Thinking Systemically About Water: An interview with J. Carl Ganter

By Marta Maretich, Chief Editor, Maximpact, @mmmaretich

Water sector investments continue to be high on the wish-list of many impact investors. But what are the wider issues surrounding investment in water? Maximpact talks to J. Carl Ganter, award-winning CEO and Founder of Circle of Blue and member of the World Economic Forum’s Global Agenda Council on Water Security.

What’s your view of water sector investing?

A few years ago, some venture capital firms invited me to make the rounds in California. I visited three different firms. Two of them had practically the same list of 68 companies to invest in, which they slid across the table with great gravitas. They asked me to comment, to tell them which ones I thought were winners.

What struck me at the time was that all these investments were what I think of as traditional. They were investments in a new type of pump or a new type of filter, for example, or a desalination plant. The venture capital firms, at least at this point, still had a very old world, 20th century, incremental way of thinking about investing in water. They were looking for ways to turn the water crisis into an opportunity by doing what they had always done.

I flipped their perspective and asked, “What if you had known in advance that Australia was under severe drought and its entire rice industry was going to collapse and this was going to ripple across world markets, affecting not only commodities traders, but impacting on the way the UNHCR manages its budgets for human disasters, its ability to buy food for refugees. How would that have changed your water investment choices?”

I don’t think they had ever thought about the wider ramifications of investing in water. Clearly, they weren’t thinking systemically about water. Hopefully, impact investors will take a more sophisticated approach.

What do you mean by “thinking systemically about water”?

I am seeing this as one of the biggest trends in the water sector today. I have an unusual perspective right now, with one foot in the “water buffalo” crowd; the community of water experts and people on the inside of the conversation; and the other in the world of journalism, which requires more of an everyman’s perspective.

In the water buffalo crowd, we’re hearing a lot more talk of a nexus of water, food and energy in a changing climate. In other words, it’s better not to think of water in isolation, but to consider it as part of a system in which those four pieces; water, food, energy and the effects of climate change; are interlinked.

And why is that important for impact investors?

From my experience, it seems that many in the investment community are still trying to figure out where the big play is in the water sector. But by thinking this way, they’re missing a massive opportunity.

If we understand there is a system in operation here, a competition, it’s possible to take a very different approach to everything we do. It’s become our mantra at the WEF, where I’m a member of the Global Agenda Council on Water Security. We joke about tattooing it on our foreheads; water, food and energy in a changing climate. We can’t think exclusively about water anymore; even the dedicated water buffalo’s can’t; we all have to think about the four-part system.

When it comes to impact investing, we need to embed that meta-message so that people looking for capital and impact investors are all thinking systemically. For example, if you’re in micro-finance and your focus is on women’s issues, then you really need to have water and sanitation embedded in your thinking. If you don’t, your work won’t be as effective as it could be. Or it may fail all together.

Why is that? When you bring water to communities in an appropriate way, you bring health, gender equality and education to girls and women. Girls will come to school because there are bathrooms that are safe for them to use. They have time for education because they aren’t carrying water all day. By thinking about these issues systemically, you can really have an outsized impact with the same level of investment.

Apart from thinking systemically, what can we do to be more effective when it comes to investing in water?

At the WEF, we’ve identified two major areas where change needs to happen. Both of these have implications for impact investing.

The first is governance. How do we break down the siloes within governments so that the water ministry talks to the infrastructure ministry and the education ministry? How do we remove the obstacles that prevent institutions from different sectors collaborating? Governance; the systems and processes that encourage cooperation and safeguard accountability; is key to breaking down siloes and creating conditions where collaboration can happen.

The other issue is values: What is the value of water? How much should people pay for water services? To what degree is water a human right? The answers to these questions tell us how much we value water for human use, industrial use, agricultural use and ecological use. Considering the value of water helps us include water in all of our conversations so that it isn’t an afterthought. It shouldn’t come down to a crisis situation if that can be avoided with foresight.

What would you like to say to an impact fund manager trying to put a portfolio together that includes water?

I’d advise someone on the sharp end of investing to think about water impact risk. By this I don’t mean only for water investments, I mean for all investments.

From the micro finance to large-scale bonds, it’s possible to go down the line with each investment, not only in the water world, and rate each one by risk of water impact.

For example, you might have an investment in an energy company. If you’re drawing a percentage of energy from hydro-electric energy, you need to consider how a prolonged drought like the one in California would affect electricity output. If you have investments in manufacturing businesses overseas you need to think about how drought in those parts of the world might ripple through your investments.

Organizations like Ceres have been successful in getting companies to disclose their water and climate risks in their annual reports. They’ve developed a method for assessment that impact investors could learn from.

Any other advice?

Our biggest obstacle lies in what we don’t know about what’s happening around the planet in this competition between water, food and energy. Our first step should be to invest heavily in understanding what is really going on. To this end, the White House recently announced its landmark Climate Data Initiative. Circle of Blue is participating and supporting this initiative with a new data dashboard that displays in real-time California’s water supplies.

This kind of information scaled will provide the key to finding solutions for the water issues we’re facing today. Not only that, but data projects like these will offer deeper insight for investment and return. Impact investors should consider how they can capitalize companies and projects that are collecting data and putting it in context.

One last thing: Do water experts really call themselves Water Buffalos?

(Laughs) Circle of Blue recently did two huge conference calls on water issues that each included about 400 people from around the world, with such experts as Peter Gleick, Jay Famiglietti and Lynn Ingram. I polled the participants beforehand, and many preferred, only half joking, to be identified as water buffalo’s. Perhaps it symbolizes persistence and strength while wading through vast pools of water and mud.

Circle of Blue announces new initiative exploring the water-food-energy nexus in India.

Ceres President Mindy Lubber will participate in the opening plenary of the 2014 Skoll World Forum in Oxford, U.K., from April. Hear what she has to say.

J. Carl Ganter

About J. Carl Ganter: J. Carl Ganter is co-founder and director of Circle of Blue, an internationally recognized center for original front-line reporting, research, and analysis on resource issues, with a focus on the intersection between water, food, and energy. He is a member of the World Economic Forum Global Agenda Council on Water Security and, for more than five years, served on the Woodrow Wilson International Center for Scholars Navigating Peace Water Working Group. In 2012 he received the Rockefeller Foundation Centennial Innovation Award

What the Impact Investing Sector Needs Now

By Tom Holland, Founder and CEO of Maximpact

The impact investing sector is reaching a critical moment in its evolution.

It’s expanded hugely in the 18 months since Maximpact came on the scene, attracting attention from world leaders, governments and mainstream investors.

New funds are launching almost daily while more mature funds are developing sophisticated investment philosophies, models and methodologies.

All this is healthy; it’s what we’re all working for. But to continue this healthy growth, impact now needs several key things:

Increased collaboration:
Despite the growth in the sector, many parts of it are still working in separate silos. Activity is up, more capital is invested, but the sector is still very fragmented. Many impact organizations don’t connect with the wider impact community or take advantage of the many possibilities it offers. There’s nothing wrong with specializing in your area, but impact investors need to adopt a big umbrella approach and do more to collaborate across organizations, regions, sectors and disciplines.

Diversity:
There are lots of different impact investing models out there now. Instead of spending our time debating definitions, we need to embrace this diversity and use it to our advantage. Quality is important but we shouldn’t assume rigid standardization is the only way to achieve it. A wide range of approaches gives investors options and offers multiple ways to tackle problems using impact capital.


Greater efficiency:
For impact fund managers, sourcing impact deals is still a very time-consuming process. A fund manager may have to review 100 deals to find 2-3 that are right for him; that’s highly inefficient. At the same time, an impact entrepreneur may have to take her pitch to many, many funds before she finds finance. This is a huge amount of time and energy that could be used building the business and doing good for the planet. The sector needs to find ways to make this matching process more efficient so that more deals can be done.


More money:
The final thing the sector needs is, of course, more money. We’d all like to see increased amounts of capital invested in the right places; and by the “right places” I mean in businesses that produce results for a triple bottom line. It isn’t just large cash infusions that are needed, but a whole range of different levels and types of investment by individuals as well as institutions. Crowdfunding will play a role, making it possible to deploy very small amounts of capital for good, so will large-scale investing by governments and major financial institutions.

The points on this wish-list are interdependent. Only by making deal flow more efficient; and ensuring diversity as well as quality across the impact sector; will we be able to attract the volume and variety of capital that will really make a difference. Collaboration, the first item on my list, holds the key to resolving the issues around the others: efficiency, diversity and capitalization.

At Maximpact we try to practice what we preach when it comes to developing sector capacity and this starts with a commitment to collaboration. Our platform is designed to encourage collaboration among users and we welcome opportunities to work with other parts of the sector ourselves; in fact, we will be announcing some exciting new collaborative and innovative partnerships and alliances in the near future.

There’s still much more to do, but we are looking forward to seeing how the developing sector meets its new challenges; and to playing an active role in finding the solutions we’re all looking for.

