Impact investing: like charity, it can begin at home.
“You don’t have to invest in Africa or Latin America: impact investing can be close to home”, said Professor Dr Harry Hummels at a Sustainability Day organised by PwC Luxembourg. Impact investing grew out of philanthropic project investing but has evolved into a commercially viable sector. “It’s not an asset class” stresses Professor Hummels, who is responsible for European Liaison at the Global Impact investing Network (GIIN), “you can use any asset class to do it".
Impact investment projects are typically in the sectors of agriculture, renewable energy, microfinance, SMEs, community development and healthcare. They present a solution for investors seeking a responsible investment with measurable results, maybe addressing a problem within their own community.
Ideas … they’re all around you
Professor Hummels gave two examples of such projects. The Gym Group, founded in 2008, provides low cost health and fitness facilities in purpose-built gyms that are open 24 hours a day and located mainly in under-served areas. Today the group has 30 sites across the country and over 160,000 members, of which some 40% are first-time gym goers. It has been a good investment, too: the company is ranked 13th in the latest Sunday Times Fast Track 100 list.
Another successful example is the 4 star Hoxton Hotel, built in a deprived area of London. Hoxton, which describes itself as “a no bullshit hotel” has something of a cult following and is a commercial success. 80% of staff costs go to members of the local community.
The greatest drawback at present is the lack of a suitable legal structure in which philanthropic and commercial investors can coexist. Moreover, the mix is likely to change over time. “The investment cycle is not the same as the project cycle: it can take time to reach the point of commercial viability", noted Corinne Feypel (Banque de Luxembourg) and Valérie Arnold (PwC) in their summary of the workshop sessions.
Other challenges include management (are the skills needed to start the project the skills that are needed to run a company?), identifying the key stakeholders in the project and getting the KPIs right (what is the company trying to do? Who will measure this?).
The société d’impact
A bill currently before the Luxembourg Parliament will, if adopted, create a vehicle that resolves a great many of these questions. The Société d’Impacte will be a hybrid vehicle: as proposed, up to 70% of capital may be held by commercial investors and up to 100% by donors, as needed. No dividend can be paid out to commercial investors until the KPI targets are met and the dividend due to donors is set aside in an account for use as working capital. Not for profit organisations can hold dividend shares, making the Société d’Impacte an ideal vehicle for treasury management.
An example of a company that may benefit from the new structure is the Luxembourg NGO Comité National de Défense Social (CNDS). CNDS is an association of entrepreneurs, 11 of which produce goods and services – such as carpentry and market gardening - employing the handicapped. Gilles Rod, Director, sees the Société d’Impacte as a solution: “We would like to set up a marketing platform and create a viable business", he said of the venture, which is currently funded 80%-100% by the state. The European Commission is working on a similar project, the EU Social Entrepreneurship fund.
The world has changed a lot since Milton Freedman wrote that “the social responsibility of a company is to make profits” and that “corporate social responsibility is fundamentally subversive". For students of 21st century, economics is evolving into a less dismal science. EDR