Description of the concept
The concept of social and environmental impact investing includes a wide range of investment profiles. In 2017, the Omydiar Network made the analysis of its investments based on its genuine interest in generating impact in light of market needs. To this end, it created the "continuous performance". The Network analyzed its investment portfolio "which ranges from fully commercial investments at one end to philanthropic grants at the other, and includes a wide range of viable investment profiles, some of which involve a trade-off between social return and financial impact, and many of which do not."
By impact investing we mean "investments made in companies, organizations and funds with the intention of generating a social or environmental impact along with a financial return". However, not all social and environmental challenges can be addressed with an impact investing approach, where a financial return is expected. It is necessary to have investors, philanthropists who are willing to sacrifice their investments with the commitment to generate social and environmental transformations. This is what we know as impact investors.
The investment by impact are those investments in which there is a greater appetite for risk, in terms of financial return, and support for social organizations, which by their nature have a social mission, will not have a financial return but whose existence and mission is essential to promote order and social justice. This type of investment is also willing to support social enterprises and organizations that are in their early stages and need patient capital to validate their models, generate a trajectory and later be able to scale with the help of impact investors seeking financial return.
Investors by impact - the vast majority of them philanthropists - play a key role in addressing pressing social or environmental problems where there are no commercially viable solutions or where, because of market rules, early-stage entrepreneurs cannot access them.
In addition to providing financial resources, investors by Impact investors have the capacity to provide knowledge and non-financial support that will, in turn, scale and professionalize the social and environmental sector to increase its resilience, develop its talent and competencies, manage and measure its impact, and achieve greater access to the ecosystem or markets in order to ensure lasting social and environmental impact. For their part, impact investors will be able to bring the best of the commercial world to the service of impact.
Evolution of the concept
Several organizations have begun to apply the different investment and impact profiles through the design of different investment strategies to promote financially innovative solutions to address societal challenges. Such is the case of Bridges Fund Management and other investors such as foundations, investment funds and family offices.
Under this holistic view of approaching investments along the equity continuum, you can leverage different financial tools, combining grants, debt and equity into multiple investments within your own portfolio, to achieve deeper social impact and in turn, find key partners and collaborators who are willing to join you in investing in that equity continuum.
Precisely for the purpose of incentivizing more patient capital, the MacArthur, Rockefeller and Omidyar Network foundations launched, in 2019, the Catalytic Capital Consortium (C3) grantmaking program to advance projects that remove barriers to the use of catalytic capital.
This catalytic capital is precisely that concessionary, risk-tolerant, flexible capital whose purpose is to attract more investment from actors that currently do not invest in social and environmental issues. "It is a capital willing to support impact-driven companies and organizations that lack access to capital in the market. Through this capital we are able to not only unlock access to capital, but also strengthen entrepreneurship, communities, and drive innovation.
Today there are already examples that have joined this understanding of the continuum of capital. In Spain, the Open Value Foundation's vision is to promote "a world where philanthropy and traditional investment generate, through impact investment, the sustainable development of society and people".
The interaction of investments along the capital continuum allows us to understand that, in a vibrant ecosystem for generating social and environmental transformations, the investment by impact and investment from impact are not binary worlds, nor are they mutually exclusive. That is why it is necessary to know where investment portfolios are positioned, according to risk, level of commitment to impact, and expected financial return.
The Case for Social and Environmental Investment in the Latin American Capital Continuum
Latimpacto, a network created in 2020, following the model of the sister networks in Europe, -EVPAAsia -, Asia -APVN- and AfricaAVPA-is committed to articulating investors, corporations and philanthropists who invest in Latin America and the Caribbean committed to achieving a more strategic impact within their portfolio of projects; understanding the connection of this continuum of capital and, consequently, generating bridges between the two worlds: impact investment (conditioned to achieve a financial return and philanthropic investment where social impact is a priority) and philanthropic investment where social impact is a priority.
The challenge for Latimpacto is to achieve greater interdependence among investors in accordance with their expectations and thus be more strategic in mobilizing the necessary resources from the private sector to achieve the UN SDGs. It is estimated that between US$ 5 to 7 billion dollars of investment is needed annually to achieve the goals.
In Latin America, financial institutions highlight the role played by Banco Galicia in Argentina, which "recognizes the importance of its role in the development of the country and, therefore, offers a special line of credit for B companies, with the purpose of accompanying them in their growth".
Another example is the Bancolombia Group Foundation, part of the Bancolombia Group, a major player in Colombia's financial sector. "It set out on a strategic rethink in 2016, following the signing of the Colombian government's Peace Agreement with the FARC guerrillas. It made the decision to play a more active role in the fight against inequality by focusing its efforts on interventions with a rural approach. The proposal seeks to strengthen the associative, technical, administrative and financial processes of rural enterprises and connect them with value markets."