Image: KaidiPhotography

Impact Investing 2.0 and the Rise of Multilingual Leadership Teams: An Interview with Jed Emerson

By Marta Maretich, Chief Writer, Maximpact.com

To mark the publication of Impact Investing 2.0, a watershed study of 12 successful impact investing funds, Maximpact talks to co-author Jed Emerson about “multilingual leadership” and why he thinks the very nature of leadership in impact organizations is changing.

Maximpact: At SOCAP13 you took turns with Cathy Clark, of CASE and Ben Thornley, of Pacific Community Ventures, to introduce different findings of your joint Impact Investing 2.0 report. You presented the part about “multilingual teams”. Why are multilingual teams so important to impact investing funds and why are they so interesting to you?

Jed Emerson: This is a really critical issue, first because all organizations need leaders and I think that there have been profound changes to the concept of leadership in the last ten to 15 years. In someways the Impact Investing 2.0 research is one more step forward in that progression and in other ways it’s a new way to think about leading impact organizations.

Maximpact: In Impact Investing, your seminal book with Anthony Bugg-Levine, you write about the need for a move from charismatic to collaborative leadership. Do you see evidence in this report that an evolution is taking place in fund leadership?

Jed Emerson: I think it’s clearly taking place! It’s interesting, because in 2000, when I published my first working paper on blended value during a faculty appointment at Harvard Business School, I talked about “mutant managers”. At the time I said we need these oddly genetically modified people that could play both/and rather than either/or in social investing.

The term “multilingual leaders” is probably a more accurate way to describe what these new kinds of leaders do; cutting across silos to draw connections between business and the social/development finance sectors.

For me this term holds special meaning because in some ways that’s the background I come out of. I started my career in social work and youth work and morphed from that into venture philanthropy, community development, sustainable private equity and then on into the areas I’m active in now, in impact investing. In an important sense, this is a very personal kind of observation for me.

Part of this insight was formed simply from watching the sector develop over time. I’ve spent the last 20 years observing both the field and its practitioners emerge into this “new” space. It’s been striking to see the finance-first people, who’ve come into the conversation with traditional banking and investment skills, needing to get up to speed with the social element of impact investing. Meanwhile, you see people coming out of the more traditional development backgrounds who are really sucking up the skill sets around investing and finance while recognizing that if your ventures are not sustainable on financial terms they won’t be sustainable in impact terms.

Whether you’re giving your profit to shareholders and investors or using it to build community equity, if you don’t know how to play this type of dual game you won’t be effective.

As we were going through the two-year process of first identifying the 12 funds we wanted to profile and then beginning the deep dive analysis and case study work, we did multiple interviews with investors and managers making use of the various products and strategies these funds were bringing to market. It was really interesting to see our research team as a whole realizing this issue of leadership was central to the success of the funds we looked at.

I was surprised myself because I think the focus of a lot of the discussions around impact investing in the last five to ten years has been “we need to improve our skill set around financial structuring”, or “we need people who have done deals who know how to invest”. We’ve heard a lot of this kind of rhetoric.

However, what we found during the course of the research was, no, in fact what funds need are more people who can play in the muddy middle, first, without losing track of the financial discipline that one needs and, second, without losing the focus on impact, which is the reason we’re applying those financial skills to begin with.

The research process reminded us what a lot of us already knew: that funds need both financial and impact discipline to be successful. On the other hand our research has shed new light on the idea of multilingual leadership. For us, at the level of fund investment teams, this means a kind of leadership that includes various individuals that speak the language of various parts of the practice.

The funds that have performed most effectively are those that have teams and individuals who can really play across perspectives and silos rather than coming in as representatives of a particular, individual perspective or silo.

Maximpact: Can you say more about how it works? Who is on the multilingual management dream team?

Jed Emerson: We speak of it as themes rather than directives in the report because in each case the constellation and makeup of the teams is different. Yet, at the end of the day, all of them reflect this multilingual orientation.

For example, you may have a fund with a leader who has more expertise on one side or the other but who has the ability to understand all the perspectives and the language of all the different silos he or she is drawing upon. The leadership team might be made up of individuals who are each fully multilingual, or be comprised of folks who come into the conversation with a deeper expertise in one or the other silos.

The important thing is that all team members have an understanding of the humility with which multilingual leadership comes forward. By that I mean an awareness of the fact that, though you may be really great in your area, you won’t be successful unless you’re able to take your expertise and marry it with that of the other experts in your team in an effective way. As individuals, it means seeing your own “blind spots” and working to establish a wider vision of where you yourself need to develop new skills and leadership language.

In the context of the funds we’re seeing, yes, there are individuals who are outstanding in terms of their work and expertise and skill set. But the success of the fund is a function of teamwork and integrated perspective and practice. It’s not the success of an individual, not the triumph of the charismatic leader. The charismatic leader may be able to hold the torch, but the light is shed by the team as a whole.

Maximpact: What are the core skills needed on a fund management team?

Jed Emerson: On the one hand, there are skills around being able to maintain financial discipline: analyzing deals, understanding the marketplace in which the deal will function, looking at various investors; perspectives on value creation in a possible deal. It’s having the skills needed in order to be a successful financial investor.

At the same time the management team needs to understand the impact context in which the investment will play out. For example, if your impact goal is job creation but you’re creating lousy jobs, then that’s not a successful strategy.

That financial discipline has to be complemented fully by an understanding of context and social opportunity. If you have both those things, you can then translate that social opportunity into financial metrics. In this way the impact investment process looks more like a DNA strand than a double bottom line. From this we derived the schematic for the Mission First and Last section of the report.

Maximpact: Does multilingual leadership reflect the multi-stakeholder nature of impact investing?

Jed Emerson: Definitely! It speaks to the idea that when you’re investing for impact there are multiple beneficiaries; as well as multiple actors contributing to value creation. You have various levels of financial return that come to shareholders and stakeholders alike. Those financial returns are in fact part and parcel of the generation of social and environmental impacts that grow out of being able to work on a sustainable financial basis. The multilingual team reflects that range of interests and outcomes.

Maximpact: Can graduate schools create the kind of multilingual leaders you’re talking about?

Jed Emerson: Not only can graduate schools create multilingual leaders, but they have to! I read a comment in a McKenzie report the other day that said business schools can no longer be teaching business as usual and the incoming classes are increasingly demanding schools give them the skills and tools needed to execute within this new context of impact generation.

20 years ago none of the graduate schools were doing anything like this. Then slowly things began to change. Harvard Business School started the ball rolling with its social enterprise initiative in the 90s. This was complemented by the work at Stanford Center for Social Innovation and Kellogg School of Management; I taught social entrepreneurship at Kellogg in 1999-2000.

We’ve seen this movement come forward over two decades; and now it’s been fully unleashed. I see the evidence everywhere. For example, I wasn’t able to attend the NetImpact conference this week but I was tracking the twitter feeds. Boy, could you feel the passion and enthusiasm coming through those posts and tweets! More than that, you could feel the sense of urgency and focused direction from the participants. To me, this is the driving force behind the need to train our future leaders in this multilingual way.

Maximpact: Are any grad schools doing it now?

Jed Emerson: A good example of a school taking up the challenge is the James Lee Sorenson Center for Impact Investing in Utah. Lewis Hower is their fund director. The interesting thing for me is that they’re using students to engage in the due diligence around impact investing opportunities.

When I first heard about this, honestly my reaction was, “Man, that’s got to be a recipe for disaster!” Because you’ve got these folks who are learning skills while they’re doing the analysis, so you might think maybe that analysis is going to have to be improved over time. Yet the work these students are doing with Center staff is evidently really strong. It’s very good analysis.

My other observation is that the students who are coming to learn at the Sorenson Center are not just business or economics students. They’re coming out of the humanities and much more traditional liberal arts backgrounds as well. Now, that is the future of impact leadership!

In my view, the Sorenson Center and others are creating an environment with the potential to produce the multilingual leaders of the future. No CEO can aspire to lead a global organization these days and not be aware of all the things beyond the balance sheet that will determine whether that organization is successful. As a matter of course, the leadership of these organizations will be looking to hire managers and team members who can come to the table ready to play on that basis. Business schools and graduate programs will have to provide their students with the education and the tools and the learning they need to be successful in this new market.

Maximpact: How can impact funds go about building these multilingual teams?

Jed Emerson: I work with a small set of family offices, one of which is currently recruiting folks to run a new impact fund. I wasn’t sure when we started recruiting what kind of candidates we would see. Truthfully, I expected a lot of candidates with very traditional private equity and venture capital backgrounds who had decided they were done making money and wanted to go “do good.” And I’m not such a big fan of the “do gooder” approach, so was kind of bracing myself;

But I was pleasantly surprised to see the number of folks that clearly fit our research team’s description of multilingual leaders. Yet the thing that really surprised and pleased me was the high caliber and solid quality of these individuals. The experience has validated my feeling we’re on the right track and the change is happening.

