Impact Multiple Archives - Wealth of Nations Advisors

Monetising the Impact of an Investment

Adam Fuehrer — Fri, 23 Jul 2021 06:34:59 +0000

What’s your multiple on the dollar you spend on impact

The Global Impact Investing Network defined Impact Investments as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return[1]. With the turn of the decade, the Coronavirus pandemic elucidated systemic shortcomings of the standard operating model of governments and financial systems, while at the same time the increasing trend of ESG regulations are further highlighting that the investing world will be required to not only measure the return on the dollar invested against the risk taken to achieve it but will also need to move a significant step further, in actually quantifying the measurable impact that dollar has had on society and the environment.

Fortunately, the field of impact investing has never been better positioned to address this challenge and capitalise on the opportunities this presents.

What we and the market as a whole is looking to address is the ‘Impact Monetisation’, which refers to the monetary valuation process of the positive impact created by an investment[2]. Monetising impact is a potential tool that investors can use to evaluate the impact an investment generates over the lifetime of the investment or the current impact value. This consequently will enable the ranking between impact investments that produce greater social or environmental impact versus another investment.

The need for Impact Monetisation can be considered as part of the natural progression of the assessment process for Impact Investors. It fits in the investment due diligence process where Impact Investors will compare the impact an investment creates in the same manner of the risk and return of a traditional investment.

The research surrounding impact monetisation is growing and at Wealth of Nation Advisors (WoNA), we are aiming to lead the way in Australia by expanding upon our research into measuring and monetising impact by the transferrable economic value an investment creates. We apply this monetisation technique to impact fund managers we represent and look at the impact monetisation at the fund level and/or company level. This tool allows WoNA to compare different funds and individual companies in terms of the holistic impact they provide. WoNA is working on an impact multiple, which considers the capital deployed by a fund or investment divided by our calculation of the social and/or environmental impact that an investment generates.

Let us consider an example:

At a company level let us imagine a company called Project Smallholder. Project Smallholder is a company based in South Asia whose operations are in the export and sale of fresh dairy products. The ‘Impact Monetisation’ that was used, to value the impact created, were based on the income uplift smallholder farmers gained who were part of the projects supply chain. Smallholder farmers have small scale productions (>1 hectare land under cultivation), and usually sell their goods in open markets to inconsistent and non-market rate incomes. However, farmers in Project Smallholder were able to intervene, enabling smallholder farmers to gain access to consistent income by enabling supply chain linkages through sale contracts[3].

The impact monetisation for this impact investment was the income uplift the smallholder farmers obtained prior to the sale contract and after.

For illustrative purposes, let’s visualise Project Smallholder to have completed raising $25mn US. The calculation below is how the positive impact was derived.

Project Smallholder Impact Multiple

Annual Income (w/out Project Smallholder) $500 USD

Annual Income uplift (from Project Smallholder) 100%

Annual Income (from Project Smallholder) $1,000 USD

Income Uplift (from Project Smallholder) $500 USD

# Of smallholder farmers under contract 250,000

Total Annual Income Uplift (from Project Smallholder) $125,000,000 USD

Divided by: Total Equity Investments $25,000,000 USD

Project Smallholder Impact Multiple 5.0x

As another example let us look at an infrastructure fund that focuses on energy and sustainability.

For illustrative purposes, let’s call the Fund, Renewable Energy Fund I (REFI). The underlying assets in the fund are primarily solar and wind energy infrastructure assets which over its lifetime generates power from photovoltaic modules (solar) that convert light directly to electricity and turbines that spin from wind that converts the spinning of a magnetic inside a coil into electrical energy[4]. In contrast to the common coal fire energy stations which produce carbon dioxide emissions from a combustion reaction, the solar and wind farm project produces no carbon dioxide emissions. The impact monetisation created from the project can be deduced to be from the aversion of the social costs of carbon dioxide. The social cost of carbon is a measure of the economic harm from those impacts, expressed as the dollar value of the total damages from emitting one ton of carbon dioxide into the atmosphere[5].

