Fotos: Peter Kruppa

How money works

Philanthropic impact investing takes many forms. The fundamental question is whether to focus on returns or demonstrable impact.

A multi­tude of play­ers are invol­ved in the impact inves­t­ing market. Its great diver­sity is one of the key findings of the study conduc­ted by the Global Impact Inves­t­ing Network (GIIN) in 2023. Insu­rance compa­nies and banks, fund mana­gers, indi­vi­dual inves­tors and family offices invest in the same way as foun­da­ti­ons. What unites them all is the idea that the invest­ments will have a measura­ble posi­tive social or envi­ron­men­tal impact. Howe­ver, they differ in their return expectations.

There are invest­ments where returns are deli­bera­tely waived, or at least the return expec­ta­ti­ons are not the main focus,’ says Profes­sor Markus Frölich, Profes­sor of Econo­mics at the Univer­sity of Mann­heim and Direc­tor of the Center for Evalua­tion and Development. 

But there are also impact invest­ments that certainly can gene­rate a return. As an exam­ple, he menti­ons insu­rance products for small­hol­ders who bear the risk of crop fail­ures. These products improve the social secu­rity of farmers. At the same time, there is the possi­bi­lity of a small return, but there is no commer­cial market, as the risk is very high. Accor­ding to the GIIN survey of 307 inves­tors, 12 per cent expect a below-average return on their impact invest­ments, which has an impact on the preser­va­tion of capi­tal. Although 14 per cent also accept a below-average return, they expect it to be closer to the market return. The majo­rity of inves­tors aim for a risk-adjus­ted market return.

Inten­ded impact

The idea of making an impact with invest­ments is not new. ‘The deve­lo­p­ment banks were the first to create these kinds of invest­ment pots,’ says Sabine Döbeli, Mana­ging Direc­tor of Swiss Sustainable Finance (SSF). The aim was for them to speci­fi­cally contri­bute to poverty alle­via­tion. In the early 1990s, they helped exis­ting NGOs become commer­cial micro­fi­nance institutions.

Today, impact inves­t­ing is carried out in both emer­ging and indus­tria­li­sed econo­mies. In addi­tion to social concerns, impact inves­t­ing is prima­rily aimed at envi­ron­men­tal protec­tion issues. Thema­ti­cally, they ther­e­fore come under the heading of sustainable invest­ment stra­te­gies, i.e. invest­ments that take into account envi­ron­men­tal, social and gover­nance (ESG) factors. ‘For us, impact inves­t­ing is a sub-area of sustainable invest­ment,’ says Sabine Döbeli. In gene­ral, impact is an issue. ‘More and more invest­ment products are geared towards making a posi­tive impact,’ she says. The simple way is to invest in compa­nies that are alre­ady achie­ving the desi­red long-term impact. A distinc­tion must be made between this and an invest­ment where the inves­tor deli­bera­tely influen­ces the company. The latter is a concept known as ‘inves­tor steward­ship’; in such cases, inves­tors play an active role. By exer­cis­ing their voting rights and in dialo­gue with manage­ment, they influence the course of the company in order to achieve impro­ve­ments. This mainly applies to equi­ties and bonds. By contrast, tradi­tio­nal impact inves­t­ing takes place in the private market, i.e. in invest­ments that are not traded on the stock exch­ange. ‘It is crucial that new capi­tal is made available for inno­va­tive solu­ti­ons that contri­bute to a sustainable world,’ she says. In impact inves­t­ing, the inves­tor defi­nes what the inten­ded impact is. We need measu­re­ment crite­ria and ther­e­fore proof of what has chan­ged as a result of the invest­ment. ‘These are the factors that set impact inves­t­ing apart,’ says Sabine Döbeli. ‘Today, impact invest­ments are usually carried out by specia­lists who are prima­rily invol­ved in private markets and thus make new capi­tal available.’

