Can the private sector benefit from 'impact investing'?

Can the private sector benefit from 'impact investing'?

Impact investing has come a long way since John Elkington coined the phrase “Triple Bottom Line” in his 1997 book Cannibals with Forks: the Triple Bottom Line of 21st Century Business. In a relatively short amount of time, this term has captured the ethos of this emerging asset class. According to an often cited 2010 JP Morgan report, this segment of the market offers the potential over the next 10 years for invested capital of $400 billion-$1 trillion, and profit of $183 billion-$667 billion.

For the uninitiated, impact investing refers to investments made based on criteria that go beyond just financial return and attempt to create benefits for both society and the environment. Also known by some as “socially responsible investing,” “corporate social responsibility” or “environment, social and corporate governance,” impact investing looks more specifically at how investments can promote positive impacts and less at the minimization of negative impacts.

San Francisco recently played host to the annual flagship impact investing event, SOCAP12. Conference organizers report that attendance has tripled since the first conference was held back in back in 2008. This growing interest in SOCAP may be a reflection of a maturing market and signal of the potential for growth in this largely untapped sector.

The growth in the interest in impact investing market may also be due to the meltdown of traditional capital markets over the past five years, as it can be a safer long-term place for investors to put their money, as well as their hopes for the future. According to a recent study by Oekom Research, its portfolio of 300 major companies that had satisfied its industry-specific sustainability requirements outperformed the MSCI World Total Return Index by 15 percent from 2005-2011.

Conservation International (CI) — along with our partners, including the French Development Agency, Starbucks Coffee and the International Finance Corporation — have been involved in impact investing since 1998 through the Verde Ventures Fund. While it may come as a surprise to the traditional financial community that a conservation organization has a long history of involvement in impact investing, for CI it was a logical step in searching for innovative ways to provide conservation finance at scale.

The Verde Ventures business philosophy is based on our steadfast belief that economic opportunity and responsible stewardship of the Earth are at the core of successful conservation efforts benefiting both people and nature. It also recognizes that by leveraging investments through debt finance and capacity building of “disruptive innovators” -- businesses that unexpectedly improve products or services with implications on scaling and rapid growth. This strategy paves the way for a greater impact compared to just grants alone.

One of these innovative disruptors is Madécasse, a chocolate company based in Madagascar. Its unique business model of incorporating domestic processing creates four times more value for the Malagasy economy than traditionally produced certified chocolate, which is bought in Madagascar and manufactured overseas.

Financing provided by Verde Ventures is enabling Madécasse to provide substantial financial benefits for the local economy. It's also creating opportunities for smallholder farmers to engage in practices that conserve ecosystems. The cocoa that goes into every bar of Madécasse chocolate originates in a unique agro-ecosystem that mimics forest conditions. Old-growth forest provides the shade needed for cocoa to thrive, but also serves to maintain the health of the hydrological cycle and create habitat for a variety of forest-dwelling species.

Another great example of the impact that targeted investment can have is Root Capital, a nonprofit financial institution and Verde Ventures’ partner that provides finance to agricultural businesses in Africa and Latin America. One of its loan recipients, the Savannah Fruits Company, is a Ghana-based company that produces shea butter to export for use in cosmetics. The business improves livelihoods for rural women by providing a stable, well-paying market for raw shea nuts.

Root Capital's trade finance loans remove cash-flow barriers and allow the company to source the butter in large volumes. This enables the business to grow, incorporate more women suppliers and pay their suppliers a premium over the market price. The investment encourages Ghanaian communities to protect the shea trees, which also forms a “green belt” that acts as a buffer against the encroachment of the Sahara Desert.

Even though the portfolios of impact investing funds like Verde Ventures and Root Capital are predominantly focused on commodities and trade finance, impact investing is not only about chocolate and shea butter. Energy, housing, tourism, financial services, education and other sectors are also beginning to receive more investment targeted to maximize social and environmental benefits.

So while the momentum around impact investing continues to be built, actions on the ground have already begun to take hold that could potentially serve as proof-of-concept of the role impact investing can play to revitalize economies and conserve the natural resources on which we all depend.

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