Drs Alcanne J Houtzaager MA, public Speaker on Inclusive Impact Investing

Inclusive Impact Investment productsLast January Brian Trelstad, partner at the British social / impact investor Bridges Ventures* wrote Making-sense-of-the-many-kinds-of-impact-investing in Harvards Business Review. He described the 5 P's of Impact and the importance of Impact Fidelity. The later being the impact twin of fiduciary duty. Trelstad appealed to investors to decide on the kind of impact they want to have, how deep or broad their intended impact is, and the level of impact risk they are willing to accept. And not just evaluate their present portfolio on impact investments, allocate a minor share for impact investing or wait for the impact investing market to evolve further.

Trelstad suggests 5 P's of impact: Place, Planet, Process, Product and Paradigm. Place is the geographical location of the investee/investment; a poor country, region or an underserved community; Process: investing in a company based on it's business practices such as 'fair trade', the supply chain policy, sustainable production or buy-one-give-one (away) models; Planet: Investments with clear measurable environmental impact such as conservation, protection or Carbon Dioxide emission reduction through energy saving products & processes. Product: Investments in products or services with positive social impact such as work & income, available & affordable housing, education, health care and other basic needs.Paradigm: Investments aiming for a systemic change such as drastic quantitative or qualitative improvement of basic needs or impact katalysts.

Trelstad also adds choices for intensity and immediacy to be refined by adding depth, width and timeframes for impact.

I love the simplicity of the 5 P's: they are clear and combinable to win-win-win-win-win-win strategies and propositions**. I've been brooding on the 5 P's ever since and have come up with the PRIPC for impact investment products to accelerate the market by adding inclusiveness, impact incentives and upscaling focus. It is a pity I didn't come up with a cool term, though the resemblance to the UN Principles for Responsible Investing is sort of a bonus.

I propose Public, Return, Impact, Price and Catalyst for inclusive Impact Investment products

Drs Alcanne J Houtzaager MA, public Speaker on Inclusive Impact Investing

Public as in publicly listed equity or regulated crowdfunding for impact. The first offers value transparency, varying degrees of liquidity and diversity and the latter protects the interests of small investors through legal requirements for crowdfundingplatforms. It can open up an investment universe that was exclusively targeting large investors. Such as renewable energy projects offered at www.duurzaaminvesteren.nl, a Dutch crowdfundingplatform with approval of the Financial Markets Authority (AFM). The Dutch super sustainable Triodos Bank invests in it as part ofit's promoting inclusive impact investing strategy.

Return should only be risk related. To often impact is suggested to come at an extra price as costs for ethical, responsible or sustainable investments screening. Also due diligence and impact measurement are often mentioned. Blame the persistent discourse on the fee for exclusion (less spread) and selection (ESG research) and it's effect on overall return. Impact investment has evolved to balancing impact & return. Return is primarily related to risk which is related to business development stage investing, regions such as emerging markets and to sectors. Only a few selected impact first investors, such as development banks and charitable trusts take on high(er) risk at lower rewards. But it is their mission to achieve impact and thus support a project, region, sector or the impact investment market. theGIIN/CatalyticFirstLossCapital (pdf, 36 pag. 2013). Impact investors that want to achieve scale will go for balanced impact & return or even finance first to grow their available investment capital (and preferably put it in revolving funds if they are not yet aiming at 100% impact portfolio's.

Impact should be measured, preferably with a standard data & system so it can be reported, benchmarked & rated. Rating gives investors impact value for money and can steer allocation to more effective impact investments. A product in which the impact is incentivised is absolutely an ideal investment. This characteristic comes from the concept of Social Impact Bonds or Pay-for-Success bonds. A British invention taking over the world with private investments in the social sector and development. Repayment comes when the proposed impact is achieved with returnand a bonus for high(er) impact. Repayment comes from public funds, governmental, municipal, pooled (SIB or impact)funds. Pay out for investors is based on societal savings on for instance juvenile recidivism (the 1st SIB, for Peterborough prison), unemployment (benefits) educational success, homelessness, health costs etc. At present globally there are over 40 Social and Development Bonds implemented and another 100 or so in the pipeline. The market is estimated at 200million US$ (the Brookings Institute).

Drs Alcanne J Houtzaager MA, public Speaker on Inclusive Impact Investing

(some) Dutch Social Impact Bonds have a unique characteristic and that is that the social entrepreneur running the project, ie the investee, is also an investor. An incentive for high(er) impact levels as pay out will be higher as well. And it encourages (hands on) investors to keep the costs low.

Growing impact I have suggested the incentive aspect of Social Impact Bonds to Sean Kidney CEO of the Climate (green) Bonds Initiative. Globally over 600billion US$ is invested in Green and Climate Bonds that traditionally were issued by development banks. The market is accelerating as municipalities and corporations are issuing green bonds to finance their sustainable activities at attractive capital costs. Real time data on issues on: ClimateBonds.netGreen bonds generally aim at reducing carbon dioxide emissions and other environmental goals. Standards have been defined by experts for various sectors and the Climate Bonds Initiative has set up an external assessment process through verification. According to Sean the growing interest for green bonds is part of the ESG risk integration process in the capital markets. An impact incentive would be a new and uncertain factor, a disincentive for investors. For sustainable investors this is probably an acceptable risk. But an important achievement of the introduction of green bonds as an investment instrument is that they have attracted traditional investors who might shy away from them once an impact incentive is introduced.