The precise defi­ni­tion of impact and how impacts are measured

There are diffe­rent views on how to define and measure impact. ‘In the field of econo­mics, howe­ver, the term is very precis­ely defi­ned,’ explains Markus Frölich. Impact is measu­red at the level of the people who are ulti­m­ately affec­ted, he says; in other words, those for whom an impact is to be achie­ved. This must be deter­mi­ned in compa­ri­son with a control group. Three Nobel Prizes have been awarded for defi­ning and measu­ring impact: in 2000 to Profes­sor James Heck­man; in 2019 to Profes­sors Baner­jee, Duflo and Kremer; and in 2021 to Profes­sors Angrist, Card and Imbens. The three econo­mists Esther Duflo, Abhi­jit Baner­jee and Michael Kremer provi­ded key insights into this topic. In 2019, they were awarded the Nobel Prize in Econo­mics for their work in poverty rese­arch. They mana­ged to demons­trate the vary­ing impact of finan­cial aid. To this end, they went to Kenyan villa­ges and put toge­ther diffe­rent groups, which all recei­ved diffe­rent kinds of support. This allo­wed the rese­ar­chers to deter­mine which types of aid were useful based on their impact. Accor­ding to Frölich, the trend towards econo­mists being stron­gly orien­ted towards medi­cine and the natu­ral scien­ces when it comes to measu­ring impact began as far back as the turn of the mill­en­nium. He also talks about the credi­bi­lity revo­lu­tion, as descri­bed by econo­mist Profes­sor Joshua Angrist. In econo­mics, social and poli­ti­cal scien­ces, there was a move to intro­duce stan­dards in medi­cine and the natu­ral scien­ces and to demons­trate impact by means of empi­ri­cal compa­ri­son groups. Frölich compa­res this approach to phar­maceu­tics: when a medi­ca­tion is intro­du­ced, its effect is tested and veri­fied against that of a compa­ri­son group that has been trea­ted with a placebo. It should be essen­tial for impact inves­t­ing that an impact is clearly demons­tra­ble. Toge­ther with trans­pa­rency, this crea­tes credi­bi­lity. It’s abso­lut­ely key. This evidence enables impact inves­t­ing to hedge against accu­sa­ti­ons of green­wa­shing. This suspi­cion can arise, espe­ci­ally with invest­ments that promise an impact that is diffi­cult to measure. After all, the marke­ting aspect of sustaina­bi­lity is appe­al­ing. An invest­ment may appear more attrac­tive if it promi­ses a long-term impact in addi­tion to a return, but these promi­ses are often not fulfil­led. ‘Over­all, it’s proba­bly a conti­nuum,’ says Markus Frölich. A conti­nuum that ranges from return-orien­ted invest­ments, which make sustaina­bi­lity promi­ses prima­rily for marke­ting reasons, to impact invest­ments, which have a demons­tra­ble impact and accept below-average returns. Trans­pa­rency, tracea­bi­lity and measura­ble objec­ti­ves could provide guidance, but are unfort­u­na­tely very often not achieved.

More and better jobs

The SECO Start-up Fund (SSF), an initia­tive of the State Secre­ta­riat for Econo­mic Affairs (SECO), has a clearly defi­ned objec­tive. Its aim is to promote job crea­tion in emer­ging and tran­si­tion econo­mies (ETEs) by support­ing the foun­ding of new compa­nies with successful busi­ness models. To this end, the SECO Start-up Fund grants long-term, inte­rest-bearing loans to investors/borrowers who are domic­i­led in Switz­er­land and are seeking co-finan­cing for a start-up in an ETE.

‘We always work on a subsi­diary basis to other market parti­ci­pants,’ says Susanne Gross­mann, a part­ner at fund manage­ment firm FINANCE­cont­act. For every loan gran­ted by the SECO Start-up Fund, it defi­nes impact targets. 

The number and quality of jobs that a borrower or start-up should create is an important objec­tive. ‘Where possi­ble, the posi­ti­ons should be formal long-term employ­ment contracts,’ she says. ‘This is because these posi­ti­ons are usually better covered by social secu­rity and gene­rally longer lasting than tempo­rary contracts.’ This corre­sponds to SECO’s primary objec­tive of crea­ting ‘more and better jobs’. In addi­tion to the jobs crea­ted directly in the start-up, other impacts are also asses­sed, such as the gene­ra­tion of income oppor­tu­ni­ties for self-employed persons who have a formal employ­ment rela­ti­onship with the start-up, such as small­hol­ders who supply a proces­sing company. Gross­mann points out that these effects are less directly verifiable.

Risk of unfair compe­ti­tive advantages

Some­ti­mes, these requi­re­ments prevent the fund from getting invol­ved. In gene­ral, FINANCE­cont­act has noti­ced a decline in demand over the past few years. This is no doubt due in part to the pande­mic, which prac­ti­cally brought demand for loans to a standstill for two years. In addi­tion, the impact finan­cing scene has deve­lo­ped signi­fi­cantly over the last two deca­des. It often opera­tes on the basis of non-repa­ya­ble subsi­dies (in Swiss law: à fonds perdu), favou­ring orga­ni­sa­ti­ons that execute projects. Gross­mann, on the other hand, considers it important that they allo­cate public funds to finance commer­cial busi­ness models in the form of loans rather than grants. She is funda­men­tally criti­cal of non-repa­ya­ble subsi­dies being used to finance the private sector, because they can give compa­nies unfair compe­ti­tive advan­ta­ges in a market. Commer­ci­ally finan­ced compe­ti­tors with poten­ti­ally more finan­ci­ally sustainable busi­ness models may suffer as a result. Gross­mann belie­ves that there are still too many non-repa­ya­ble subsi­dies being allo­ca­ted in the private sector at the moment. Although she does see that mixed finan­cing can make sense in speci­fic cases, such as for compa­nies that provide services that offer a ‘public good’, or agri­cul­tu­ral projects that take a long time to gene­rate income. ‘But you have to apply such finan­cing almost home­opa­thi­cally, as you might say,’ she says, ‘because you can also do an awful lot of damage.’

