By Anthony Berkley, Vice President, Corporate Social Responsibility, Prudential Financial, Inc., and Charles Haines, Program Associate, Strategic Investor Initiative, CECP | 4 May 2017
There is a new way for companies to strategically manage resources and achieve their corporate societal engagement strategy: “Impact investing,” is a powerful new tool for corporate responsibility leaders. It is defined as investing with the intention of achieving both financial returns and measurable social, or environmental impact.
Impact investing has gained favor with investors relatively rapidly. The size of the global impact investing market is approximately US$60bn, but is projected to grow to US$2 trillion in 2025, according to JPMorgan Chase and GIIN. Prudential Retirement’s proprietary research on participants aged 21-55 and enrolled in 401K retirement plans also shows that employees are interested in the field and ready to engage if concerns can be addressed. Only a third of respondents were familiar with impact investing at the outset. Once it was explained that impact investing is distinct from philanthropy in that it measures both investment return and requires a measurable impact for each investment, 39 percent were very likely to consider impact investing as an option in their retirement plans. That number rises even higher – to 43% – when respondents consider it as an option across all their investments, both within-plan and without.
Yet the extent and depth of corporate use of impact investing is the least understood area in this emerging marketplace. Through research conducted by CECP and co-designed and sponsored by Prudential Financial, Inc., we found that one-third of large companies are active in impact investing, amounting to an estimated US$2.4 billion market. We believe these investments have strong growth potential as companies with cash on their balance sheet seek new methods to affect change on social issues.
There appears to be no trade-off between traditional corporate philanthropy, community engagement and thoughtful impact investing. The companies who are most active in traditional corporate responsibility are also the companies most likely to be engaging with impact investing, or interested in doing so. Median total giving for companies active with impact investing was more than those not active in impact investing by a substantial margin of $25.7 million to $15.0 million.
THE SIX APPROACHES
For the companies that are leveraging impact investing, how are they making such investments? And are there replicable approaches that can serve as models for companies looking to leverage impact investing as a strategy? We uncovered the following six most common types of corporate impact investing:
Direct Investments provide funds to social enterprises from the corporation’s own balance sheet with the investment listed on its annual IRS disclosures. The capital may come from the corporate business unit most closely aligned with the social enterprise. Generally, this is the business unit that will be responsible for extracting strategic returns from the investment.
The 2013 acquisition of B-Corporation Plum Organics by Campbell Soup Company and General Mills’ acquisition of B-Corporation Annie’s are two examples of direct investments. The moves allowed the larger companies to gain access to new consumer segments, while Plum Organics and Annie’s benefited from access to supply chain and resources.
The most commonly found investing with purpose approach in the study, both from survey respondents as well as in external research, was Corporate Venture Capital (CVC), which fits within the category of Self-Managed Funds. In a self-managed fund, the corporation sets up an investment company or creates a captive fund, i.e., a fund funded entirely by the corporation. Nearly half of our survey participants responded that they dedicate funds for corporate venture capital.
Cisco has one of the most active CVC units in the market and in 2009 invested in Husk Power Systems, a biomass electricity generator for rural households in India. Intel Capital and the Grameen Trust formed Grameen Intel Social Business, which provides IT solutions for rural entrepreneurs in sectors such as agriculture, education, and healthcare.
Corporations can also invest corporate capital through Third-Party Funds such as syndicates (temporary financial services group to handle a large transaction) or funds with companies as limited partners. In most third-party funds, a general partner seeks investment capital with limited partner investors that support the fund’s investment strategy. Therefore, the corporation is one of several investors in the limited partnership.
Beginning in 2014, 3M made a three-year US$5M program related investment in the Closed Loop Fund, a consortium of major corporations that have created a $100 million fund aimed at improving recycling in municipalities. Similarly, Acumen and Unilever announced in December 2015 that they will invest nearly US$800,000 to enable BURN Manufacturing to bring their new low-cost, energy-efficient, wood-burning cook stove, the Kuniokoa™, to smallholder and plantation workers in tea estates in Kenya and Tanzania.
Strategic Alliances include both strategic non-financial partnerships and joint ventures with social enterprises. These alliances can generate income, lower production and/or distribution costs, assist with product development, and create innovative market-based social benefits. Some alliances may involve extending firms’ supply chains, others may provide corporations with unique market insights.
Afghanistan’s largest telecommunications provider Roshan – a B Corporation – launched a mobile money transfer service, for which Roshan uses Vodafone’s award-winning transfer platform. The two companies agreed to a profit-sharing model for provision of the service. Another example includes the EKOCENTER partnership between the Coca-Cola Company and SOLARKIOSK, which began in 2014. By working together, the two companies were able to create more than 100 EKOCENTERs located throughout Africa and Asia, which provide solar power, safe drinking water, and mobile connectivity, and can serve as a catalyst for community growth.
Accelerators and Incubators
Accelerators and Incubators are agreements between corporations and social enterprises to embark on specific projects to realize financial, strategic, and social returns. Incubators support people or teams with ideas to gain access to the mentorship and space needed to grow at their own pace. Corporate incubators often do not have set timeframes for their support. Accelerators, in contrast, enable rapid screening of a large number of start-ups focused on a particular technology or region. The start-ups are usually on the verge of launching revenue-generating activities. The corporate sponsor promotes their development by granting them access to office space, technical support, high-quality mentoring, networks of other start-ups, and funding sources.
As an example, AT&T runs a six-month accelerator program focused on education start-ups where companies receive a US$100,000 investment in exchange for up to 5 percent equity. Similar the PwC Foundation has supported the Points of Light’s Civic Accelerator with more than US$2 million in grant funding to date. The investments focus on civic ventures that use innovative methods and platforms to mobilize people to address social issues in areas such as education, environment, economy, and technology-for-good.
Access to capital remains a major problem in many places around the world and Corporate Foundations are well placed to help solve this by integrating impact investments as a key component of their portfolios, which will benefit from the ability to re-invest returns from the sustainable social investments. Corporate foundations can do this through program-related investments such as low-interest loans, loan guarantees, real estate, or equity investments. These are investments that are designed both to achieve a measurable social impact and provide a financial return that can then be reinvested into other charitable pursuits.
In 2015, The Prudential Foundation extended a five-year, US$5 million loan to the Opportunity Finance Network. The loan provides capital to support grass-roots innovation in consumer finance through community loans, credit unions and banks. The goal is to transform how the underbanked and unbanked in rural, urban and immigrant communities access capital.
THE ROAD AHEAD
Still, companies with robust purpose-driven investment portfolios are the exception, not the norm. But we expect impact investing to grow into a core strategy for companies to strengthen ties to both their community and consumer stakeholders. The three approaches observed in this study that have the greatest potential for impact at scale given their connection to the companies’ core resources are direct investments, corporate venture capital (CVC) self-managed funds, and investments in third party funds. CECP is encouraged by the use of innovative approaches of companies across sectors seeking to complement their philanthropic activities with opportunities to invest with purpose, thereby accelerating progress on societal challenges while driving business performance.