29 January 2018
As one of the leading figures in the UK Impact Investment Sector, how would you characterize its growth over the years?
I would say two things. Firstly, things are ‘Accelerating’ and secondly, we are at the stage of the ‘Microscopic becoming small’. People have been talking about the social or impact investment sector for a long time, and I’ve been involved in the sector since around 1999. The fact we have been talking about it for such a long time proves it’s been slow in taking off. On the other hand, growth in the sector is really accelerating at the present time.
There have been a few big events this year that really reinforce the idea that the sector is becoming part of the mainstream. There have been some big developments in the UK and internationally, for example in the US there has been the $2bn Rise Fund. Another example is the entry of Barclays into the arena with their Multi-Impact Growth Fund. However, the major event in the UK this year is the closing of the £100m Palatine Impact Fund. Palatine, are the first mainstream PE House in the UK, to raise an impact fund. Previously here in the UK, the industry had only seen the government or otherwise subsidized funds investing in impact.
To give further clarification, I’d like to share some figures from ClearlySo. In the 7 years leading up to 2016, ClearlySo raised around £100m for its high impact enterprises. In the 12 months ending March 2018, we will raise over £80m! So, something has changed. Either we became incredibly clever this year (which would be great, but I doubt) or the way we have positioned ourselves over the years is finally paying off, or things have really started to change. Not only that, ClearlySo is uniquely targeting mainstream investors, which is unlike other intermediaries. We want to make sure all investors start to think about all the investments they undertake. This approach is well-suited to the current trends in the market.
What are the main factors that have contributed to this recent acceleration?
Mainstream investors have over the past few years been thinking, looking and considering moves into the impact area. All that has changed this year, is that they have taken action and ‘they have actually done it’! The shift really has been about working groups thinking, writing and talking about it to people actually doing it.
Possibly to some extent, the implicit exit of government from this sector has motivated the private sector to get more focused on impact. A superb example of this recent acceleration the 2016 Fund from Partners Group, a leading Swiss-based PE Fund Investor.
Can impact projects attract mainstream investors, if yes, how?
YES! By offering market returns or close to market returns, together with high levels of impact. By disrupting sectors, by innovating, by proving they can generate impactful businesses that scale. Once a start-up has all these ingredients it will be lucrative to any mainstream investor irrespective of impact policy.
In ClearlySo’s view, impact and financial success are positively correlated. For example, JustGiving was impactful and successful, the Body Shop was impactful and successful—I could go on.
I founded ClearlySo with the motto of creating ‘100 JustGivings’, to facilitate the creation of 100 great impactful businesses, which are also immensely successful. Justgiving recently sold itself for almost 20 times its initial valuation, for nearly £100m. The social impact model is so much more powerful potentially than charity. It doesn’t mean that charity doesn’t have a role to play but that the social impact model has far more potential.
Measuring and assessing impact has always been perceived as a daunting task; has the situation changed?
YES! My view is, ‘why should it be perceived to be a daunting task’? Something as complex as impact is hard to measure—but not impossible! You just need to start to address the need—”how does one measure impact?”
The UN has helpfully outlined 17 sustainable development goals (SDGs), and most of the world seems to agree—it is great there is emerging a global standard around these SDGs. It is therefore, simply a matter of establishing systems that are in accordance with these 17 SDGs. At ClearlySo we have established a product called ‘ClearlySo ATLAS’ which measures the impact of PE firms’ portfolio companies in accordance with the 17 SDG’s. Like any other business, research and data analysis are key to defining and measuring business outcome/impact.
How has technology Influenced this change?
We couldn’t do what we have done with ClearlySo ATLAS if it were not for technology. We deliver through a web browser a set of number which are the assessed impact of each company. Cambridge University have done some work around the 17 SDGs and grouped them into 6 parts and we simply score each company on these 6 parts. Without technology we couldn’t deliver this.
What are the current trends in the impact investment sector?
It’s pretty much what I’ve said earlier. The current trend is that products are being developed and companies are being found, that meet the needs of mainstream investors. If you don’t meet the needs of mainstream investors, then it going to be difficult for the company to find investment. Government subsidy and foundation grants are dwindling.
