Edward Hanrahan on the barriers to scaling-up impact investment

23rd April, 2014 by Duncan Jefferies

ClimateCare’s Director says profit needn’t be a dirty word when it comes to impact investing, in Green Futures latest Q&A.

What are the barriers to scaling up impact investment on sustainability issues from ClimateCare’s point of view?

We believe that it is absolutely essential for a truly sustainable business to make a profit and as a result we make great efforts to ensure that all the projects we work with are managed to deliver profitability, as well as to deliver positive impacts for people and the environment. For us, it is absolutely key that sustainability really does mean sustainable from a financial, profit motivation basis.

To date, the majority of what is called ‘impact investment’ has focused on impact alone and has therefore been aimed at companies who deliver impact, but often follow unprofitable business models. To us, that is not really impact investing but subsidy or grant giving.

Yes, these organisations do have an impact, and yes, they are deserving of funding, but many of these organisations have unsustainable or un-scalable business models. If we want to unlock mainstream finance through true impact investment, I think that we really need to look at this through the lens of the investor, where an opportunity is assessed not only against impact, but as a true commercial investment.  

Is there any trade-off between achieving an impact and profitability?

We don't believe there should have to be a trade-off between the impacts achieved and commercial level profitability – and we’ve proven that there doesn't need to be.

But what we’ve seen to date is reluctance from many who claim to be in the impact space to the very idea of making a commercial level profit through delivering positive impacts.

Instead, the focus has been on organisations that are doing slightly quirky, new and innovative things. And whilst those things are great, we don't believe that's really what we need to unlock investment at scale and create a stream of new revenue to fund sustainable development.

It might seem boring in comparison, but in our experience, generating impacts at scale is about selecting proven, low risk models, those that can deliver positive impacts for people, positive impacts for the environment and a return on investment. These are the models where impact investment has the potential to substantially scale up activity and make the biggest difference.

So what really needs to change in your opinion? Is there a need for more realism in terms of how projects are assessed, for example?

On the whole, I think what we actually need to do is be very clear about what impact ‘investors’ are looking to achieve – just impact, just financial return, or both? Then we can relook at the financing structures and targets of projects, to make them more attractive for investment.

If we're trying to scale things up – which is absolutely what I think we should be doing – we need to bring impact investing out of its niche. We need to bring it into the realm of pension funds and traditional capital management, and to do that, we've got to be more realistic. Firstly, more realistic in terms of scaleability, but also more realistic in terms of 'what is the impact that you're delivering and what is the financial ROI to investors?'

What’s the best way to define the impact of an investment?

There is no one size fits all. Just as every type of impact is different, the measurement of a health impact will need to be different to an education impact. Trying to find a ‘one size fits all’ may be counterproductive. But I think that government and the aid sectors (the public purse who are already paying for these outcomes), are open about moving towards a more results-based model for some development outcomes. It decreases risk and creates greater efficiencies. From our perspective, that change will really catalyse this market, because it will give organisations like ours an income stream to compete for, and people will really have to deliver or they won’t get paid.

Do you think there’s still a resistance to for-profit companies entering the social and environmental investment space?

We’ve seen some resistance, but you know, we won't get mainstream capital investing into non-profit maximising companies – and why would they? The pension funds, etc. – have a fiduciary responsibility to make money. What we can do, is give them the opportunity to do so in a way that delivers positive benefits for people and the environment.

What we are doing at ClimateCare is demonstrating that there need not be a trade-off between profitability and achieving positive impacts at scale. Our goal is to try and divert mainstream sources of capital away from negative impact investments and toward positive impact investments. Realistically that is not going to happen unless you can show that there is no commensurate loss in investment return.

So the traditional sector has got to get over its suspicion of for-profit solutions and the ‘motives’ of for profit companies, because it's not really about the motives. If we can find a company that can, for example, eradicate waterborne disease at a lower cost per intervention, can do it at scale and roll it out, and they turn a profit – that type of company should be the darling of the social impact world and large scale investment – debt or equity should be channeled there.

The absolute Holy Grail, we've always said at ClimateCare, is to make it more profitable to tackle issues such as poverty or climate change, than to cause them.

Duncan Jefferies is Assistant Editor, Green Futures.

ClimateCare is a Forum for the Future partner.
www.climatecare.org

Photo credit: ClimateCare

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