How unfortunate..... But what if sustainable investors are willing to accept impact incentives at a price? And governments could introduce fiscal regulation to stimulate impact incentives in (verfied) green bonds?

The Price of impact investments should be affordable, making impact investing inclusive and not limited to institutional investors, charities and High Net Worth Individuals. Thus minimum investments from penny stock to a couple of hundred Euro and not thousands or even hundred thousands of Euro's. Also low nominals for (green) bonds and not the usual 100.000US$ or Euro are important to make that market truly inclusive. Affordable also means that the costs of investments have to be reasonable. No excessive buy or sell fees or minimum percentages and reasonable fund fees or portfolio costs. Otherwise return will melt away for small investors, especially in the long term. As on-line brokers have slashed dealing prices and ETPs have done the same for investment funds fees, private investors have seen the costs of investing melt away. But when newly developed impact investments are only available at high costs it will take decades to accelerate the market as it remains dominated by institutional investors who need large deals to afford their operational costs. As we have seen happen to sustainable investing....

Drs Alcanne J Houtzaager MA, public Speaker on Inclusive Impact Investing

Catalyst: Inclusive impact investment products should be transparent about their impact acceleration ambitions. Are they raising additional funds or growth capital? These are fundamentally different impact goals.

Additional capital is crucial for start ups that have great difficulty raising capital or face to high capital costs limiting first stage(s) development. Additionality is an argument often heard in (major donor) philanthropy and in early or ©classic impact investing to have the most impact. Without the investment no impact will be achieved at all. @SeeIINieuwsl/Mapping-impact-investing types. Additional capital is more often found in venture capital deals or crowdfunding. Note that the latter is overtaking the venture capital market this year (according to Massolutions). Additional funds may be very effective is getting started in the first place, think of disruptive change models that have to overcome many black hat perspectives and barriers.

Or are investees I.e. investment products raising growth capital for a more mature business expanding its market share or in a new market (sector or region)? Growth capital is essential to achieve scale, not just for impact but also to break even. Scale is something that philanthropy just can not achieve and for which it often turns to public bodies. But those are often as impotent as charities, especially during economic crises when expenditure is cut, but demand rises. Or in conflict areas when more is destroyed than preserved let alone developed. What has been built over decades, can be brought down in hours.

The traditional view on impact investing & social investing through social impact bonds is that they are growth investments in proven income (which can be subsidies) or savings generating business models. Growth is essential to upscale solutions for societal problems. For instance the financing of prevention, hard to get financed through charitiesor governments, but when proven effective an obvious candidate for public remuneration. And just think of the human suffering that can be avoided.

Another often mentioned goal is innovation, bringing dynamics and differentiation of services and again income generating activities by transferring the innovative model(s). The first Social Impact Bond regards it's bringing together different parties and organizing in a supply or support chain for it's clientèle as a major achievement, that would not have been there without the investment through the SIB.

Drs Alcanne J Houtzaager MA, public Speaker on Inclusive Impact Investing

Impact ambitionsAnother relevant characteristic of an investment product is the ambition of the investee to upscale impact. With antiny disruptive change start up their ambition is obvious: to conquer to world. But what about newly developed impact creating activities of multinationals, safer investments for private investors. Many corporations have CSR, ESG, R&D ambitions, but are they pursuing as much impact as possible? Or are they happy with an high impact sideline product or service? (delivering great public relations and image/reputation result). Do they plan to integrate their high(er)impact production process through the whole organization (worldwide), grow organically or patent out their unique impact invention, find partners, franchisers, distribution channels etc. Looking at impact ambitions of corporations is an unique characteristic in the impact reports listed at the UK's Social Stock Exchange. This stock exchange had 10 listings, has seen 6 entries lately and is expecting 11 more. Socialstockexchange/1Q16. There are social stock exchanges in 8 countries in varying shapes and sizes. Forbes/stock-exchanges-for-social-enterprises-heres-where-you-can-find-them More on the 4 big SSE's in StandfordSocialInnovationReview/Theriseofsocialstockexchanges

In the 5 types of impact investing, this quality is particularly important for ©indirect impact investments. Are your investees i.e. investments doing the best they can?

My ideal impact investment does not yet exist. Many of my portfolio investments do however have a couple of the qualities mentioned in this model. But as new investment products labeled as impact investments are entering the market it is worth looking at their credentials with high impact ambitions in mind.

Thoughts, comments and suggestions are welcome!

Alcanne Houtzaager on LinkedIn or impactinvestmentnews@yahoo.com

*BridgesVentures is an initiative of the Father of Social Investment Sir Ronald Cohen, Chairman of the Social Investment Task Force (SITF) for the British Government (2000) He was also chairman of the G7 Social InvestmentTaskforce and is promoting social investment worldwide. **If you are a bit hesitant about the simplicity of the 5 P's maybe check out TheImpact Framework for families. It is aninitiative of the former World Economic Forum Davos Impact Investing Initiative director Abigail Noble. Their frameworkhas the P's, but also taps into traditional investment choices such as Socially Responsible Investing and ESG screened. TheImpact/FrameworksForFamilies_2016 (pdf, 16 pag. Impact Themes on pag 9).

Drs Alcanne J Houtzaager MA, public Speaker on Inclusive Impact Investing