaccine being distributed globally, which in turn has led to around eight million cases of cholera being avoided. And if you look at the mortality rate of cholera it’s around 100,000 lives saved. That’s the impact outcome generated. If you look at the financial return, this investment delivered a significant double digit market rate return, a significant double digit IRR, or internal rate of return, which really proves that we can achieve impact at scale linked to a target, the sustainable development goals here, and financial market rate returns which are aligned with the private market strategy.
 

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