Renewable Energy Fund Impact Multiple

CO₂ Emissions Avoided (Metric Tons/Year) 2,000,000

(x) Social Cost of Carbon (per ton) $125 USD

Total Social Cost of Carbon dioxide (Avoided 2021) $250,000,000 USD

Divided by: Capital Deployed $100,000,000 USD

Renewable Energy Fund Impact Multiple 2.5x

Whilst there has been increased research and improvement in the monetisation of impact, it is still a work in progress. Select impact investments may create various impacts from the operations of a business. In certain cases, this should be considered when configuring the impact monetisation of an entity. Additionally, studies comparable to the listed case studies have been conducted in context where data sources are validated and readily available. Addressing impact multiple of money calculations in companies, funds and bonds in markets and companies where data is limited (e.g., emerging & frontier markets, new technologies, lack of research) will limit the accuracy of the monetisation of impact. We believe the impact multiple realistically should be used as a guide to show the measurable impact an investment has across asset classes, risk/return profiles and impact thematic and WONA like many, will continue to work on improving the calculation of impact monetisation which we are sure, will continue to be assisted with the advances in data collection through technology, especially in emerging markets.

It’s clear that impact monetisation is a journey.

In a world still heavily weighted on ‘trading impact’ or ‘impact by proxy’, investors and regulators for that matter – like Europe with Article 9 funds – are starting to realise that there is a difference between leveraging the concept of ‘trading impact’ versus delivering impact.

We work with the best-in-class global as well as local impact managers, along with progressive institutional investors across Australia and New Zealand, who invest with the intention of delivering positive measurable and quantifiable social and/or environmental impact, while at the same time delivering market-equivalent risk-adjusted returns.

Impact Monetisation is about a journey in following the money. As an investor ask yourself the question, what true impact is my dollar having – am I trading impact or creating it? Check out the impact managers we represent via the website or the IIP APP, it’s how you start to follow the money.

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Don’t be fooled: There is a difference between Impact Investing and ESG

Adam Fuehrer — Thu, 27 May 2021 01:09:42 +0000

Don’t be fooled:

There is a difference between Impact Investing and ESG

The Definitions and Differences

Many people and companies believe that if one is to be conscious of the environmental and social implications of their investments or screen out any negative effects and put in place some level of basic governance to their capital investments that they are Impact Investors. This customary view does not level up to what “Impact Investing” really is.

The GIIN (Global impact Investing Network) defines impact investing as “investments with the intention to generate positive, measurable social and environmental impacts alongside a financial return”[1]. The key factor in this definition is the INTENTION of the Investor or Enterprise that wishes to part with their capital, as they intend to advance a positive ethical outcome alongside a favourable financial return.

In the case of ESG, Investopedia defines this area as an “environmental, social and governance practice of an investment, that may have material impact on the performance of that venture”[2]. Although this shows a social and environmental conscience, the main objective of ESG valuation pertains to the investment’s financial performance. Therefore, this adherence to ESG is mostly a risk mitigating factor for practical purposes beyond an ethical concern, since many organisations wish to follow ESG criteria for brand promotion, to avoid negative PR and/or to signal their companies that they could be at risk similar to the VW emission scandal or the 2010 BP oil spill debacle that plummeted the company’s stock prices and resulted in billion-dollar payouts and negative public relations[3]. In short ESG is driven by a commercial opportunity over an intentional positive outcome to society and the environment.

Another factor to note is that ‘Socially Responsible Investing’ (SRI), which is similar to ESG, yet goes one step further by actively eliminating or selecting investments that follow certain ethical guidelines. For example, SRI’s will seek to avoid investing in companies that deal with alcohol, tobacco, firearms production, human rights and labour violations and environmental damages etc[4]. SRI still values profit but it seeks to balance its yield against its core principles, i.e., to generate return without violating one’s social conscience[5].

Why Impact Investing?

Impact investing allows an investor, whether it be a Fund Manager, an Individual Investor, a Pension Fund, Religious Institution, an Insurance Company, a DFI or Bank to provide capital to address the world’s most pressing challenges in the world. Whether it be equality, sustainable agriculture, renewable energy, conservation, micro finance, climate impacts and/or accessibility to basic services such as housing, healthcare, education and food for all people.

Impact investing is not a welfare scheme or charity. Many impact enterprises and investors seek to intentionally invest in projects or research that will provide a future positive social and environmental impact (more so under 1 or more of the 17 stated UNSDG’s)[6], they also expect to generate a financial return on capital at market value, with a few exceptions at concessionary return in the short term.