Role and responsibility

One advan­tage of a loan, in her eyes, is its binding nature. The borrower has grea­ter perso­nal respon­si­bi­lity. Because the SSF only provi­des part of the finan­ces requi­red, the borrower must also make an invest­ment them­sel­ves. Susanne Gross­mann is convin­ced that if capi­tal has a price, it promo­tes busi­ness models that are sustainable – not only soci­ally, but also finan­ci­ally. In addi­tion to finan­cing, the fund supports borro­wers with advice and assis­tance, if desi­red: ‘We work more or less as a sound­ing board or as a coach.’ But there are limits. The important thing is that ever­yone sticks to their roles. Because the loan has to be repaid in the end. As a lender, the SSF is careful not to influence busi­ness decis­i­ons. Because the lender cannot be respon­si­ble for the business’s success or fail­ure: in the end, they will want their money back.

Selec­ting an impact

Before impacts can be measu­red, an inves­tor must define the desi­red objec­ti­ves. In answer to this ques­tion, Markus Frölich notes that diffe­rent ques­ti­ons are often mixed up toge­ther. On the one hand, the effect of impact inves­t­ing can be measu­red: the support of child­ren in soci­ally diffi­cult envi­ron­ments can be measu­red in the same way as the impact of support for gifted child­ren. But when it comes to compa­ring these two effects, the orga­ni­sa­tion must decide which objec­tive it feels to be more important. Neutral, relia­ble data helps with this. What can happen in the absence of such data beco­mes appa­rent during discus­sions in society when, in a poli­ti­cal process, support­ers and oppon­ents of a measure use diffe­rent expert assess­ments to arrive at diffe­rent results. A stan­dard of rigo­rous scien­ti­fic impact measu­re­ment can prevent this. Credi­ble measu­re­ment results give secu­rity to a project and its objec­ti­ves. Markus Frölich cites the exam­ple of PROGRESA from Mexico. There, the govern­ment intro­du­ced condi­tio­nal cash trans­fers: social assis­tance was paid to mothers on the condi­tion that they could prove that they sent their child­ren to school and ensu­red their health was taken care of. A compre­hen­sive, inde­pen­dent study provi­ded objec­tive evidence of the impact of the programme. This meant that the new govern­ment could not stop the scheme after the elec­tions, although on prin­ci­ple it would have liked to have stop­ped program­mes brought in by the previous govern­ment, on the pretext of their inef­fec­ti­ve­ness. Trans­pa­rency and measu­ra­bi­lity also enable compa­ra­bi­lity between count­ries. Frölich notes that the inde­pen­dent scien­ti­fic measu­re­ment of social projects is more deve­lo­ped in emer­ging econo­mies than in indus­tria­li­sed count­ries. As he puts it: ‘Projects in emer­ging econo­mies are often finan­ced by the Global North, which then demands objec­tive proof of their effectiveness.’

Soft factors also count

The GIIN study shows that most impact inves­tors today take steps to measure the effec­ti­ve­ness of their invest­ments: 46 per cent examine their impact every year, 22 per cent measure it even more often, while only 5 per cent do so on an ad hoc basis. Only 1 per cent never check their impact. The SECO Start-up Fund reviews the impact of its loans at least once a year, as well as once every five years after funding has come to an end. Borro­wers report on their impact by means of a ques­ti­on­n­aire. The soft factors exami­ned also include compli­ance issues (envi­ron­ment, social and gover­nance) and the corpo­rate model per se. The idea is to find out whether borro­wers have brought a whole new type of busi­ness model into the market that others can adopt or even copy. The effect on other inves­tors is also of inte­rest. ‘We look at what further invest­ments the Start-up Fund’s loan has trig­ge­red,’ says Susanne Grossmann.

180 billion Swiss francs

For the autumn, Swiss Sustainable Finance has announ­ced a new study that will examine the impact inves­t­ing market in Switz­er­land. The previous data on all sustainable invest­ments shows that the share of impact invest­ments accounts for around 11 per cent of sustainable invest­ments. Invest­ments worth around 180 billion Swiss francs now apply an impact approach in Switz­er­land. ‘There are various forms, which also include the real estate market, for exam­ple,’ says Sabine Döbeli. In rela­tion to the over­all invest­ment market, this is likely to amount to three to five per cent. The poten­tial for impact inves­t­ing must be asses­sed correctly. It remains only a supple­ment to an invest­ment port­fo­lio. She says: ‘But you also need to consider how you can achieve an impact with the rest of a port­fo­lio, and inves­tor steward­ship is an important tool in this respect.’

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