Part three of a series on growing the impact investment market introduces how impact investment can provide access to non-traditional sources of growth and business innovation.
By Dr. Maximilian Martin & William Burckart
Much of the current attention on impact investing—the practice of investing for financial, social and environmental (hereafter referenced as “social”) returns—concerns the role of government in creating an enabling environment for the market, how investors can get involved and how impact can be measured.
Receiving less attention is how impact investment can actually serve as a powerful new way for companies to further their long-term business interests while helping achieve wider social and environmental goals.
Making Impact Investible and its companion Primer that was commissioned by the U.K. government for the G8 Social Impact Investment Forum cover a great deal of ground concerning the emergence of impact investing, new markets and sustainability issues—such as the massive pent-up demand at the base of the pyramid, the need for radical resource efficiency, the end of the welfare state as we know it, and the rise of Lifestyles of Health and Sustainability (LOHAS) consumers—and how they are increasingly moving from the margin to the mainstream.
More consumers will be reaching for sustainable products as the global middle class expands from 1.7 billion people to 3.6 billion in 2030. This is already enabling new business models with sustainable value creation at the core rather than as just bolt-on PR efforts.
But achieving scale is challenging.
This has as much to do with limited investment resources, as it does with an inadequate supply of technical expertise. Social enterprises need access to both; from the impact investment capital that values the “impact” and “financial” features of the enterprise, to the partners that can provide needed advice and guidance.
Sustainable Business Innovation 2.0
Take the example of Frutama, a client of Impact Economy. Frutama is the first Peruvian company to enable the sustainable harvesting, processing and marketing of Açai and Aguaje, two Amazonian fruit species, by linking indigenous fruit producers in the Peruvian Amazon to global markets. The well-known fruit Açai already serves a multimillion-dollar worldwide demand.
One of the features that makes Frutama’s story so compelling is the simple fact that it exists. Frutama operates in the poor northernmost region of Peru where few economic incentives to preserve the environment exist. In the absence of sustainable value chains, felling trees for wood, fruit or palm hearts (harvested from the inner core and growing bud of certain palm trees) represents the most attractive source of income. The rainforest is being plundered and trees cut as a result, all while social fragmentation and sustained poverty patterns persist.
But by connecting “superfruits” to LOHAS consumers in America and Europe and commercializing locally produced Amazonian fruits, social enterprises like Frutama can create sustainable jobs and incentives to protect the environment.
Enabling New Sustainable Businesses: Key Findings
Making Impact Investible provides a number of key findings related to how impact investment can serve to build the underlying critical mass of social businesses, including:
1. Focus on quality is key in the LOHAS segment.
The world of virtuous consumption is expanding fast, with a market turnover of roughly $300 billion in the U.S. alone. But many products and services promoted to this consumer segment are thinly veiled marketing stunts, with questionable “health” or “sustainability” contents. Superfruits like Aguaje and Açai can fulfill both requirements if they are properly sourced and processed, as can other products or services. Impact investors have a role to play in ensuring the growth of credible sustainable businesses.
2. A strategic use of all forms of capital is key to building new sustainable businesses.
Impact investing plays an especially meaningful role if it is embedded in the overall financing of innovation. Few social businesses ever take off without any grant funding for a proof of concept phase. A clever combination of concessionary and non-concessionary debt, equity and mezzanine instruments is key to financing growth, a point that is explored further in Understanding the True Potential of Hybrid Financing Strategies for Social Entrepreneurs.
3. Impact investment partnerships can be beneficial for both social entrepreneurs and multinationals.
Future growth and business innovation for many multinational companies will need to directly factor social inequality, unrest, and global resource and commodity shortages into the development of products and services. Leading companies such as Coca-Cola or Danone with its social enterprise incubator Danone Communities have recognized this opportunity. Each has expanded into emerging markets and attempted to bring products and services to hard to reach populations by investing in start-ups, brokering partnerships with foundations and nonprofit organizations, and providing technical support where needed.
These are the exact kinds of expertise social entrepreneurs on the ground need access to but that impact investors find hard to provide from afar. In the case of Frutama this dynamic has been particularly true. The company has developed a small-scale but cutting edge expertise in rainforest logistics, negotiated formal relationships with local communities, and developed know-how. Despite the progress, Frutama struggles with challenges related to upgrading its supply chains, issues that major logistics firms would find easy to overcome.
The three findings above can help impact investors to strategically look for partners, raising the likelihood of success for the thousands of new business solutions to systemic social problems they are resourcing. And multinationals can utilize impact investing to access innovations and non-traditional sources of growth.
Of course, the full value of impact investing cannot be captured without unlocking much more capital to invest in scaling up these enterprises. To help fill in this missing piece, next week we will publish our fourth and final post in this series, where we will examine the investment side of the impact investment equation.
Part II: Measuring the "Impact" of Impact Investment
Part I: Making Impact Investible: Cutting Through the Hype of Impact Investing