I’d like to point out that the Impact Investing 2.0 report doesn’t say, “This is what needs to happen”. It’s not prescriptive in that sense. What the report says is, “This is what is already happening in the most successful funds”. It describes what is currently the practice of the better organizations. As new fund mangers and new investors come up through these processes, I think we will begin to see the practices we identify in this report as the default operating process of the field. This will simply be the way we do business.

Maximpact: What happens to those poor charismatic leaders once the multilingual team takes over?

Jed Emerson: (Laughs) I think that the role of the charismatic leader will always be with us yet we’ll move beyond them being the focus. We need those individuals for movement building and for creating so many aspects of organizations. That said, you can’t build a successful organization on the back of an individual!

The most successful charismatic leaders will recognize this multilingual future. As opposed to the classic “founder-syndrome” individual who clutches on to power until the organization withers and dies, successful charismatic leaders will take on a new role helping position their teams for success.

The rise of multilingual leadership provides charismatic leaders with the option of an out, an opportunity to go back to developing new ideas, to be innovative, to be visionary; yet they will have to step aside. They’ll be able to pursue new avenues because they can be confident the teams they nurtured are shepherding their original vision; but taking it to new places and new levels of success.

I see “Leadership of the Whole” rather than leadership of individuals as the future of this sector. It’s a movement in many ways, but it’s also simply how you build effective sustainable organizations that are creating value over the long term; over multiple lifetimes and not individual careers. For me, this topic of leadership is really the crux of how we will all and each be successful over the long haul!

About Jed Emerson

Jed is widely recognized as an international thought leader on impact investing, performance metrics and sustainable finance. Originator of the term blended value, he has spent over two decades exploring how capital investment strategies may be executed to create multiple returns.

Jed has held appointments at Harvard, Stanford and Oxford business schools and has written extensively on impact investing, social return on investment, and related areas. He is co-author with Anthony Bugg-Levine of Impact Investing: Transforming How We Make Money While Making A Difference.

Jed is Chief Impact Strategist for ImpactAssets and chair of the ImpactAssets 50, a field-building strategy that promotes leading impact investing firms. He is a founding director of both Larkin Street Services and the Roberts Enterprise Development Fund (REDF), a founding board member of Pacific Community Ventures, and the first senior fellow at Generation Investment Management, among numerous other appointments.

Jed is currently a senior fellow with the Center for Social Investment (Heidelberg University) and senior advisor to The Sterling Group (Hong Kong).

You can follow Jed Emerson on Twitter via: @blendedvalue

Read the full Impact Investing 2.0 report.

Watch the video of Jed Emerson, Cathy Clark and Ben Thornley introducing Impact Investing 2.0 at SOCAP13:

[Image credit: Courtesy of Jed Emerson]

Better Names for Impact Investing (and other insights from Hazel Henderson)

by Marta Maretich

Hazel Henderson has never really liked the term “impact investing”.

“All investments have impacts,” she told us. “I pointed this out to the authors of the original paper published by the Rockefeller Foundation. Some of these impacts include blowing the tops off mountains and spilling oil in the Gulf of Mexico!”

Not mincing words is one of the characteristics that has made Henderson a thought leader in the ethical investing movement. Futurist, evolutionary economist, worldwide syndicated columnist, consultant on sustainable development and author of many books, articles and blogs, Henderson has turned her personal vision of a new kind of capitalism into a remarkable career spanning four decades.

Her CV is beyond distinguished, including 22 years of service on the Advisory Council of the Calvert Social Investment Fund and membership in the Social Investment Forum and the Social Venture Network. She founded Ethical Markets Media and won a slew of international honors for her work. She is the creator of the Green Transition Scoreboard, a tool that tracks the private financial system for all green sectors worldwide since 2007 (current total is $5.2 trillion) and measures progress “as defined by the triple bottom line of planet, people and profits”. Follow #greenscore on Twitter.

Taking a measured view of impact

This stellar track record speaks of Henderson’s lifelong commitment to positive change in the area of beneficial finance and socially responsible investing. It also makes her a hard person to impress. While the world gets more excited about the potential of impact investing to solve its many problems, her support for the practice is tempered with realism.

“While I applaud the approach and achievements so far of this kind of investing,” she says, “I don’t see it as a new “asset class” since it must operate within all the old and still failing models of mainstream investing. And, as I have discussed with many of impact investing’s best practitioners in our TV series Transforming Finance the term “impact investing” simply adds to the confusion! Why not call it “positive impact investing” and thus make its good intentions clear?”

She’s right of course

Henderson makes several important points here; ones borne out by the latest research into impact investing.

One is that impact investing is not a distinct new field of investing, or “asset class”, but an investment approach that spans asset classes. For Henderson, who has been at the forefront of the worldwide movement to diversify the financial methods that can be used to achieve social and environmental benefit, it’s only one tool in the larger toolbox that now (thanks to her and social benefit investment pioneers like her) includes a full spectrum of approaches: microfinance, social entrepreneurship, social impact bonds, venture philanthropy, catalytic capital, responsible investing, patient capital and so on.

Another of Henderson’s points is that not all impact is good impact: “blowing the tops off mountains,” as she puts it, definitely comes into the bad impact category.

The principle here is that intentionality matters when it comes to impact investing. Obviously, the idea is to avoid bad impacts; that goes without saying. But it’s not enough for good impacts to happen by accident, either, or as mere byproducts of doing business. To be authentic impact businesses, enterprises have to be built around the positive impacts they exist to create (along with profits).

And it’s not enough to cross our fingers and hope for positive impact without bothering to find out whether it’s really happening. Positive impact goals; and the metric processes that measure them; need to form part of the business plan of impact businesses. Otherwise, there’s nothing to distinguish them from ordinary businesses and no reason for impact investors (who currently complain of a shortage of good opportunities) to commit their capital.

Keeping sight of a higher purpose

Finally; and perhaps most importantly; Henderson’s comment reflects her belief that we need to do more than just tinker with the way world finance works.

Impact investing may be a good thing, but its dependence on the “old and still failing models of mainstream investing” mean that the approach is, after all, nothing so revolutionary as is sometimes claimed. More precisely, it’s an adaptation of what we’ve had in the past, using familiar techniques and market models, though in new contexts. As such, it doesn’t go far enough to satisfy Henderson, whose organization’s mission is: “to foster the evolution of capitalism beyond current models based on materialism, maximizing self-interest and profit, competition and fear of scarcity”. Henderson proposes to achieve this by reforming markets and metrics while growing the green economy worldwide.

Henderson’s vision for the future of finance is more radical than that of the elite group that gave impact investing its name. Where they hoped to harness the power of capital for good, Henderson wants to alter the very nature of capitalism, transforming it into something that better serves the needs of humanity and the planet. This higher purpose makes it unlikely that she will champion any single approach to changing the way we invest. In one example of her far-reaching strategy, Henderson has partnered with the company Biomimicry 3.8 to create a set of Principles of Ethical Biomimicry Finance, now available on license to responsible asset managers.

Henderson is well placed to take the long view of various social investing movements. Her comment serves a reminder that impact investing is just beginning to prove itself. The jury is still out, and it’s probably a good thing the early hype seems to be dying down. However keen we are on impact investing (and we are keen) it is not a silver bullet for solving the world’s problems.

At the same time, it’s a good thing that the sector is growing. More deals, more collaboration and more experimentation may serve to take us closer to a time when all businesses are, as Henderson would have it, positive impact businesses.

For more about Hazel Henderson see this interview in Green Money Journal.

Hazel has recently released Mapping the Global Transition to the Solar Age: From Economism to Earth Systems Science from the UK’s Institute of Chartered Accountants of England and Wales (ICAEW) and Tomorrow’s Company. It will appear soon in the US from Cosimo Publications, NY.

One Year of Maximpact by Tom Holland

Maximpact.com has been in operation almost one year. And what a year it’s been for impact investing and for us.

The last twelve months have seen impact investing; in fact all forms of social and sustainable investing gain significant ground. We saw the Impact G8 in London and heard the buzz around impact grow louder. Some of the main infrastructure issues such as measurement and exits have begun to be addressed. The US has launched a huge impact investing initiative. Social Impact Bonds are beginning to prove their worth. And all over the world, new educational programs have been launched to train the impact professionals of the future.

Impact investing is on its way to becoming mainstream; and the range of opportunities for investors and businesses has never been broader.

For Maximpact it’s been a year of discovery. Recently someone asked me what the highlight of Maximpact’s first year has been. That’s a tough question in a 12-month period that’s seen us doing so many new things for the first time. Yet I suppose the highlight has been all the support we’ve had from all parts of the various sectors. We see this support very directly from the number of individual funds, intermediaries and funds listing on the deal site. And we’ve heard it through the user feedback, which has been very positive both in person and through our social media channels like Twitter and LinkedIn.