We as individuals and team members in organisations each have the ability to positively change the trajectory our forefathers deteriorated over decades of industrialisation and over consumption. The opportunity to be a part of the future solution, one that is no longer decades away, but a present circumstance and action that falls upon our shoulders to push forward so our children and the future generations can enjoy the pleasures of natural beauty, humanity and kindness to all things around us that we were lucky to experience and have a glimpse of when we were young.

Comparison of ESG versus Impact Investing in a typical investment process

Gaining greater clarity in the difference of Impact Investing over ESG can be determined by the actions taken at each stage of a typical investment process. The 4 key stages are: Originate, Deployment of capital, Managing the investment project and Exit[7].

Measuring Impact

In the past many of the concerns in ‘Impact Investing’ has been due to the lack of standardised measurements. Yet with improved and more robust screening tools being developed over the past couple of years such as IRIS+ (under GIIN), IFC’s Environment and Performance Standards, Operating Principles for Impact Management (with good guidance on responsible exits), UN Principles of Responsible Investments (PRI), Sustainable Accounting Standard Board, Alinus SPI4 etc. greater ability and capacity is being presented frequently to assist in validating the returns and positive impact that these investments are bringing not only to the investor but to the overall community and planet.

Although many questions may exist in these screening processes and they may vary according to the asset class or industry the measurement pertains too, one of the key questions asked by many is how an enterprise/investor can monetise impact?

Y Analytics provides a simplified measure to assess impact and help organisations define impact by incorporating 4 metrics[8].

Although no unified best practice has emerged for impact investing as yet, the pace at which impact investing is gaining traction gives hope that more refined, streamlined methodologies will emerge in the near future. Until that time, multiple frameworks are used in combination (on average a combination of three tools, frameworks, standards and rating systems[9]), along with some customised elements to fit an investor’s strategy[10].

To understand these frameworks and their roles in impact management, Franklin Templeton and Tideline classified the frameworks into five broad categories.

Ultimately each investor must decide on a combination and level of customisation required for proper impact management system. As this is an emerging area, a dynamic process is required to continuously improve and capture all impact variables.

That is why here at #WoNA, we make it our mission to assist each investor find the right IMPACT Fund Manager that sets a combination of realistic, evidence-based targets for what our investments can achieve, that value the importance of monitoring and evaluating actual achievements using appropriate data to ascertain whether the investment made provides material positive changes to society and the environment and avoids harm along the way.

Therefor in summary, despite the commonalities in ESG and Impact Investing and the fact that many advisors lump these two areas together into an umbrella term such as ‘sustainable investments’, there are 3 important distinctions that can help investors ensure their investment are impact investments. They are,

Select assets with the INTENT of impact,
Contribution to the impact of the INVESTEE FIRM,
OBJECTIVE MEASUREMENT of the impact investment.

[1] GIIN – What you need to know about Impact Investing – (https://thegiin.org/impact-investing/need-to-know/) accessed on 9^th April 2021

[2] Investopedia – ESG, SRI and Impact Investing: What’s the Difference – (https://www.investopedia.com/financial-advisor/esg-sri-impact-investing-explaining-difference-clients/) accessed 7^th April 2021

[3] Investopedia – ESG Criteria – (https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) accessed 11^th April 2021

[4] [Same as ref. 2 above]

[5] SRI – (https://www.investopedia.com/financial-advisor/esg-sri-impact-investing-explaining-difference-clients/) accessed on 7^th April 2021

[6] UN Sustainable Development Goals – (https://sdgs.un.org/goals) accessed 12^th April 2021

[7] IFC – The difference between ESG and Impact Investing and why it matters (https://ifc-org.medium.com/the-difference-between-esg-and-impact-investing-and-why-it-matters-8bf459b3ccb6)

[8] Evidence based Impact, Y analytics (https://yanalytics.org/research-insights/evidence-based-impact ) assessed 15th April 2021

[9] GIIN: The state of impact Measurement and Management Practice, December 2017 – accessed 15^th April 2021

[10] Franklin Templeton: Five Building Blocks for Impact Management – (https://www.ftinstitutionalemea.com/content-common/topic-paper/en_GB/five-building-blocks-for-impact-management-tideline-0319.pdf) assessed 12^th April 2021

Image Credits: Markus Spiske from Pexel

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