Arowana Impact Capital
Heightened interest in social responsibility, equality, and sustainable development, especially among the younger generation, has prompted investors to rethink where they are directing their capital. Through impact investing, individual and institutional investors alike are unleashing the power of their capital for social and environmental good.
What is impact investing?
According to the Global Impact Investing Network (GIIN), impact investments are “investments made with the intention to generate positive, measurable social, and environmental impact alongside a financial return”. These investments are made towards businesses, organisations, projects, or funds to help finance solutions to some of society’s biggest challenges.
While the term impact investing may be new to some, individual and institutional investors have been making impact investments for decades. Throughout its history, impact investing has challenged the notion that social and environmental issues are usually addressed only through philanthropic means, and that investments prioritise, and to a certain extent, only focus on achieving financial returns.
As such, impact investing has directed capital to finance new ideas and fresh solutions that address society’s biggest prevailing challenges, such as poverty, inequality, the lack of access to education, healthcare, housing, and other social services. It has also supported the development of diverse sectors such as microfinance, renewable energy, biodiversity conservation, and sustainable agriculture, to name just a few.
Impact investing and other ethical investments
In conjunction with the renewed interest in impact investing, its concept and the term itself is often grouped together or used interchangeably with other responsible or ethical investments such as environmental, social, and governance (ESG) investing and socially responsible investing (SRI).
However, while each of these is a form of ethical investing, each takes different approaches towards the act of investing itself. ESG tends to focus on deliberately avoiding investments that have a negative impact on society or the environment, while SRI actively chooses investments based on specific ethical considerations and avoids investing in companies that profit from and/or are complicit in harmful or improper practice. Beyond mitigation, impact investing goes a step further by putting its money where its mouth is―towards ideas and solutions that yield both positive social outcomes and financial returns.
Across the globe, impact investment firms help businesses and organisations achieve specific goals and social outcomes. Arowana Impact Capital, for one, partners with small to midsize enterprises (SMEs) that focus on livelihood creation, education and healthcare, sustainable urbanisation, and financial inclusion.
Globally, the impact investment market continues to grow. Today, more than 1,720 organisations worldwide are currently involved in impact investing, with current market size estimated at US$715bn, according to the 2020 Annual Impact Investor Survey of GIIN. While impact investors have differing expectations with regards to financial returns, most pursue competitive, market-rate returns on their investments.
How to Get Started in Impact Investing
What does it mean to practice impact investing?
The Global Impact Investing Network (GIIN) has laid out the core characteristics that constitute impact investing. These characteristics, informed by a decade of work and research with global investors, outline the steps towards developing a rigorous impact investment practice. These are the same principles and approaches that guide Arowana Impact Capital towards making meaningful and credible impact investments.
1. Set intentions and impact targets.
Investors have varied reasons for pursuing impact investing, whether it is central to their mission as a company, a part of their commitment as a responsible investor, or an efficient approach to achieve their impact targets. Across the board, however, impact investors intentionally finance solutions to various social and environmental challenges.
This intentional desire to contribute to measurable social and environmental good is at the core of what makes impact investing different from other investment approaches. The GIIN adds that, prior to starting an impact investment, one must answer three key questions, namely:
1. What types of impact do I seek?
2. What are my financial return expectations?
3. How do I allocate my assets?
2. Design investments based on evidence and impact data.
The best way to identify a pressing social or environmental need is to align with the latest research and data, as well as with the calls to action from relevant communities and organisations. Using the best evidence available allows investors to set targets and design investment strategies that can best address these needs, thereby increasing their contribution to positive social and environmental impact.
At Arowana Impact Capital, we incorporate technology and data analytics at every stage of our sustainability planning and impact investment framework. This allows us to connect data and insights to real-world impact and translate our ideas into meaningful actions. By improving our capacity to analyse our impact, we also improve the thoroughness of our investment activities over time.
