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Sustainability Drives Impact Investment in Natural Resources

by Marta Maretich

Natural resources have always been precious to mankind. Today, they are more in demand than ever. Population growth, climate change and the rising affluence of developing nations are putting a strain on the planet’s limited resources. Water, arable land, food, fuel and raw materials are seeing a period of unprecedented demand and there is worldwide concern about future shortages and the destruction of ecosystem services, such as photosynthesis, pollination, flood prevention and climate stabilization, that results from over-exploitation.

But while the pressures on our resources are getting bigger; and the consequences of depleting them are getting clearer; there are positive developments, too. A global movement for sustainability is now maturing and this is encouraging an explosion in the kind of responsible resource businesses that belong in our impact portfolios.

Sustainability goes mainstream

Once a thing of the green fringe, sustainability is now mainstream and this is one of the factors that makes natural resources attractive investments now. Governments are the key drivers of today’s sustainability agenda as they increasingly use policy, regulation and subsidy to support the development of new kinds of businesses and convert existing businesses to more sustainable practices. Working in concert with governments, international bodies like the UN, the WEF and the World Bank are launching programs designed encourage sustainability and establish standards in a range of resource sectors. Natural resources are seen as key to development for some of the world’s poorest communities; including rural smallholders and indigenous peoples; and this puts them at the center of international efforts to raise living standards.

Meanwhile, public awareness of sustainability issues increasingly drives consumer choices. Businesses; even those that once ignored the idea; now know that being able to demonstrate sustainability makes economic sense. Jobs in sustainability are multiplying as businesses hire analysts, consultants and other specialists to manage their sustainability and reporting commitments.

Resources take center stage

With sustainability a growth area for world markets; and a priority for many world governments; there is a new focus on natural resource investing. The emphasis now is on finding ways to make more of nature’s gifts while preserving and maintaining them for the future. New businesses; and new ways of doing business; are springing up, encouraged by government policy and shaped by the expertise of development and philanthropic organizations who have blazed trails in the areas of sustainable use of resources.

This is good news for impact investors looking to place their capital in the natural resources sector. Here are some of the trends and developments in four resource areas: Oceans, Minerals, Forestry and Land.

Oceans

The world’s salty waters have been a focal point for resources-based activity in recent months. Concerns about overfishing and acidification, a consequence of the seas absorbing high CO2 emissions, are leading governments, environmental campaigners and business leaders to place a new emphasis on the oceans and this is changing the investing landscape.

On the governmental side, 2013 saw the US instituting the National Oceans Policy, joining other governments including Australia, South Africa, Namibia and the Philippines in establishing comprehensive, future-focused policies for ocean resource management. The social enterprise sector kept in step, highlighting the issue by including an ocean themed “track” at SOCAP13. For the first time veteran campaigners and ocean champions discussed ocean topics along with journalists, entrepreneurs, and impact investors from other sectors including small scale agriculture, health, and poverty alleviation; all of which are connected to ocean and coastal issues. Meanwhile, in the private sector, The Economist is throwing its weight behind sustainability issues as it plays host to the World Oceans Summit in California in February of this year.

These developments set the stage for a mini-boom in sustainable marine businesses in areas like fishing, aquaculture and energy and mineral extraction. New government regulations will also drive growth in compliance industries, such as environmental remediation and business-to-business services providing sustainability reports and the like.

Minerals

Mining; and its products, mineral; have a bad reputation in the world of sustainability. Mineral extraction is widely associated with human rights violations, environmental damage and conflict. For those reasons it remains a largely unexplored sector for impact investors. Yet in the mainstream financial markets, mining is big business, with growth driven by demand from the resource-hungry emerging economies like China, India and Brazil; demand that is not going away anytime soon. This fact, plus the alluring possibility of helping to bring change to the mining sector, means that impact and sustainable investors should think again about minerals when looking for places to commit their capital.

The tools for change may already be in our hands. An excellent piece of research conducted by the International Institute for Environment and Development (IIED) charts the significant progress made in mining policy, oversight and governance over the last decade, especially by the International Council on Mining and Metals (ICMM), a coalition of mining companies that has embraced sustainability standards and put issues like indigenous rights, community development and climate change on its agenda.

The IIED report indicates a rising awareness and acceptance of sustainability in the industry itself; a hopeful sign for the future. The challenge for the next 10 years, it concludes, will be implementing those standards we now have more widely. Such a move could transform the mining industry; and impact investors, with an insistence on standards and reporting, could play an important part in this transformation.