Other cases to highlight with respect to their approach to their investments along the equity continuum include:
- Cemex, in Mexico, which in conjunction with the Tecnológico de Monterrey offers training to entrepreneurs and social innovators.
- Brazil's Lab Habitação, led by the steel company Gerdau, is an example of how the company's business model can be integrated into projects that seek to benefit social and environmental projects.
- Puerto Asis Investments, a family office Argentina that operates through different strategies across the spectrum of the capital continuum. It invests to create opportunities, empower people and transform problems into innovative, scalable and sustainable solutions.
- The Santo Domingo Foundation, which "through an integral model of territorial development, develops two macro housing projects in two cities in Colombia. They aim to enhance the opportunities of the territory and articulate urban, community and economic development to improve the quality of life of the families who come to live in them". In these projects, investors participate with the expectation of return and the Foundation puts at the service, not only catalytic capital, but also all its knowledge and social work with the communities.
- Promotora Social México "covers a broad segment of the capital continuum to support organizations with a high social commitment. Among its investments, Clínicas del Azúcar, a social enterprise that has managed to replicate a low-cost and effective medical care scheme against diabetes, stands out. Promotora Social Mexico has supported, with capital investment and close accompaniment in the management of the business, which has allowed Clínicas del Azúcar to become a key player in the attention of one of the most important health problems in the country".
- FIS Ameris (Chile), where the main donors are high net worth families, argues that investors believe they have two wallets: "one to invest and make money and another to donate and be good people". He argues that the union of these two "wallets" is possible for socio-environmental impact to take precedence.
Trends and controversies of the concept
We are only eight years away from the target set by the United Nations to achieve the 17 Sustainable Development Goals (SDGs) and there are still huge delays in achieving them. The UN Secretary General, in his report on progress towards the SDGs in 2021, highlighted the havoc wreaked by the Covid-19 pandemic: "For the first time in more than 20 years, between 119 and 124 million people were pushed back into extreme poverty in 2020, 101 million additional children have fallen below the minimum level of reading proficiency, women have faced increased domestic violence, unpaid and underpaid care work falls increasingly and disproportionately on the shoulders of women and girls, affecting educational and income opportunities and health." The report also highlights how concentrations of the main greenhouse gases continue to rise and the effects of the climate crisis are being felt around the world.
In the face of these challenges, it is evident, and this is also highlighted in the aforementioned report, that achieving the SDGs requires the joint action and participation of all sectors of society, including governments at all levels, the private sector, academia, civil society and citizens.
The role of the private sector in a market economy is fundamentally to be the largest generator of investment and jobs, so it is understood that its investments must generate the highest return. Some argue that the best way to maximize impact from the private sector is to create a profitable business enterprise that can grow rapidly, generating healthy cash flow and tapping the capital markets. Without access to capital, the company will not be able to scale and generate investment and employment.
However, this assertion is called into question in the face of the challenges we face of inequality and poverty, and the climate crisis. Sir Ronald Cohen, standard bearer for impact investing, points out that to change the world we must move towards a model where "profit and impact go hand in hand." In doing so, he stresses the need to "transform the private sector from a polluter and generator of inequality into a powerful force for good; distributing opportunity more fairly; and providing solutions to our great social and environmental challenges."
Now, the debate is whether all social and environmental challenges can be taken on with an expectation of seeking to generate financial returns - that is, under the impact investment approach - and how to achieve that balance, so as not to abandon those causes that require investors willing to provide more patient capital and willing to take risks, and who are even willing to compromise on their financial return.
In this state of need for initial and patient capital, we also find early-stage companies-especially those operating in emerging markets and aimed at supporting vulnerable populations. These are ventures in which commercial investors have no interest in financing. These entrepreneurs require the support of investors who not only provide money and are concerned about financial returns, but also those who are committed to providing non-financial support and patient capital, with the capacity to assume risks.
The invitation and the great challenge is to understand the concept of the capital continuum as an approach to be more strategic in the approach of the private and philanthropic sector, to act in a more interconnected way to generate the social and environmental impact required to meet the challenges we face as humanity.
References
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Catalytic Capital Consortium. n.d. https://www.macfound.org/programs/catalytic-capital-consortium.
Cohen, Sir Ronald. 2020. Impact: Reshaping Capitalism to Drive Real Change. Ebury Press.
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—. 2021. «Lab Habitação: Grandes empresas unidas para promover negocios de impacto en vivienda.» https://www.ecosistema.latimpacto.org/labhabita%C3%A7%C3%A3o.
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