Users from many sectors including impact, sustainability, eco and green are telling us Maximpact is useful for networking, finding deals,identifying collaboration partners and securing investment. They also say it’s a good way to find new ideas and technologies and a way to deploy existing technologies for new uses. Our Newsstand resources feature has proved very popular. We’re also having more approaches from organizations and funds who want to collaborate with Maximpact; the EVPA is one example we’re proud of.

Surprises, good ones

This is everything we hoped for when we started out a year ago. Yet in some ways, the experience has been one big year-long surprise. I mean, we thought that our big tent approach would help the markets increase volume and gain momentum. Bringing CSR, eco and green, cleantech and sustainable investing all onto one platform was a strategy designed to open up the market and create more impact. We believed in the idea completely, but no one had tried it before and there’s always that fear that your brilliant concept won’t work in practice.

I’m very glad and relieved to say it does work. The industry has taken to the idea. There are signs that some of the old barriers are coming down, opening up the way for more investment, more impact. Now, with this year behind us, I can confidently encourage more people do what we’ve done: to innovate, to collaborate, to encourage collaboration and to accelerate change.To dive in and do their part.

That’s not to say there isn’t a lot more for us to do. There are quite a number of people that see the good in what Maximpact is doing but are still sitting on the sidelines. There are still whole parts of the sector that haven’t yet recognized the extraordinary potential in this kind of investing. We continue to try to draw these players in, to get them to try the platform and join the open community. The truth is that impact investing and other forms of sustainable investing need many approaches and innovators. We are doing it one way, but there will be other ways. We welcome this diversity.

What’s on the horizon

Anniversaries naturally make you look back; they also force you to look forward.

For the industry as a whole, we think the next growth phase is going to be very interesting. Responsible and sustainable practice is becoming the expected norm in all aspects of business, in all industries. Businesses that once made their “green” and “social” credentials a selling point, for example, now hardly even mention them. And yet in practice they may be more”green” and “social” than ever. These values are now almost taken for granted by the public as part of a new contract between business and society.

This revolution is being driven by public demand and by governments who see the benefit of a more sustainable approach. As an important part of this larger trend, the view of finance is also changing. We’re all heading toward socially conscious financing and investment. Philanthropic organizations are finding more synergies between market practices and mission goals. They have hugely valuable intellectual property and knowledge, which gives them an edge for pioneering some of these new models. All this will have a dramatic effect on the size of the social benefit, impact and eco and green investing markets in the coming year and far into the future.

For Maximpact, the challenge is to keep ahead of this fast-moving trend. This means continually streamlining our deal platform, making it more efficient, adding more users and more deals and doing everything we canto make it the most lively marketplace in the industry.

We’re also adding new services: video pitches that allow users take their deals directly to potential investors; software that gives enterprises the tools to become investment-ready; a boutique fee-based service to provide specialized professional expertise to the sustainable and social investors. And so much more; we’re rolling out new software products in just a few weeks, a move we’re all excited about.

What we’re building around Maximpact is a solution center for the whole industry. It’s all about putting vision together with the skills and tools of finance. We think the coming year is going to be even more exciting than the last; and we’re looking forward to it.

Mike McCreless Reveals the Secrets of Root Capital’s Success

Root CapitalBy Marta Maretich

Root Capital is one of impact investing’s success stories.This nonprofit social investment fund grows rural prosperity in poor, environmentally vulnerable places in Africa and Latin America by lending capital, delivering financial training, and strengthening value chains for small and growing rural businesses. Since 1999, Root Capital has disbursed more than $500 million in loans to more than 425 borrowers representing nearly 750,000 farmers and artisans in 40 countries in Latin America and Sub-Saharan Africa while maintaining a repayment rate of 98% for borrowers and a 100% repayment rate to investors.

But what lies behind this impressive record? Mike McCreless, Root Capital’s director of strategy and impact, talks to Maximpact about the importance of agriculture, the secrets to Root Capital’s success and what’s coming for agricultural impact investing in the future.

Maximpact: Why is agriculture such a key sector for impact investing?

Mike McCreless: The first reason is that the need is so great. There are 2.6 billion people living on less than $2 a day, which is the international poverty line. 75% of these people live in rural areas and most of them are involved in agriculture. If you want to reach these people, agriculture is a good place to start

The second reason is that agriculture has been a neglected area for decades in international development circles. Beginning in the 80s and through the 90s there was a trend of disinvestment in agriculture. Foreign aid for agriculture dropped from 18% in 1979 to 3% in 2004. Root Capital began work in1999, when investment in agriculture was near its lowest ebb.

Today, investment in agriculture is making a resurgence. Foreign aid agencies and commercial capital are getting back into the picture; the New Alliance for Food Security, Feed the Future and World Bank Global Food Crisis Response Program are some examples. Policymakers are beginning to realize the power of agriculture to both to achieve food security at a national level and to transform livelihoods for the rural poor. At the same time, it’s becoming clear that any approach to mitigating climate change must involve agriculture given its large carbon footprint, especially as practiced in many developed countries. Finally,better agricultural practice is needed to feed a global population that will reach 9 billion by 2050.

Maximpact: You say the funding picture is improving for agriculture. Is there still a role for impact investors?

Mike McCreless: The funding, both public and private, is beginning to come back. However, the private capital is drawn primarily to the bigger deals, for large-scale commercial agriculture. Most of that money is not reaching down to the 2.6 billion living on $2 per day, mainly smaller farmers with one to four acres of land. This means there’s still an important role for impact investors to play.They can place their money with the agricultural businesses that engage directly with those smallholders who may not be benefiting from the large-scale influx of agricultural monies.

Maximpact: There are many ways of doing impact investing. How does Root Capital do it?

Mike McCreless: We invest in emerging agribusinesses that have the potential to connect smallholder farmers to markets but cannot access loans locally because they are considered too small, too risky, and too remote by commercial banks. Many of our clients are cooperatives, owned and managed by the farmers themselves. Others are private businesses that source product from smallholders or sell them agricultural inputs such as seeds.

In most cases, the businesses we invest in aggregate the harvests of 100, 1000 or even a few thousand farmers. With access to credit,they can purchase more volume from farmers and more reliably supply their buyers, which often leads to larger purchases the next year and, over time,price premiums tied to improved quality. When farmers can connect to markets in this way they’re able to get a higher share of the end price than if they sold to a local trader.

We don’t establish new agricultural businesses ourselves. Rather,we build on the strength of pre-existing, locally-driven initiatives. Where there is already momentum for change and a market-based approach but a financing constraint, we can unlock latent potential with our loans and financial management training. We have found that capital by itself is often not enough. Fledgling agricultural businesses also need support in managing cash flows, assembling financial statements, and building a credit history, and our financial advisory services team helps businesses to these things.

Maximpact: What are the special challenges for impact investing in agriculture?

Mike McCreless: There are a lot of not very glamorous specifics that are key to making it work. There’s a lot of technical knowledge related to agricultural risk and small-scale farming; harvest cycles, perish ability, quality standards in the market. An investor needs to understand these.

You also have to be able to scope the whole agricultural value chain from the farm to the end buyer. You need a good feel for who the buyers are and for the relationship between buyers and a given agricultural business. Likewise, you need a sense for the strength of the relationship between the agricultural business and the smallholder farmers whose harvest it purchases. This informs how much of that product it makes sense to finance and how to structure the finance to support the business and mitigate risk.

Maximpact: Root Capital has been very successful as an impact financier. What are the keys to your success?

Mike McCreless: Honestly, the financial tools are not complicated. The key for us is choosing the right businesses to invest in. The way our model works from an impact and finance perspective is that we are able to identify clients in an early-stage sweet spot, where they’re ready for external capital but not yet able to access it, and we provide the capital they need to grow. We look for agricultural businesses that really can’t get a loan anywhere else because they’re too small or because local banks often don’t lend to agricultural businesses. Then we give them that first loan that helps them achieve their potential.

Having the right personnel is also key. A lot of our loan officers, our founders and early employees came from backgrounds as farmers. Others came out of a farmer cooperatives or agribusiness, often in the finance function. Their expertise makes it possible for them to assess the risks and the credit worthiness of agricultural businesses. Today we still hire loan officers who have that combination of agriculture and finance backgrounds. We favor people who grew up in the country where we’re operating, who have local knowledge, know local languages, and are familiar with the agricultural businesses in that region.

There’s been an interesting evolution over the course of the last several years where intuitively “knowing how to pick-em” has been translated into formal systems and processes that can guide people how to do that on a larger scale.

Right now we’re trying to formalize and crystallize the process of how to pick businesses to invest in. We’ve developed a social and environmental due diligence process that is embedded into our credit evaluation process. Our social and environmental due diligence is based on what our most mission-driven and perceptive loan officers knew intuitively to look for, buttressed by additional research and consultation with outside experts. We are preparing our first issue brief on the topic.

Maximpact: What’s in the future of impact investing for agriculture?