3. Measure, manage, and optimise impact performance.
Impact measurement and management is a hallmark of impact investing. This can be done by aligning with global frameworks and assessments, such as the Global Impact Investment Rating System (GIIRS), the Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB), among others. Investors may also align with the metrics of IRIS+, a globally-recognised system to measure, manage, and optimise impact.
Most impact investors also monitor and measure the performance of their investments against the Sustainable Development Goals of the United Nations (UN SDGs), a shared global blueprint and call to action for achieving peace and prosperity for people and the planet by 2030. In impact investing, financial returns will always be part of performance measurement. And while impact investors target a wide range of financial returns, depending on the industry and asset class, most pursue risk-adjusted, market-rate returns on their investments.
4. Allocate assets wisely and contribute to the growth of impact investing.
To date, there are more than 1,720 organisations involved in impact investing globally, managing assets worth around US$715bn, according to the 2020 Annual Impact Investor Survey of the GIIN.
Indeed, the possibilities are endless as impact investing is not limited by geography, industry, or asset class. In fact, impact investors target a wide range of sectors that need financial backing. These include various sectors such as energy, microfinance, housing, food and agriculture, infrastructure, healthcare, and education.
With offices in Australia, Israel, London, the Philippines, and Singapore, Arowana Impact Capital (AIC) intentionally focusses on four key impact areas, namely: (1) livelihood creation, (2) access to education and healthcare, (3) sustainable urbanisation, and (4) financial inclusion. We also contribute to the growth of the industry by sharing our insights and best practices, where possible, to empower others to learn from our experiences in impact investing.
What is ESG Investing?
Today, more people are increasingly concerned about environmental and social problems such as climate change, poverty, gender, and racial inequality, as well as data security and privacy. In line with this growing social awareness, investors are also keen to put their money where their mouth is by investing in companies that are aligned with their personal values and priorities.
There is a growing subset of investment options for these kinds of investors. One of them is ESG investing, which looks at a company’s financial performance in relation to its non-financial performance in the environmental, social, and governance (ESG) criteria. It is a strategy that allows you to invest in companies that strive to make the world a better place―or, at the very least, endeavour to do less harm to the environment and society.
Breaking down the ESG criteria
Having an ESG criteria helps investors find companies whose values and priorities match their own. Today, many mutual funds, brokerage firms, and financial advisors offer investment products following an ESG criteria. Realistically, however, no single company will meet all the requirements of this ESG criteria. As such, investors must set priorities and decide which issues are most important to them.
Environmental. This criterion looks at how a company fares as a steward of the environment and natural resources. This includes an evaluation of a company’s energy use, carbon emissions and intensity, waste and effluents management, land and water use, natural resource and biodiversity conservation, as well as compliance with pertinent environmental regulations. A thorough evaluation of these material issues will reveal the environmental risks a company may be exposed to, which may inevitably impact their financial performance.
Social. This criterion looks at how the company manages its relationships with different stakeholders, namely, its employees, suppliers, customers, shareholders, and communities. Under this criterion, there is an emphasis on whether different stakeholders are consulted on and engaged with, especially with regards to business decisions that may impact them, and whether their interests and well-being are considered in the decision-making process. Fostering harmonious relationships with different stakeholders strengthens a company’s social license to operate, which bodes well for financial performance and business sustainability.
Governance. This criterion looks at the quality of the company’s leadership and management, as well as how it handles shareholder rights, executive pay, audits, and internal controls, among other considerations. Investors want the assurance that the company does not engage in illegal activities or condones conflicts of interest. Additionally, a company may be evaluated based on the comprehensiveness of their policies, and whether these also address environmental and social concerns.
ESG and financial performance
Given the extent and complexity of these criteria, ESG investing relies heavily on the independent ratings determined by third-party evaluators and research groups. These independent ratings give investors a better view of a company’s environmental impact, social outcomes, and governance issues.
