Lecture 6

Question 1

Impact investing (SI 3.0)

Answer 1

Investments made into companies/funds with the intention to generate ESG impact alongside a financial return.

Without financial return, investments for impact are donations for charity, which is not investing.

The financial returns are not optimized, there just has to be some return.

Question 2

Motivation for impact investing

Answer 2

• Achieving impact
• Lower risk profile (hedge against e.g. climate risk)
• A source of alpha
• Better reputation (generates impact and financial returns)

Question 3

Key elements of impact investing

Answer 3

• Intentionality
• Additionality
• Measurement

Question 4

Investment vehicles

Answer 4

• Venture capital fund/Private Equity (most important): start-ups/early stage private equity funds
• Private debt fund: often applied in capital impact investments with high capital needs (e.g. solar, wind)

Question 5

Impact investment in venture capital

Answer 5

• Dedicated to themes and managed by theme specialist
• Isolation of the return expectations and of the impact results
• Impact VC usually own close to 100%
• The global supply of VC impact funds is comparatively small, but growing

Question 6

Barber - Impact investing

Questions

Answer 6

Do SI investors expect low returns before making the impact investment?

Do they willingly make low return investments?

Question 7

Key elements of impact investing

Intentionality

Answer 7

Intentionally contribute to social and environmental goals (as opposed to SI 1.0)

Question 8

Key elements of impact investing

Additionality

Answer 8

Project or firm with impact only sees the light of day thanks to impact investment

Question 9

Key elements of impact investing

Measurement

Answer 9

The level of impact is measured and monitored throughout the life of the investment

+ ESG scores – not good, only hard data matters
+ These shows the real sustainability impact
+ Using themes to know what to measure

Question 10

Process of VC

Answer 10

Vintage: the moment when investors commit to pay in a VC fund. o Themes and portfolio limits are known
o Actual portfolio firms are not known

Manager of the fund: is also investor) has the network to spot opportunities and the expertise to make investment decisions

Investment phase: the manager (GP) makes investment in firms during the first 3 years

Development/Growth: firms grow towards maturity (around 10 years)

Liquidation: Monetization of the portfolio through a corporate sale or IPO
o The moment when investors are paid and manager receives fees

Question 11

Barber - Impact investing

Return conclusion

Answer 11

• Impact VC funds have significantly lower post IRRs than traditional VCs
• The risk is a bit lower as well

Question 12

Barber - Impact investing

Willingness to pay (WTP) conclusion

Answer 12

An investor is indifferent between Impact VC and traditional if E(R) of Impact VC is 2.5%-3.7% lower

Willingness to pay is highest in Europe/Latin America/Africa and lowest in Asia

Willingness to pay is higher for development organizations, financial institutions, public pensions

Willingness to pay is higher for environment, poverty and diversity

Question 13

Barber - Impact investing

Overall conclusion

Answer 13

Investors derive non-monetary utility from investing in dual objective VC funds, thus sacrificing returns

These benefits are liked by sustainable investors, regardless of the amount of money made from it, as they expect the returns to be lower

Question 14

Barber - Impact investing

Discussions

Answer 14

Listed equity funds with higher ESG ratings also show lower returns

But despite this, from listed equity funds investors actually expect: high returns, low risk, high ESG results (like Impact VC)

Why?