Mike McCreless: We think there will be a formalization of what’s been happening in this sector over the last ten years, a re-emergence of a formal sector around agribusiness investing and smallholder agricultural finance. For instance, just last year the Dalberg Group published an important report that suggests several paths forward for this sector. This report has gotten great traction and we anticipate that increased collaboration will follow as a result.

We also see an extension of impact investing to new frontiers such as longer-term investments linked to increasing productivity. An example: coffee rust in Central America is wiping out coffee crops. This is a bigger problem than Root Capital can tackle alone so we’re working with a range of partners that can bring different types of expertise to address the problem.

Fundamentally, the idea is to provide finance for farmers to”renovate” their coffee farms or replace aging and often sick plants with young, healthy ones. Although many of Root Capital’s loans are for one year or less, we are increasingly offering long-term loans, for instance for major capital expenditures. Coffee renovation loans would be even longer-term investments because it takes three years for a coffee tree to start to produce coffee, and longer to reach full productivity.

A lot can happen in that time. It’s a riskier but a higher impact investment, because without renovation the farmer would eventually be left without any income from coffee as the trees age and die. To stay on the leading edge we need to find new ways to bring financial tools to meet new challenges. Even as we keep on offering familiar products in familiar sectors, finding the next frontier of unmet needs is key for the sector.

Maximpact: Who do you admire in this sector?

Mike McCreless: Good question! Financiers such as Root Capital can always improve practice by learning from organizations on the sourcing and production side. We learn a lot from organizations like Catholic Relief Services who have been very active in tackling the coffee blight. They understand the cutting edge of best practice in terms of production methods, processing and farmer engagement. They are finding new ways to help farmers re-invest in themselves and contribute the time and the money to capitalize their cooperative for long-term success. These are all things we need to understand to be successful.

We also admire; and learn from; many of our buyers. For this reason identifying the buyers that deliver benefits to smallholder farmers is the way forward. Good buyers are, for us, the best value chain partners.

As for buyers we admire? One company that springs to mind is Theo, an ethical chocolate company. We admire their progressive sourcing programs and ways of engaging with farmers. Green Mountain Coffee Roasters has led the way in raising awareness of the problem of chronic hunger among coffee farmers, and in investing in programs to address the problem. Sustainable Harvest has done a lot to strengthen the livelihoods of farmers it buys coffee from. Falcon is doing great work sourcing from difficult, often post-conflict environments. And of course, folks like Equal Exchange and Coop Coffees were at the front of the ethical sourcing movement. Engaging with buyers and other partners in the value chain is always an educational opportunity for us.

Find out more about Root Capital and how their approach works.

For impact investing opportunities in agriculture, login to Maximpact and navigate to Deal Search. Or register today.

Five Questions about SRI – Weekly Expert Interview with Tom Holland in Emerging Markets ESG

Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.” The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience. The goals of Five Questions about SRI are fourfold:

  • To collect a catalogue of examples of SRI in practice in emerging markets;
  • To raise awareness about SRI in emerging markets;
  • To reflect on what SRI in emerging markets means to practitioners; and
  • To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interview is with Tom Holland, Director, Maximpact, Monaco.

Emerging Markets ESG: How would you define socially responsible investment (SRI)?

Tom HollandTom Holland: At Maximpact we’re focused on impact investing, which we see as one kind of SRI among others. We define an impact investment as one that is impactful and beneficial for the planet and its inhabitants; and that includes people and their communities as well as animals and other living things. By definition, an impact investment also generates a financial return, so our site concentrates on deals that have potential to deliver more than one kind of benefit. We believe it’s possible’ ;and we think it’s necessary if we’re going to find sustainable solutions to the challenges we face now and in the future. It’s a new asset class, and there’s still a lot for us all to learn. To encourage innovation and increase deal flow; one of the issues limiting the growth of the sector; we’ve purposefully adopted a wide definition of what counts as an impact investment. We list many kinds of deals from many kinds of funds, intermediaries and entrepreneurs, some of them new to the field. Maximpact’s platform is there to build bridges between diverse parts of the impact sector and invite new players into the arena.

Emerging Markets ESG: What distinguishes SRI from mainstream investment?

Tom Holland: Normally, mainstream investment doesn’t take the social or environmental element into account. Financial return; and that means market-rate return; is everything. In SRI, including impact investing, there are other kinds of benefits, and these are just as important as the financial returns, sometimes more so. Impact investing is unique among different kinds of SRI because by definition it requires that both financial and social or environmental returns are measured. Financial measurements are of course already well developed. Now, systems that measure social and environmental impact; including GIIRS, IRIS and PULSE; are being honed and developed as the sector matures. What the sector needs at this point is more practice, trial and error, opportunities to field test these systems and find out which ones really work. At Maximpact, we’re trying to increase the amount of impact investing, bump up the number of deals and encourage cross-sector collaboration. All of these things will feed the development of better metrics, which in turn will help make social investing of all kinds more effective and consequently more attractive to investors.

Emerging Markets ESG: Which extra-financial theme; environmental, social or governance; is the most challenging for companies in emerging markets to manage?

Tom Holland: I would argue that governance is the most challenging extra-financial theme in developing countries on two different levels. First, there are the challenges of dealing with the systems inside a given country, and sometimes these can make both developing enterprises and delivering social and environmental benefit very challenging. Governance in this sense is an element of infrastructure and therefore presents a fundamental challenge for companies, one that has to be tackled in order for them to succeed.

On another level, the decision-making structures and systems of the companies themselves can be a challenge in the world of impact investing whether they are working in emerging markets or not. There are well-established governance models for companies that mainly generate profits. Equally, there are excellent governance models for nonprofits and other kinds of charitable organizations. With impact investing, the governance models are just beginning to emerge. How do you set up an organization that delivers on two very different fronts at once? Who are your shareholders? How do you deal with multiple stakeholders, a situation that is common in a world where a lot of the deals are highly collaborative, involving cross-sectoral investment, and where many have impacts that effect whole communities or geographical regions? Again, the answers will only emerge with more experience and more research.

Emerging Markets ESG: Which extra-financial theme; environmental, social or governance; is the most challenging for investors in emerging market companies to analyze?

Tom Holland:This varies. The challenge is case by case, which could be company-specific or country-specific. For example, if we have educated and informed staff on the ground in a particular country, as well as a system of metrics such as the ones mentioned above, we can obtain useful information. If we are working in a new country we may need to collect our own data from scratch, or look for it from out-of-country sources, or simply tap into the expertise of organizations that have experience in a given locale by forming collaborative arrangements with them. Openness to collaboration will be one of the keys to successful impact investing. It also looks as if there’s a trend toward big development organizations like the UN and major philanthropic institutions making more of their data public, which would be a very good thing for impact investing and social investing in general. Let’s hope this movement continues to gain momentum. More, better data would give us the raw material we need to find ways to invest capital where it’s most needed.

Emerging Markets ESG: MaxImpact is a meta-portal. Who are you trying to reach and what impact would you like to see?

Tom Holland: At Maximpact we have what’s been called a “big tent” approach. Listing with us is free, though all our users are vetted. Our reach is global. There is no size requirement for deals, and no size limit. This is something we are proud of. We’ve adopted a broad definition of impact so that we can be inclusive and invite all kinds of users to list with us. Right now on site we have deals listed by individual entrepreneurs, green technology companies, philanthropic organizations, social enterprise hubs, CSR funds, impact investment funds, family foundations, large foundations and many others. A number of these are among the impact investing pioneers; they’ve been supportive of Maximpact; but some are trying impact investing for the very first time, just dipping their toes into the water. We think that’s great. We’re here to open up the field and draw in more investors. Because we believe that this is how the impact investing sector will grow and how it will perfect its market mechanisms and overcome some of its early infrastructure shortfalls.

To answer your question simply: We’re trying to reach all kinds of investors, anyone who has capital to invest and wants to do good with it while making a return. Impact investing, like other kinds of social investing, is part of a broader cultural shift towards using the power of business to meet social and environmental needs. People all over the world see the sense in using capital to do more good; and people see the need for change as urgent. At Maximpact we want to be instrumental in bringing that change about. We’d like to see more investors take up the practice of impact investing and devote more of their capital to enterprises that deliver the kind of goods and services that people and the planet need in order to create a better, more sustainable future for all of us. Maximpact’s mission is threefold: 1. To create a more sustainable future by accelerating the rate at which we do good for our planet and its inhabitants; 2. To support the growth of impact investing by providing a place for entrepreneurs, intermediaries and funders of all kinds to list impact deals and ventures regardless of size, sector, location or type; and 3. To foster a better future through sharing, collaboration and co-investment in the impact investment sector.

Why the Impact Sector Needs New Legal Structures: Guru Arthur Wood Talks to Maximpact

Arthur Wood,social finance pioneer and founder of Total Impact Advisors, is an impact sector leader with new legal structures in his sights. A former banker with years on the financial “dark side” (as he calls it) Wood left banking to become the head of social financial services at Ashoka. Today he’s back in the private sector as one of the founders of Total Impact Advisors but he hasn’t given up his role as an advocate for sector development.