As in impact investing, there is a prevailing misconception that ESG investing does not yield substantial financial returns. However, research from the CFA Institute suggests that “systematically considering ESG issues will likely lead to more complete investment analyses and better-informed investment decisions.”
Indeed, integrating an ESG criteria serves to enhance traditional financial analysis by identifying potential risks and opportunities. While environmental and social impact underpin ESG investing, yielding financial returns is still part of its goals. As such, a thorough ESG valuation helps investors avoid companies whose practices pose a greater financial risk.
Given the pace at which environmentalism and social consciousness now steer government and business decision-making, ESG investing will only continue to grow. According to the latest report from the US SIF Foundation, in the US alone, investors held US$11.6tn in assets chosen based on ESG criteria at the beginning of 2018, a 43.2% increase from US$8.1tn in 2016.
What is Socially Responsible Investing (SRI)?
We just highlighted the key characteristics of impact investing and ESG investing. These concepts are often used interchangeably with socially responsible investing (SRI), which is a bigger umbrella term for investments that meet a certain standard of social responsibility.
SRI is an investment strategy based around ethical frameworks, which may be outside the scope of the environmental, social, and governance (ESG) criteria. As such, it would be easy to categorise impact investing and ESG investing under the bigger umbrella of SRI. And while these three investment approaches all seek financial returns while promoting social and environmental good, knowing their differences will inform how you design and make decisions about your investment.
Growing interest in the Philippines
There is growing interest in SRI in the Philippines and throughout Southeast Asia. According to the GIIN, the Philippines is the second-largest impact investing market in Southeast Asia, both in terms of amount of capital deployed and number of deals completed between 2007 and 2017.
Aside from impact investing, faith funds and community investing are also gaining ground in the Philippines. Faith funds are a form of ethical investing anchored on specific religious guidelines and doctrines. In a predominantly Catholic Philippines, there is a growing subset of funds that integrates Catholic moral and social teachings into investments, thereby enabling the devout to reconcile their faith with their investment practices.
Community investing, on the other hand, directly funds organisations that work with communities, especially those unable to secure funds from banks and other financial institutions. These organisations usually provide social services to local communities, such as affordable housing and microfinancing. The goal of community investing, beyond the financial returns, is to improve quality of life and to lessen dependence on government assistance. As with other SRIs, community investing is also guided by ethical frameworks and theories of change on how best to support communities towards independence and self-sufficiency.
Positive and negative screening
One defining characteristic of SRI, which sets it apart from impact investing and ESG investing, is how it actively refrains from investing in companies or sectors deemed harmful to social and natural ecosystems. SRI can exclude such companies or sectors with the help of positive and negative screening.
With positive screening, investors actively seek out and invest in companies, stocks, and other financial instruments that have a net positive impact on society―that is, profitable while advancing social and environmental good. At Arowana Impact Capital, we intentionally target small to midsize enterprises advancing livelihood creation, education and healthcare, sustainable urbanisation, and financial inclusion.
Negative screening, on the other hand, filters out investments in contentious and otherwise divisive industries. SRI tends to echo the political and social climate of the time, and, as such, tends to also be politically charged, if not polarising.
For example, climate activists urge investors to stop financing coal and other fossil-fuel companies, as well as sectors that have a high carbon footprint. Some investors are also rethinking their investments in firearms, tobacco, and alcohol, despite their profitability. Even faith-based groups are refraining from investing in companies that do not align with their religious doctrines, which ultimately paved the way for faith funds to emerge.
With an increasing focus on social consciousness, SRI will also continue to grow. In the Philippines alone, according to the GIIN, there has been an increase in impact investing activity since 2014,. Additionally, SRI assets under management (AUM) in the United States grew by 38% from 2016 to 2018.
As with other investment approaches, there isn’t a set way of doing SRI. Like ethical frameworks, negative and positive screening only serve as a guide on how best to approach your socially responsible investment. As such, investors are urged to determine their priorities, not just in financial performance terms, but in the lasting social impact they want to create in the world.
