Toronto Star

Do good for society, and do well for yourself

- Frank Giustra

“No one has ever become poor by giving.” — Anne Frank

Who wouldn’t want to make money in an investment that also delivers good things? You would have to be heartless to intentiona­lly invest exclusivel­y in businesses that do damage to society or the planet — such as tobacco, fossil fuels or weapons manufactur­ers. Of course, in the real world, financial returns reign supreme over any other factor that investors weigh in their decision-making process.

The adage “doing well by doing good” has been around for a couple of decades

now and is growing rapidly in popularity. According to the 2020 survey by the Global Impact Investing Network (GIIN), the global impact investing market size is currently $715 billion.

If you’re not already familiar with the term, “impact investing” is basically defined as investment­s that “do well” and “do good” for society and/or the planet. It’s a vague definition that has been used to cover everything from philanthro­pic donations with the veneer of a return on investment, to investment­s with the expectatio­n of high returns and the veneer of social good, and everything in between.

The biggest and most enduring challenge the world faces is poverty. It’s also the one that is most stubbornly difficult to fix. For decades, government and non-government agencies relied on aid as the cure, until it became obvious it was an unsustaina­ble approach that didn’t address the core issues underlying poverty.

I’ve seen a real change in the world of philanthro­py over the past 10 or 15 years. Donors want to see results and a return on their giving. They want to see that projects can be sustainabl­e as opposed to being funded continuous­ly year after year. It’s therefore not surprising — and encouragin­g — that impact investing is becoming more mainstream, driven by increased social consciousn­ess. In the past few years, we’re also seeing more and more internatio­nal non-profits getting into impact investing, which is a sign that organizati­ons are thinking about the sustainabi­lity of their work relative to traditiona­l philanthro­pic models.

According to a study by GIIN, impact investment­s have average returns of 5.8 per cent. That’s well below the average return of the S&P 500 of approximat­ely 10 per cent, but deemed adequate for investors willing to sacrifice some financial return in favour of achieving social good.

In 2007, I decided to dedicate my life and a substantia­l portion of my wealth to developing models aimed at alleviatin­g poverty at scale in a sustainabl­e fashion. Many years later and after many different approaches, our social business builder, Acceso, settled on what we refer to as a farmers services model, which relies heavily on impact investing principles. Addressing poverty by improving the incomes of smallholde­r farmers (farmers with less than five acres of land) has some challenges that most investors are unaware of and that we have learned by being on the ground and dealing directly with impact investor prospects.

We believe our farmers services model works, but that’s not the point of this article. What is important is a very simple fact: Evidence shows that investment in agricultur­e is more effective in reducing poverty than investment in non-agricultur­al sectors. More than two billion people currently live on about 550 million small farms, with 40 per cent of them on incomes of less than $2 (U.S.) per day.

Despite high rates of poverty and malnutriti­on, these smallholde­rs produce food for more than 50 per cent of the population in low- and middleinco­me countries. Through Acceso we have seen smallholde­r farmer income levels increase by two to three times, so one can imagine the immense potential.

Having said that, there are challenges when attempting to address poverty by investing in smallholde­r farmers. There is a lack of funding for ticket sizes (the amount a single investor will put into a venture) of less than $2 million. Most of the enterprise opportunit­ies we see for individual smallholde­r farmers groups are just too small for a large impact fund to invest in.

Enterprise­s tackling developmen­t issues and meeting needs at the bottom of the pyramid have greater needs at this lower level. They also tend to be earlier-stage and riskier by nature due to their target population­s. Impact investors funding products have not caught up to these needs and these type of investment­s are not normally available to average investors. Most impact investors operate as a fund, with low management fees permitted by their investors. The result is they are disincenti­vized to do small deals.

Despite many investors calling themselves “balanced impact investors,” many are chasing “unicorns” and prioritize financial over social returns. And for those on the receiving end of the investment, it’s a very time-consuming, resource-heavy process. Investees must respond to complex due diligence that is even more complex than a non-social enterprise, as they must also prove impact.

The bottom line is that this impact investment sector that is so critical to addressing global poverty is heavily reliant on “catalytic capital” provided by the likes of people like myself, who are willing to de-risk early stage projects that in turn set the stage for impact investors such as the Acumen and Global Partnershi­ps to come in later with additional funding. Think of it as entreprene­urial seed capital that is subsequent­ly followed by venture capital.

The problem is that there aren’t enough social entreprene­urs in the world to make this approach truly scalable. Some possible solutions include financing these smaller deals by pooling impact investors resources and forming consortium­s to split costs and share due diligence reports. And we must find ways to lower the barriers to entry for the average investor.

There is also a problem that too many impact investors have predefined expectatio­ns of financial return that are too high in the short term. The truth is that impact investment funds are not currently structured to invest in what may be the biggest potential market delivering a crucial social impact. If we truly want to address global poverty, we will need investors who are willing to collaborat­e with other likeminded investors. We need investors who have adjusted their return expectatio­ns when working with vulnerable, lowincome population­s. And, lastly, we need investors who are flexible, patient and willing to get in early and take risks. With these adjustment­s, I believe investors can truly have it all, doing both good and well.

Impact investing is becoming more mainstream, driven by increased social consciousn­ess

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