“What we’re trying to do,” Wood told Maximpact in a recent interview, “is to create mechanisms whereby you can apply for-profit capital market tools, create cross-subsidization and layer financing structures in a simple, replicable,modular manner.” His commitment to this end lead him to become one of the chief architects of the social impact bond, an innovative financial arrangement designed to secure funding for social benefit outcomes. He is also a driving force behind a new legal structure for social benefit companies, the Social Enterprise Limited Liability Partnership or SELLP.

But why do legal structures matter to the impact sector? And why do they matter today more than ever?

A time of convergence

We are living through a process of “fundamental convergence and reconfiguration of the social and commercial sectors from completely separate fields to a common space”according to a much-quoted article in a recent issue of the Stanford Social Innovation Review. That sounds radical; and it is. It’s also welcome news for many of our readers who support this shift to common ground.

And yet this time of convergence raises fundamental issues for the sector. As one result, the very shape of the social benefit organization is undergoing a transformation.The days when were only two kinds of organizations, for profit and nonprofit,are gone for good. Today there’s a need for new kinds of organizations where players from different sectors are able to collaborate in new ways. Complex hybrid organizations that blend philanthropy, business and government; and that, significantly, draw their capital from a variety of sources; already emerging, though not without difficulty.

Early solutions

One early solution to the convergence challenge has been to establish two organizations,a for-profit and a non-profit, linked in a joint venture. Commonly the non-profit owns equity in the for-profit, giving it the power to control the activities of the joint venture while pursuing its mission. Another approach is to create complex collaborative structures using contractual frameworks to establish new kinds of relationships within existing legal structures. Once controversial,such entities are becoming more commonplace today as the charitable sector,government and the private sector try to find ways to work together.

Yet these arrangements have limitations. Experience shows that they can throw up significant structural, cultural and governance challenges as mission-driven organizations try to cope with the world of business and satisfy government demands for accountability. They are expensive to set up, too, because each one must be tailor-made with the help of specialist legal advice. Finally,although they are capable of functioning, they don’t easily accommodate the development of the kind of complex, multi-layered, multi-stakeholder organizations that are emerging today.

“What we’ve traditionally done is to create these entities one by one and try to force not-for-profits into a for-profit contractual frameworks,” says Wood.”Cross-subsidization between social and economic mission in a for-profit/not-for-profit environment is very difficult without a proper legal structure. Firstly, it’s expensive to set up and hard to replicate. Secondly,when it’s done within a contractual rather than a regulatory framework, the better-resourced partner always has an advantage; and this is not usually the social benefit collaborator. Thirdly, doing it outside of a regulatory framework makes it difficult for governments to help achieve scale, compliance or replication. Finally, the status quo frameworks don’t include social mission as a primary requirement.”

According to Wood, the challenge is facilitating the “cross-subsidization of social and economic mission” in a more efficient, scalable way. That means establishing off-the-shelf legal structures like the 501(c)(3) in the US, that are easy to adopt without specialist advice, straightforward to manage in practical terms and transparent vis-vis government regulators.

Emergent legal structures

Wood is part of a group of like-minded leaders, some from the charitable side, others from the worlds of banking and business, who are trying to establish just such structures. They are having some success; new legal forms are starting to emerge:

In the US

  • The Low-Liability Limited Company or L3C has been made by adapting an existing legal form to meet social investing needs. Developed specifically to encourage investment by foundations, the L3C is now being used to form new kinds of entities. New IRS guidance released in April 2012 provides more clarity about the tax status of L3C type structures and increases their appeal to investors. The L3C has passed in eleven US jurisdictions, nine states and two Indian Nations and a federal bill has been tabled.
  • Certified B Corporations or B Corps are the invention of the nonprofit certification body B Lab. B Corps go through a certification program that ensures they meet standards of purpose, legal accountability and transparency. Today B Corps are recognized in 11 US states with legislation pending in 16 more. There are currently some 600 B Corps organizations operating in 15 countries.
  • Flexible Purpose Corporations are recognized in the state of California; the outdoor gear company Patagonia was an early adopter. This legal structure allows corporations to pursue a specific mission in addition to profits. Directors choose a “special purpose” that benefits society, establish strategy to meet its goals and report on its performance to shareholders.

In the UK

  • Community Interest Companies (CICs) are limited companies with additional features created to encourage business for community benefit. The company’s money and equipment can only be used for its social objectives and there is a cap on shareholder dividends; a limitation currently being challenged by Stephen Lloyd, one of the architects of the form. CICs are regulated by the UK Charity Commission.
  • Similar to the L3C in the US, the Social Enterprise LLP is adapted from the existing Limited Liability Partnership form, or LLP. Still awaiting approval by Government, it’s been designed as an off-the-shelf structure for social enterprises, providing a form for collaborative partnerships that may involve a number of for-profit and not-for profit-stakeholders. The SE LLP is transparent for tax purposes, has a charitable golden share to ensure social mission lock and, like the CIC, may provide a cap on returns. It is regulated by the CIC regulator.
  • Charitable Incorporated Organisations (CIOs) are incorporated charities that are not companies. Members and trustees are personally safeguarded from the financial liabilities the charity incurs. The charity has a legal personality of its own, which means it can conduct business in its own name, rather than the name of the trustees. Like CICs, CIOs are regulated by the UK Charity Commission.

Worldwide

  • Finland, Norway, France and Luxembourg have all created new legal structures to facilitate the establishment of hybrid organizations, often by adapting existing structures.

But is it enough?

Despite these advances, change isn’t happening fast enough for those who want to see more structural options available to social benefit organizations. As the sector continues its rapid growth and an ever wider range of players get involved, the need for new structures becomes more pressing.

Yet there’s inertia when it comes to changing old ways. Foundations, the target investors for L3Cs, have been slow to take up the opportunity to put their money into socially beneficial entities; in a recent blog for Pioneers Post, Wood points out that some 98% of the capital of US foundations is still unaligned with social mission. Meanwhile, the SELLP is stalled as the UK Government mulls over its tax implications, a situation that frustrates Wood.

“There are numerous examples of these types of structures accepted by the IRS in America today,” he points out. “In this sense it is not a legal question but one of scaling, replication and marketing. The contentious issue is the compliance framework and how complex that needs to be. An LLC framework is of course extremely flexible, with an extensive body of existing law surrounding it,including precedents for creating internationally collaborative frameworks. In this sense the L3C and the SELLP are not new but simply iterations of the existing LLC and LLP codes but with a social purpose built in.”

Beyond legal structures

The delay leaves Wood and his collaborators looking for other strategies to bolster the sector while the gears of government slowly grind. Currently they are discussing ways to tweak the social impact bond framework to make it more broadly useful and cheaper to adopt.

“With a little more social and financial engineering we will be able to create a standardized product that is applicable to any social issue,” says Wood. “What most people overlook is that by securitizing the cash flows of a social impact bond you can create quasi-equity. This has a clear financial value as a function of the achievement of the tangible social outcome by a number of collaborating stakeholders. Thus social equity actually has financial equity value.”

That’s good news for a burgeoning sector looking for more ways to make impact investing work, but it raises other questions. One of them regards oversight: Who will manage the partners in a social bond’s collaborative framework. How will they do it?

For Wood, this is a strong argument for establishing legal structures. “Social bonds are certainly useful, but there still needs to be a strong regulatory (legal)framework for these interactions,” he argues. “As a society, we think it’s right to regulate grant-making because philanthropy effectively receives a subsidy though the tax code. How much more do we need regulation when we have contingent for-profit cash flows to various parties and the allocation of equity as the function of meeting a shared social goal? Without a legal structure, the alternative is just to trust the bankers who set up these deals and hope for the best.”

Total Impact Advisors is currently listing impact deals on Maximpact.com. Check out their deals and many others.

Interview by Marta Maretich

Maximpact: Broadening the Definition of Impact Investing

 

Outdoor photograph of Tom Holland

Maximpact Founder Tom Holland

 

Interview with Tom Holland by Marta Maretich

Maximpact.com is characterized by its “big tent” approach to impact investing. What made you set it up this way?

When I came in as an impact investor and started looking for deals I began to realize that the sector had structural inefficiencies. The deals above $100,000,000 are taken care of by private banking, the deals below $25,000 are handled by micro-finance and other intermediaries. Everything in between is a sort of no-man’s land where people are working in silos of activity, there’s insufficient deal-flow and insufficient liquidity. The good news is that the sector is really beginning to wake up to the problems created by this gap; a recent article in the SSRI, Closing the Pioneer Gap, described the problem very well, I thought. From our point of view, one of the things that makes the gap wider and dilutes the market is the very narrow definition of what counts as impact investment. I thought this was something we could work on by building our deal portal around a broader definition of what an impact investment could be, and so drawing in widest possible field of players from philanthropy, CSR, the eco; green technological sectors, entrepreneurs, intermediaries and funds.