Exploring the Different Kinds of Impact Investing
The core of impact investing is the intent to invest in businesses that generate positive social and environmental benefits alongside financial returns. This makes impact investing inherently subjective, as each individual investor has their own idea of what is socially good and which sectors can create the most impact on society.
There is no right or wrong way of approaching impact investing―it is simply a matter of identifying your priorities and preferences and determining the social impact you want to achieve. Indeed, there are many ways to invest in change, and the strategies included here are only a few examples of what impact investing looks like all over the world.
While impact investing in Southeast Asia is still in its development phase when compared to the global impact investing market, it has been on an upward growth trajectory since 2014. Its growth shows signs of promise: between 2017 and 2019, a total of US$6.7bn of impact capital was invested in the region, already more than half of what was invested in the previous decade. More than 58% of this impact capital is deployed in just three countries: Indonesia, the Philippines, and Vietnam.
Now, let us look at the different areas that can be supported by impact capital.
Climate Investing. Addressing the global challenges of climate change requires substantial capital. Climate investing mobilises capital to support technologies, innovations, and other solutions that address and mitigate climate change. Climate investing supports the transition to low-carbon operations or a net zero economy, helps prevent future carbon emissions, and contributes to carbon sequestration.
As with most impact investments, climate investments have clear and measurable goals. One goal can be the significant reduction of carbon emissions through clean energy sources or energy-efficient operations. Another can be the considerable preservation and restoration of certain natural habitats or ecosystems.
In climate investing alone, there are many areas where impact capital can flow. One is providing access to clean energy. Despite the rise in popularity of clean energy sources, however, reliable access to clean energy still eludes communities living in poverty.
Another area is sustainable forestry, which can help protect critical ecosystems, prevent deforestation, capture carbon, as well as create sustainable livelihood for local communities.
Lastly, climate investing also directs capital towards climate-resilient infrastructure and sustainable urbanisation.
Community Investing. Community investing is another fast-growing area of impact investing. While its facets differ per country, community investing primarily aims to support economically-challenged communities. As such, it uses investments to create resources and opportunities for disadvantaged communities often underserved by traditional financial institutions.
Globally, community investing has provided affordable housing, livelihood opportunities, education, healthcare, financial assistance, childcare, and other essential community services. In the Philippines, community investing may also involve cooperatives, community-based organisations, and even for-profit social enterprises that provide social services to marginalised communities.
Cooperatives, whose membership structures already comprise individuals and households from disadvantaged communities, primarily serve the poor and have a huge potential for social impact. As of December 2018, there were 28,784 registered cooperatives in the Philippines, according to data from the Cooperative Development Authority (CDA).
Social enterprises, on the other hand, can also be very intentional with the social impact they want to achieve and the communities they want to serve. According to the latest estimates, there may be as many as 164,400 social enterprises in the Philippines. Locally, they have been helping communities gain support for agriculture, education, financial services, energy, and livelihood development.
Gender Lens Investing. Another investment approach gaining interest among impact investors is gender lens investing (GLI). Here, they assess and manage investments with the intent to address gender issues and promote gender parity. More specifically, GLI supports investments that seek to positively impact the lives of women and girls.
One of its more obvious examples is investing in and supporting women-owned or women-led enterprises. Another is investing in enterprises that offer products and services that significantly improve the lives of women and girls. Applying a gender lens also drives investments in enterprises that promote workplace equity, either in their staffing requirements, management, boardroom representation, or within their supply chains.
Gender lens investing has gained some traction in the Philippines and across Southeast Asia. In fact, over the past three years, impact capital deployed with a gender lens has increased significantly in Southeast Asia. In the Philippines, most of these investments support enterprises that provide critical financial services to women, such as microfinancing to support entrepreneurship and other livelihood activities.
No matter the investment approach, we at Arowana Impact Capital remain committed to growing enterprises whose principles and practices align with our vision of sustainable development to advance social and environmental good.