Can philanthropists and investors leverage this unique economic moment in history as an opportunity for impact?
As COVID-19 continues to wreak havoc on our healthcare systems, political infrastructure and social fabric, the light at the end of the tunnel may be that available funds for impact investment are surging, with some estimates reaching $26 trillion to $32 trillion. This is added to the fact that capital markets continue to soar, despite the nearly 1929 levels of unemployment and bankruptcy that seem to surround us. Given this fiscal reality, can the various efforts by policymakers, philanthropists and investors to achieve the UN’s 17 Sustainable Development Goals be coordinated to leverage this unique economic moment in history as an opportunity for impact?
In a panel discussion hosted during the Milken Institute’s Global Conference 2020, vanguard venture capitalist and social innovator Sir Ronald Cohen, Start-Up Nation Central’s CEO Prof. Eugene Kandel, Baskar Reddy of Syngenta Foundation India, and Dr. Alix Zwane, CEO of the Global Innovation Fund, discussed the various ways in which available impact capital can help achieve the SDGs and close post-COVID gaps.
The main question, posed by Senior Director and founder of the Milken Institute, Prof. Glenn Yago, was whether this is a critical moment in financial history for impact investment to deliver measurable value to the economy, communities and the environment. With available funds and spirits for impact investment high, where do the business, finance and innovation communities stand in their shared goal of fostering a more sustainable global economy?
“Technology is now bringing a massive breakthrough to this big issue”
Sir Ronald Cohen has been on the venture capital scene since the ripe age of twenty-six, so it’s safe to say that he has seen his fair share of financial variability. The cofounder of Apax Partners and a pioneer in the impact investment landscape (acting cofounder of Social Finance and Chairman of the Global Steering Group for Impact Investment), Sir Cohen sees a correlation between the state of the impact investment market and the boom of technology companies in the 1990s.
“At the time, the companies that didn’t believe in technology were left behind and they were overtaken by companies that had only been around for about 20 years and had become the largest companies in their countries,” he said at the conference. “We’re now on the threshold of similar change – we’re on the threshold of an impact revolution.”
According to Sir Cohen, this “impact revolution” is already taking place, due to the $30 trillion investment gap in achieving the SDGs and the need to provide real solutions to global widespread economic and social problems, such as unemployment, access to healthcare and education – all areas where the gap of access has been widened for rich and poor due to the effects of COVID-19.
The major factor preventing traditional institutions from translating impact investments into financial value has less to do with politics than one may think. According to Sir Cohen, “now we have more than a third of all professionally managed money in the world going to achieve impact, but we have no transparency on the impact that has been created and that’s why technology is now bringing a massive breakthrough to this big issue.”
Measuring the monetary, environmental and social impact of companies
According to a methodology promoted in Cohen’s recent book and through the Harvard Business School initiative Impact Weighted Accounts, it is possible to measure the monetary, environmental and social impact of companies, data that can be used to pressure companies in “the race to the top” by incentivizing them to invest in technology and platforms that deliver impactful and sustainable solutions.
“Over the last few decades we’ve had organizations measuring the impacts in tons of carbon emissions and litters of water and so on, which have given us the foundations now for being able to translate these metrics into financial numbers that can be reflected in the profit and loss account and in the balance sheet,” he says. For instance, in the first round of new balance sheets generated measuring the actual environmental impact of 1,800 companies in dollars, “250 of these companies, or 15% of the 1,800, actually create more environmental damage than they make in profit.”
Sir Cohen’s accounting method could change the way that impact investments are quantified, removing some of the risk currently presumed in calculating the return from such investments. Aside from doing his part to remove the veil of risk from full-fledged investment in impact solutions and companies (he gives the example of Tesla as a large corporation moving in the right direction), Sir Cohen hopes that the Impact Weighted Accounts method will provide more transparency to governments on how to tax companies more fairly and to incentivize large-scale impact investment.
This could result in an economy of companies with new business models looking to deliver impact and profit simultaneously. “I think that we’re going to see entrepreneurship shift in that direction,” he says. “30% of private equity firms have already signed up for the United Nations’ Principles for Responsible Investment and you can see the values of young people in terms of their consumption, in terms of their employment and in terms of their investment preferences are all going in this direction.”
“Every additional technology is beneficial, so you don’t need to subsidize”
With a way to financially quantify impact investment, how then can technology be applied to solve social and environmental challenge at scale? To provide insight into reaching this critical mass, Prof. Kandel of SNC and Reddy of the Syngenta Foundation shared details on their initiative to disseminate agri-innovation among smallholder farmers in India, who represent about 85% of the market. Prof. Kandel sees the challenge of increasing the productivity of smallholder farmers in emerging markets as tied to the food security, sustainability and poverty alleviation challenges the world is facing.
The partnership between SNC, the Syngenta Foundation and the Milken Innovation Center is aimed at creating a platform that is both self-sustaining and scalable. Called the Evergreen Impact Accelerator, it focuses on identifying relevant technologies that can be used by participating smallholder farmers.
“According to our calculation, if we take a single region, we can reach a minimal scale of about 15 to 20 commercialized technologies, and about 25,000 to 30,000 agri-entrepreneurs,” Prof. Kandel says. “What this means is that once you’ve invested to reach that scale, from there on, any additional agri-entrepreneurs – or ‘agripreneurs’ – are financing themselves, and every additional technology is beneficial, so you don’t need to subsidize.”
Enterprises fail to cross the ‘valley of death’
Panel participants discussed the main challenge in high-risk developing countries: early-stage ideas and businesses are not backed by enough resources to prove commercial viability and scalability. Too often, potentially high-impact enterprises fail to cross the ‘valley of death,’ running out of cash before positive returns are achieved.
Conversely, large impact funds are not able to identify sufficiently scalable businesses to invest in, as many impact enterprises are not yet proven to deliver attractive risk-adjusted returns or be scalable. Large impact investors are rarely involved in the focused development of their own pipeline by supporting (with very little money) promising pilots, that are highly scalable, if successful. Connecting these two efforts can lead to a much better focus of pilots, and a much bigger pipeline for scalable investments.
It is evident that there is capital waiting to be deployed, and the biggest challenge is to identify, invest in, and nurture scalable and impactful opportunities. How can the solutions to social challenges be designed for impact at scale? The COVID-19 crisis and its short-term distractions maymake finding the right solutions to a broader range of sustainability challenges to be all the more difficult.
Investing in the agri-food sector in developing countries is especially risky. Yet, with 70% of the world’s low-income rural population dependent on this sector for their livelihood, the impact potential is huge.
The partnership created by Start-Up Nation Central, which was presented by Prof. Kandel at the conference, is deigned to solve this problem, bringing together the right expertise to develop a solution for these challenge, creating the impact on the agricultural sector, and focusing on smallholder farmers to unlock this vast potential. The project adapts technologies to the lot size, and creates business access at scale for the startups developing these technologies.
To learn more about this initiative, click here.