What is that definition?

At Maximpact we say that as long as the investment is good for the planet and good for its inhabitants; and that includes animals, not just people; we consider it to bean impact investment and subject to quality checks we will allow it to be listed on the site. This approach allows us to be far more inclusive in terms of the kinds of deals we list and it lets us reach out to a broader range of investors, some of whom are new to impact investing. Our aim is to draw more players into the arena, get them working together to increase deal-flow and encourage innovation.

Is this approach controversial?

Less and less so. The idea of using financial models to bring social and environmental benefit has really gained ground across the whole sector and with the public in recent years. Some of the prejudices about how that should be done have gone away, and that’s a good thing. Everyone is beginning to see that it’s possible to use a whole range of financial approaches, involving a broad spectrum of different kinds of players, to do good. The important thing is not the means but the ends, the outcome, defining and accounting for the benefit. The sector still has some way to go before we have a sure-fire way of doing this, but we’re all working on it. In the meantime, we think experimentation and innovation are the best ways to learn what works, and we are doing our part to encourage them by being as inclusive as we can be and facilitating collaboration wherever it happens.

So who should be using the Maximpact platform?

I want to see everybody using it to list and source deals: financial intermediaries, funds,asset managers, foundations, philanthropists, venture philanthropists,technology start-ups, qualified family officers, governments, high net worth individuals, banks and other major financial institutions. I’d like to see more CSR investors active on the site; this is a new way to give something back to society. I’d like to see more foundations using the site to source PRIs and MRIs through the platform. Foundations represent a huge pool of capital that’s still not committed to social benefit and Maximpact can help them achieve more in this area.

What can these different players do on Maximpact?

Maximpact brings together all the players; philanthropy, impact, funds, CSR and eco; green technology. In a simple way it enables people to find each other and to find the types of investments they want. They can all come onto the platform, contribute deal flow and get into a collaborative environment where they can cross-invest with one another. There’s no reason why philanthropy can’t take part in an eco or green tech investment, and the same goes for CSR.There can be two or three different kinds of investor taking a combined investment position. At the same time, the platform allows users to reach out to specific funding groups and find like-minded entrepreneurs and investors, if that’s what they prefer. It’s all about being inclusive and collaborative and trying to resolve the bigger issues that we’re all facing.

 

Cornelius Pietzner Interview

Maximpact special advisor Cornelius Pietzner has been engaged in the fields of philanthropy, social finance and investment in the US and Europe for the last 25 years. As Maximpact’s work gathers momentum, we asked him some questions about impact investing, Maximpact and the future he sees for the sector.

You have a long and varied career of involvement with very diverse charitable, philanthropic and financial endeavors. What brought you to impact investing?

I’ve been involved in supporting social entrepreneurs in various ways for 25 years. There was no cataclysmic event that derailed me from a more traditional career but I’ve always had the good fortune and the privilege of connecting my professional interests with my personal interests. I have always tried to develop and use various models, instrument sand methodologies that may be effective in improving the welfare of the planet.

I see impact investing as a means to an end, not an end in itself. This is one reason why I like the principles of Maximpact: It’s a big tent approach, a generous, inclusive strategy that doesn’t get hung up on narrow distinctions about whether an investment is purely an impact investment, just “impactful”, or whether it’s philanthropic. Maximpact is designed to facilitate deal-making across the continuum of different methods and types of intervention, whether it’s a purely philanthropic intervention or financially prioritized. I think all these approaches have their place, sometimes even in combination.

I was involved in the philanthropic sector for many years. I see continuing value and necessity for philanthropic intervention (and not just venture philanthropy, but also pure grants: giving). You can use different instruments, sometimes you have to use several in hybridized, creative approaches that are appropriate and relevant for a particular situation. What is important to be able to discern and discriminate what is appropriate, for whom, when. Doing this effectively requires flexibility and knowing what is appropriate. To be successful it is very helpful to be willing to engage in a dialogical process with the people you are working with or investing in. It’s not a unilateral relationship. The best; most sustainable and viable; engagements are those that incorporate, where possible, the entire stakeholder group.

How did you first become involved with Maximpact?

I first met Tom Holland when I was doing an investor presentation for my fund, Alterra. He’d already completed the framework for Maximpact and was exploring strategies for honing the site and getting the word out to the impact investment community about what it could do.We had several long discussions and found we could work together. Tom comes from a private equity background and I think he realized that I had a broad network spanning venture philanthropy foundations, social entrepreneurs and the relevant groups that support them, as well as the impact investment community. For my part, I felt that the principles and core of Maximpact corresponded to a missing piece of market place infrastructure.

Can you say more about the “missing piece” Maximpact provides?

Social entrepreneurs have been around obviously for a very long time indeed. However, social entrepreneurship has been articulated and embedded in the academic world really for only around 15 years, thanks to a few successful pioneer organizations. Today, you see social innovation centers and entrepreneur institutes springing up worldwide. The investment and capital markets, by contrast, have only been activated recently. The marketplace is still relatively in its infancy. It has the growing pains, redundancies and inefficiencies and also the lack of transparency of an early-stage marketplace. There’s also perhaps some carry over from more traditional finance; somewhat unconsciously, maybe; in terms of proprietary thinking. That attitude of “the tighter I hold on to my best ideas, the better off I’ll be” lingers. I hope we’re contributing to the creation of a new paradigm of collaboration. Ultimately there are enough planetary problems and issues for all of us!

When you’re building this marketplace, you need to have certain pieces in place that facilitate it; liquidity, exits and deal-flow are essential. There are always costs associated with these. The greater the costs, the more difficult it is for players in the sector, especially small players, to break through and establish themselves. The classic example; to bring it home to what Maximpact is trying to do; is simple deal sourcing, which can be erratic and expensive. One thing I like about Maximpact is that it’s not trying to do everything and be everything for everybody. It’s trying to facilitate deal-flow and make this element of the marketplace more affordable for more players. By doing this, it provides one important piece of the environment that helps impact investing grow. Once we achieve critical mass; and we are very close to that now; Maximpact’s service will be of enormous value to the funds and ultimately to the entrepreneurs

What developments would you like to see in impact investing in the next six months?

There are some pretty hefty forecasts in regard to what kind of money should be coming into the impact investing field and I don’t think any of us have seen that yet. As some people say, there’s still a lot of smoke and sizzle around. What I’d like to see is more capital in-flow, more capital available and larger amounts of capital coming from some key institutions; and they know who they are. This capital needs to be made available in a smart way that doesn’t overwhelm or prejudice the field. But, again, there are reasons why we’re not seeing this kind of activity yet. One of the reasons is that there are still some infrastructure pieces that are missing, for example exits. There’s still work to be done toward making this marketplace work effectively.

Cornelius Pietzner is Maximpact’s special advisor. He also acts separately as Chief Executive Officer of Alterra Impact Finance GmbH, a social impact investment firm in Zurich focussing on sustainable European companies. He is also President of the Alterra Foundation, a Swiss charitable foundation which supports transformation initiatives related to a more human-centered economy. Pietzner serves as Trustee or Advisory Board member to a number of charitable foundations in the USA and Europe. He is a Board member of Mind and Life International, Switzerland and Integrative Care Science Center, Sweden. From 2002-2011 he served as Chief Financial Officer on the Executive Board at the Goetheanum, General Anthroposophical Society, Switzerland. He was the Director of Camphill (life; sharing) Communities in North America. He received his degree in Political Science from Williams College, Mass. and was awarded a Thomas J. Watson Fellowship.

Interview by Marta Maretich

 

Interview with Maximpact founder Tom Holland

Photograph of Maximpact CEO Tom Holland

Maximpact founder and CEO, Tom Holland

Interview by Marta Maretich, Chief Writer

You have a background in pure investing: first banking, finance, real estate and, for the last 14 years, private equity. What brought you to impact investing?

I was investing in mining projects in Africa and decided we needed to put more back into the countries we were taking so much out of. To start I looked for more sustainable methods of alluvial mining, to create less pollution and leave the landscape in a better state. This led me to get in touch with the World Wildlife Federation. They showed me various impact projects but I still felt I could do more. From there, I started learning more about impact investing. I found many silos of activity in different places, but I saw that the sector was still very fragmented and this was leading to vast inefficiencies and really slowing down development. Years ago I had spent considerable time developing a global online portal for facilitating IPOs. Rather than finding a particular investment to get into, I decided that using this technology to create an open online marketplace for impact deals was a way to create the biggest impact of all. This would best achieve my objectives to accelerate the rate at which we do good for the planet and it’s inhabitants.

As you made the journey from being a private equity investor to building and running Maximpact, were there any individuals who influenced you?