Groups like the Alliance for Responsible Mining (ARM), which works on behalf of an estimated 20 million small-scale and artisanal miners worldwide, are already hard at work bringing change. They have developed supply chains for sustainably mined products and created the Fairtrade and Fairmined gold standards for the industry. Deals have already been struck with jewellery manufactures and, like conflict-free diamonds before them, these ethical products should find favor with consumers as they hit the marketplace in the near future.

Conflict minerals have been a contentious issue for some time and a measure of progress has been made in addressing the human and environmental costs of mineral extraction in places like the Congo. Electronics industry giant Intel has now moved to make all its microprocessors free of conflict minerals. The industry pressure group, the Electronics Industry Citizen Coalition (EICC), has compiled a useful list of conflict-free smelters and refiners, while the NGO the Enough Project has ranked companies for their use of conflict-free minerals.

Yet the path ahead is not yet clear for sustainable mining; and this is another reason for impact and social investors to enter this market. A powerful coalition of business leaders recently petitioned a panel of federal judges to overturn a provision of the 2010 Dodd-Frank law that requires companies to disclose their use of minerals from Africa. This would be a major setback for the movement for sustainable mining. However, the presence of more social investors and conscientious corporations in this resource sector could make all the difference to the way mining develops in the future.

Forestry

Unlike mining, forestry is already a popular focus for impact investors. Many sustainable forestry enterprises have cropped up in recent years, working to conserve; and sustainably exploit; wooded environments across the globe and these remain attractive investments.

It hasn’t all been plain sailing, though. Carbon offset schemes were central to many forestry enterprises and the collapse of the world carbon markets in 2012 was a blow to the sector. Some forestry sustainability accreditation programs have come under fire, too, and there has been a shakeout in certification schemes that many hope will lead to a more reliable system.

Despite this, impact investors, like the Packard Foundation, have largely stuck with forestry because of its many wider benefits. Sustainable forest management supports biodiversity and habitat conservation, creates local jobs, protects indigenous communities, fosters eco-tourism and recreation, contributes to food stability, and aids climate stabilization; as well as having the potential to generate diverse revenue streams and attract tax breaks.

Meanwhile new technologies are expanding the horizons of sustainable forestry. Innovations, such as the use of drones and sophisticated geo-mapping techniques, are advancing the science of forest management, making it possible to do more with woodlands while we protect them. Eco-tourism and boutique woodland businesses are taking off in many parts of the world. The link between agriculture and forest habitats is contributing to the search for ways to bring prosperity to some of the world’s poorest communities. At the same time, big multinationals such as paper manufacturers are bowing to regulatory pressure and seeking ways to develop more sustainable supply chains, a shift which will have implications for sustainable forestry businesses.

Land

Land is a resource that offers a host of opportunities for impact investing both in emerging and developed economies. Essential to human life and prosperity, land produces food, water, wood, fibre, fuel and minerals and, when managed responsibly, it also provides vital ecosystem services such as photosynthesis, pollination, nutrient cycling, water purification, soil formation, climate stabilisation and flood prevention.

Increasingly, land use and ownership is seen as the key to solving many of the world’s most pressing environmental and social problems. Large international organizations like the United Nations Convention to Combat Desertification (UNCCD) are now promoting responsible land investments as a way to halt land degradation and preserve the integrity of our natural capital. Land and property rights are also central to poverty alleviation, and securing land for use by rural populations is a priority for many development organizations.

Yet, as is true across the natural resources sector, there is a right way and a wrong way to invest in land. Oxfam has raised concerns about a global land grab where big investors, often foreign governments and pension funds, buy up large tracts of farmland, especially in parts Africa, Latin America and Asia, squeezing local people out. Their report drew attention to the negative impact on local communities of the wrong kind of investing and led to a call to the World Bank to end its participation in these deals.

To make sure they are part of the solution, not part of the problem, impact investors need to be aware of the issues. The right kind of investing respects the rights of locals to “Free and Prior Informed Consent”, promotes land rights and good land governance and fosters food security both locally and internationally. To avoid possible pitfalls, investors would do well to tune into the conversation about land use here and here, and subscribe to sets of principles like these and these.

In the developed world, land investment is often part of a move to a more green and sustainable lifestyle. Iroquois Valley Farms, chosen as one of the Impact Assets 50, leases farmland to organic farmers, while Beartooth Capital acquires western ranches for conservation and use as eco-tourism destinations. In cities, land acquisition plays a part in neighborhood regeneration and community home ownership schemes. With these models turning profits, and the movements behind them gaining popularity, we can expect to see more opportunities for land investment in developed economies in the future.