For me, the main trend is the ‘mainstreaming of impact investing’. Another trend is how this is extending across, so many different industry sectors. A splendid example of this is a company called Toast Ale which makes beer out of waste bread! Consequently, there are very few sectors around, that an impact story hasn’t permeated. The only example I can think of is perhaps the armaments sector, but then you never know what will be around the corner!
Why should investors consider impact investing?
The only reason people should consider impact investing is if they care about the impact of their investments. If they think that what is happening to the planet matters, that the elderly need more support, that all of society needs educating etc. etc., then they should consider it. If this isn’t important to them, then they shouldn’t think about impact investing at all. But if it isn’t important, these folks have some serious problems, in my view
On some level, I think most decent human beings care about something, whether it be people, the planet, or society. Basically, you should care about impact investing if you care about the society you/we live in. That’s the only reason you should consider impact investing and I believe that most people do.
Can you share a success story that paved the way and encouraged/inspired more social impact entrepreneurs?
I’ve already mentioned the success story of JustGiving, but due to the low profile of the founders (by design on their parts), I’m not sure it can have inspired that many. Anita Roddick, founder of The Body Shop, inspired a huge number of entrepreneurs. The company was started with hardly any money (£8k from a local garage) and was recently sold for £652m to L’Oréal. Anita Roddick changed the way people thought about consumer product consumptions whilst she built a valuable business. She brought environmental concerns to the forefront and ethical issues onto the agenda. She also changed the business model. The Body Shop didn’t have to spend much on marketing, which was probably the first time ever, a consumer products company got so much airtime largely because of its ethical positioning.
What kind of infrastructure and support is available for social impact start-ups and is it enough?
The UK has a fair amount of support. UnLtd that gives grants to inspiring impact entrepreneurs. There are also a host of foundations and governmentally supported organizations trying to facilitate and assist the development of high impact enterprises in the UK.
Obviously, the EU money will disappear, and unfortunately the government money is diminishing. However, I do think if anything, there’s probably a disproportionate amount of support available for start-ups, and not enough infrastructure and support available for those who have made it through the first 3-5 years, or who I like to call ‘the Survivors’.
Its resilience that is the best gage of the likelihood of entrepreneurial success! What will really help these ‘Survivors’ continue, is what I propose to call the ‘Tilting’ of the tax code. If we think about tax policy rationally, what we should be taxing are things we can get money out of, and discourage activity we don’t wish to encourage. Those companies who have a negative effect on society should have to pay more tax. This is because, society has to bear the cost of the bad things they have done e.g. the financial crisis, when companies pollute rivers the air etc etc. These things are called negative externalities—a by-product of what a company does.
Similarly, there are some companies, impact enterprises, that do something good for society as a by-product of what they do. An example of this is an organization called Harry Specters, who at the surface manufacture chocolates, but as a by-product give people with disabilities (autism) jobs. Surely, it’s in the interest of society, that the tax code somehow rewards them.
So, when I say, ‘tilting of the tax code’ I mean reducing the tax burden on companies making a positive impact which in turn, reinforces their business model. These incremental credits should be funded by taxes on those generating negative externalities. The idea would, on the surface, be revenue neutral, but actually would be revenue positive. Fewer bad things we must pay to fix would happen, and many good things would be provided, reducing our need to pay for them. A tax code that recognized positive and negative externalities would create more impact than anything else I can think of!
Are people’s values and ethical preferences changing?
What is interesting is how the sector is now beginning to attract human capital. For the past 20 years, we have struggled to hire great people. If we tried to hire an investment banker ten years ago, we would effectively be saying, ‘Look, I know you earn 15X, but we’d like to pay you X’. It’s not an easy sell. To some extent pay levels in the sector have improved, but we haven’t closed the gap that much. However, what is happening, is that in the same way people are making very different choices about how they consume, invest etc., people are starting to make different sorts of decisions about what they do for work. Even though they can make more money working for Goldman Sachs, some don’t want to work there, for a variety of reasons.
I don’t think enough attention is being paid to how peoples values and ethical preferences are starting to reshape themselves, not only the investment market but also the labour and consumption markets. This isn’t happening because the government decided it was a good idea or because corporates and financial institutions said so. This is happening because people’s preferences are changing. This is primarily true of young people (‘millennials’, who have inherited a world that has some serious problems. This is a natural phenomenon which is occurring, and the fact people are voting with their investment dollars in a different way than previous generations is what is driving the whole impact investment sector.