Many. The whole spirit of this sector is totally different from the one I came from and I find it inspiring. From the beginning I was touched by how nice the people in this industry are. Everybody’s doing something good. It’s so refreshing when you compare it to the skullduggery and dishonesty I experienced while I was working on mining projects. I love the feeling and find myself filled with endless energy and passion to keep going.

Maximpact has been described as having a “big tent” approach. Can you say more about that?

Maximpact does have a big tent approach because it enables absolutely anyone who’s interested in collaborating to have access to the platform. We don’t accept just any kind of deal, but we do cover any deal that’s good for the planet and it’s inhabitants. Within that limit, we work to make the platform as inclusive as possible. Listing is free. Our reach is truly global. The platform supports deals of every size; and this is something we’re proud of. On Maximpact it doesn’t matter if the deal’s for $10,000 or $175 million: The platform enables everyone to have a go. That’s what we’re here to ensure.

On this open platform, how do you maintain deal quality?

Everyone on the platform is screened and vetted to maintain the quality of the deals. Every entrepreneur is vetted by an intermediary, a fund or by Maximpact. Every intermediary and fund is vetted by Maximpact before they join. Intermediary-level deals are due-dilligenced by intermediaries, and fund-level deals have already been vetted by the funds listing them.

The Maximpact system creates a triple filtration system for deals. Each deal will indicate the type of due diligence done. Our staff go further to check each deal is displaying all information in conformity. It’s not about having ten thousand deals, it’s about having three thousand or four thousand quality deals. Users have already commented that it’s so nice not to have to sift through 60 or 70 deals to find 5 or 6 good ones.

As you say, this sector has traditionally been fragmented, with different players who have very different views of what they’re doing. Does Maximpact have an ideology?

We do have an ideology. We believe that times are changing and we need more sustainable models for doing good. We think impact investing is a sustainable model with huge potential for helping the planet and it’s inhabitants. We are supporting the development of the industry by providing a site that brings together all the players and lets them collaborate freely. We believe good things will come out of this: more deals, better quality deals, improved liquidity, accelerated learning, quicker scaling and replication and a new sense of shared purpose between all the players, whether they’re philanthropists, fund managers, green technology businesses, social entrepreneurs, intermediary organizations; whoever.

What difference would you like to see Maximpact make?

We; and I include myself in this; stop protecting what we have, which is the way we’ve been brought up, and start sharing more. We all start acting together using the tools that are available to us on the Maximpact platform and working collaboratively on the financing, execution and implementation of good ideas and new technologies. We’re able to get things working much quicker and more efficiently, giving us all more time to focus on finding new creative solutions. We use this site as an importer and exporter of technology and stamp out similar problems that crop up in different parts of the world. The site gives us an overview that assists us to stop duplicating and spot problems faster and move much more quickly and efficiently to give help where it’s needed. We direct capital more efficiently and eliminate waste. We are all more on the ball, more organized. Investors and the public see that the industry is maturing and this builds trust.

The site has been up for two months. What’s the reaction so far?

Great. I’ve been traveling, meeting people and talking about Maximpact with funds and intermediaries and entrepreneurs from all over the world. People are enthusiastic about the idea. They can see that for the little you’re giving, the willingness to collaborate, you have so much more to gain. They like the way the site works; things like the detailed search facility and the automatic deal alerts are popular with users who instantly see the value of having an easier, more efficient way to source and evaluate deals. And they love the functionality, which is something we’re always working to improve.

You’ve committed your own capital and time to establishing Maximpact. As an impact investor who’s put his money where his mouth is, what challenge would you like to issue to the sector?

When I initially came up with the concept of Maximpact, many people in the industry were intrigued. They said, “You are actually challenging us to prove whether we’re really impact investors or not.”And they were right, because if you’re really an impact person, you’re not going to sit alone in your silo. You’re going to get out and enter the collaborative community because you know that by doing this you’ll help create an environment where you can make a much bigger impact.

So I challenge everyone to come out and collaborate on Maximpact. Give it a shot for six months and actually experience what it’s like to work in a totally open environment and to see the benefits that arise out of that: You only post a summary and the information you consider to be non confidential. The value of a combined research base, new networks, the Maximpact global accelerator, cost effective due diligence, improved transparency. It’s just wonderful. You get to keep your own branding.You get to come on a global platform and play wherever you want, with whomever you want. So what’s better, to sit in your own silo or to be active? If you’re a good player, you want to be out in the marketplace.

Once everyone does this, we’ll start to see the market develop a lot more quickly, too. The missing pieces will start to fall into place. More liquidity will follow, there’ll be additional support for exits and so on. But we need everyone collaborating before this can really happen. So try Maximpact, put your deal on the table and let’s see what you can do. You’ll find so many people to do business with, so many deals. Just open your mind to the possibility that there’s a better world out there and a better way to do things.

Interview with Uli Grabenwarter, Head of Strategic Development-Equity at the European Investment Fund

By Marta Maretich

How did you get interested in impact investing?

I was responsible for the Venture Capital investment business line of the European Investment Fund up until 2010. While I was doing that, I started to see impact investing as a natural extension to the venture capital activity we were doing. At the same time I felt impact offered an opportunity to do more value creation.  I thought we were too focused on creating “unrealizable” financial value—profit—and that we needed to focus more on creating real, tangible value for the stakeholders in the market.

What do you mean by real, tangible value?

If you look at the economic model we were all running up until 2008, you have to admit that the value we were creating in the private equity market was borrowed from the future. In the crash of 2008, we “lost” $28 trillion in market capitalization on the US stock markets. At the time I asked myself, were did all that money go? If it was “lost”, why isn’t anybody out looking for it? The answer was that this so-called “value” was never really there in the first place. It was virtual value, not real or tangible.

What are you doing with impact investing today?

In 2010 I had an offer from the IESE University of Navarra in Barcelona and The Family Office Circle Foundation based in Switzerland to participate in a two-year research project on impact investing. We studied seventy-five of the largest single family offices worldwide to learn about their approach to impact investing and consider whether it’s possible to have societal value with financial return.

I completed this research and returned to the European Investment Fund in 2012. In 2013 we launched the Social Impact Accelerator, which is the first pan-European fund-of-funds structure in impact investing. This quarter we’ve gone mainstream with €350 million under management for social investing in Europe.

What do you think is impact investing’s greatest challenge?

Our biggest challenge is our mindset. Despite the growth in the sector, we still have the idea in our heads that societal and financial returns are opposed to one another, that there will always be a tradeoff between them. Our entire financial system is based on this type of faulty reasoning. Look at corporate legal structures, for example. There are hardly any that allow the coexistence of societal and financial value creation. Most of the legal forms for social enterprise actually prohibit for-profit investment.

I consider this the most significant challenge to impact investing. It’s not just that we need to redefine the cutoff point between philanthropy and investment. We need to get into our heads that both social benefits and financial return are necessary for creating value.

Unconsciously we make choices about risks, financial return and also social impact in every investment we undertake. The fact that impact investing makes our choices transparent doesn’t make the dilemma of investment choices any better or worse. So why is it that in making impact-conscious investments we feel like we have to choose between opposing values? Are we just uncomfortable with it because introducing this level of transparency makes evident the extent to which financial values are virtual ones, not real or tangible at all?

Finding a method for pricing social value will be key to solving this problem because it will allow us to integrate societal values into economic decision-making at every level.

What is your vision for the future?

A world where social impact is seen as an opportunity rather than a constraint to business development. A world with a totally new concept of innovation, one in which enterprises aim to solve societal issues permanently so that for them being “successful” means that the social issue disappears—along with the need for their business model. Successful social enterprises will be obsessed with working to put themselves out of business and constantly re-inventing themselves to meet new and changing needs.

If the non-impact investment world thought about business that way, our economic system could function in a very different way. We would derive financial value from ensuring the sustainability of our socio-economic system rather than from the concept of linear growth and consumerism that rely on resources we will run out of within the time horizon of less than a generation. Actually, in a way we would end up paying for consuming less—and find that great!

About Ulrich Grabenwarter

UGcasual 302Uli Grabenwarter is Head of Strategic Development-Equity at the European Investment Fund and the president of European Impact Investing Luxembourg, a think-tank and network promoting concepts and proposals for regulatory and policy action in support of a prospering market environment for impact investing in Luxembourg (www.eiil.lu). From 2010 he conducted a 20-month research project on impact investing in collaboration with IESE University of Navarra in Barcelona and the Family Office Circle Foundation. Previously, Uli was Head of Equity Fund Investments at EIF after having worked at the European Investment Bank and at Price Waterhouse Coopers in corporate finance, project finance, finance consulting and auditing. Uli is a visiting Professor for Private Equity and Venture Capital at IESE University and teaches the module on Alternative Investments for the Post Graduate Programme of Sacred Heart University.

Further reading:
Exposed to the J-curve: Understanding and Managing Private Equity Fund Investments (Euromoney Books, 2005)

In Search of Gamma: An Unconventional Perspective on Impact Investing” (IESE Publishing, 2011).