Conclusion

Natural resources have long been a promising sector for impact investors, especially those with an emphasis on the environment. What’s new is the increasing involvement of governments in supporting sustainability. For some natural resource industries, this is putting sustainability on the map for the first time. For others, government support and improved standards are advancing the development of sustainable practices and sparking innovation. All of this is good news for impact investors who want to put their capital behind businesses that contribute to the future health and prosperity of the planet and its inhabitants.

Image credit: 123RF

Services to Impact Funds: Why Data Can’t Give Us Everything We Need

By Marta Maretich

The impact investing sector is developing at an amazing rate and so are the needs of impact funds, investors, advisors and companies. As we move rapidly beyond the early development stages, services are starting to emerge as an important theme for 2014.

A recent article charted one aspect of the emerging trend. BCorp plan to use their data aggregation systems as a basis for providing a variety of services to the sector. The introduction of BAnalytics, a merger between the investment management tool Pulse and BCorp’s GIIRS, will allow the group to offer a range of data-based services including rating, evaluation and analysis.

BCorp is following in the footsteps of traditional financial services industry where advances in technology have delivered the ability to manage mind-blowing amounts of live data; and turn profits from them. As traditional financial service providers have discovered to their joy, data, crunched at this speed and at this scale, has the power to transform business performance; and data aggregation and analysis is itself big business for firms who make wrangling data their focus.

BCorp’s move toward offering data-based services is a welcome sign of a maturing impact marketplace and it indicates the shape of things to come. Fund and company ratings are needed to establish standards in the sector; benchmarking holds out the hope of creating comparisons, while more transparency can do no harm. We’d be remiss not to develop these systems.

Yet for now the most important application of data may be that it proves convincing to investors. Mainstream investors, who include large institutional investors and foundations, could unlock huge amounts of capital provided they can be persuaded to trust in the impact approach. Data is reassuring both to them and to the financial professionals who advise them, according to research by the WEF.

However, although important, data-based services won’t offer everything the impact sector needs to grow today. The nature and ecosystem of impact investing makes it different from traditional investing in fundamental ways; and this will drive the need for a whole range of specialist services not necessarily dependent on data.

Beyond data-based services

Take metrics for example.

Impact businesses and funds must build social and environmental impact metrics into their plans along with all the usual financial ones, correct? Straight financial metrics are no mystery to most businesspeople and financiers; years of trial and error have taught us how to “do” them. The same can’t be said for social and environmental impact metrics, which have been around for a relatively short time.

The recent emergence of IRIS as the leading measurement system, developed by GIIN and now administered, along with GIIRS and PULSE, though BCorp, means that the sector now has access to tools for measurement. (Whether it’s a good idea to make a single metrics approach so dominant at this early stage is a question we won’t tackle here.)

However, the mere existence of IRIS doesn’t mean impact measurement is now taken care of; and here is where the need for services comes in: How do impact enterprises and funds use IRIS? How do they know which measures to choose from the long list? How do they embed impact metrics into their business plans and their operations? How do they translate these processes across geographies and cultures?

The answer is that many will need expert help to set up impact data collection, reporting and analysis. There is a role for impact metrics specialists who can help establish processes and create systems that deliver accurate impact information while supporting business objectives.

Call in the specialists

This is only a small example of the kind of specialist service impact sector businesses and funds will need as the sector takes off, “specialist” being the operative word here.

Impact investing is a new sector; and it’s a complex one due to the range of actors and agencies involved. Hybrid financial arrangements are common and collaborative partnerships, blending public, private, philanthropic and government capital, are increasingly seen. Impact businesses often pass through a number of agencies, including philanthropic intermediaries, on their way to market viability and there is a growing spectrum of kinds, flavors, types and sizes of impact businesses.

Fund managers, investors and financial advisors; even very clever ones; will need help navigating this expanding field of opportunity. Impact business people will need access to expertise as they grow their businesses in a multi-stakeholder context and roll them out across the globe.

In both cases, having access to specialists; that is, experts who understand the unique requirements of impact investing; will be a decisive factor in success. Media, finance, legal, governance, research, scientific, managerial and HR expertise, with a spin on impact, will all be in demand, as will specialists capable of working in cross-sector partnerships and internationally.

Finding the expertise we need

Where will these experts come from? Some will come from the sector itself. Graduate programs are already incorporating social investing into their curriculi and a generation of “multilingual” professionals is beginning to emerge. These new impact investing leaders will understand the language of finance as well as they do that of social and environmental benefit. Their contribution will undoubtedly fill some of the sector’s need for services, but not all.

In the immediate future, the impact investing sector will need to reach out to the wider finance and business community to find the services it needs to grow. There will be a role for agencies who can help impact investing financiers and businesses source expertise from a pool of impact-able specialists in a range of fields. As the sector continues to become more accepted by the mainstream, and the needs of impact finance and business become better understood, this pool should become larger and better adapted to meet the needs of impact. The challenge lies in finding a way to give the sector easy access to the expertise it needs now.

So, data, though essential, will not provide us with all the answers. Instituting systems for capturing and analyzing data (both financial and social) is a step in the right direction but there is a risk that the focus on data and data-driven services may distract us from the real task at hand: building impact businesses and funds that deliver tangible social and environmental benefit along with financial profit. To do this will take huge amounts of human ingenuity, innovation, “hard” as well as “soft” expertise; and, yes, data too.

[Image credit: 123RF ]

 

 

How to Find Impact Investors to Finance Your Sustainable Business

By Marta Maretich

Originally posted on the OpenForests blog. OpenForests is a consultancy specializing in sustainable forestry projects.

So, you’ve written the business plan. Congratulations! (And thanks to OpenForests for their useful guide to writing a business plan for a sustainable forestry enterprise.) Now you’re ready to look past the trees and focus on the forest; the wide world of impact investment. It’s time to go out and raise capital. But where do you start?

Decide what kind of investment you’re looking for

Capital is capital, right? Not exactly. There are many different ways of structuring finance and many different ways a business can relate to its investors. Writing your business plan has given you an idea of the amount of investment you need. Now it’s time to think about the kind of investment you’re looking for.

Are you looking for debt or equity? How long will you need the money for? Do you want partners who will offer more than just capital, who will give you advice and contacts, for example? Do you need pure capital, or a blend of capital and grants?

To find out which model might work for you, tune in to the wider world of impact investing and learn about your options. Find projects similar to your own and research how their funding is structured and who their investors are. Websites and company reports can help you form a picture of what’s out there and develop more knowledge about funding choices.

Build impact measurement into your business plan

In the world of impact investment, impact measurement is as important as financial return. Impact investors look for financially viable businesses that have clear, defined and above all measurable social and/or environmental outcome targets.

To succeed with impact investors, impact metrics need to be prominent in your business plan and your pitch. You’ll need to decide which measures will mean success for you, then define how you will measure and report them. This blog by Jonanthan Kuo shows how important metrics are to Acumen, a successful impact investing pioneer.

How do you know which metrics to include? There are several systems on offer right now but IRIS, from the GIIN is a good starting place for those new to impact metrics. This standardized system offers a broad range of metrics that can be adapted to suit the needs of your business. The key is to choose metrics that are realistic, practicable, fit into your operations and serve your strategic goals. For more on the best way to “do metrics” see my recent blog post for Maximpact.com.

Research investors

The range of impact investors is growing and so is their spectrum of approaches. Some impact investors simply provide capital, others mix catalytic capital with grants to promote growth. Still others work as venture philanthropists, bringing hands-on expertise and networks to help businesses grow. Getting familiar with the different types of investors will help you target the ones that can help you most.

Conferences like SOCAP are a good place to learn about and meet potential impact investors; and if you can’t be there in person, they make videos of many of their discussions and panels available on the web.

Industry blogs like OpenForests, media streams like FastCoexist or Huffpost feature stories about impact businesses and the investors that support them. Our impact deal portal, Maximpact.com, hosts all of these types of investors on it, all of them actively looking for deals. Do your groundwork and understand your options.

Types of impact investors

  • Accelerators, Hubs and Intermediaries
  • Angel Investors
  • Venture Philanthropists
  • Enterprise Capitalists
  • Large corporations with sustainability agendas
  • Foundations
  • Family offices
  • Governments
  • International development agencies

Cultivate relationships

Business, like life, is all about relationships. Cultivating good relationships with a number of potential investors will pay off now and in the future.

Make a short list of impact investors to approach with your business plan and research them carefully before you set up a meeting. Identify their impact mission- do they want to stop deforestation, protect indigenous communities, promote synergies between agriculture and forest habitats?

Find out what investments they’ve made in the past and learn the names and backgrounds of key personnel; impact investing remains a sector where personal values matter, even at the highest levels.

Once you understand your investor, you can speak to their interests and demonstrate how your project will help them meet both their financial and social or environmental impact goals.Be prepared for a two-way dialogue. Your investors may have strong views about your business model and impact goals. Keep an open mind and be prepared to negotiate.

For more insights into how impact investors think about business, see this post by Tilman Ehrbeck.

Find out more about Maximpact.com or list a deal on our global platform.

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