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Impact Investing in a new world: Lessons from The Conduit community.

To say that the socio-economic and environmental implications of COVID-19 are going to be immense, is an understatement. We’ve seen global supply chains unravel, the vulnerabilities of our healthcare systems have been exposed and the magnitude of the inequities that permeate our societies, as well as our own lives, can no longer be unseen. The implications of the Black Lives Matter movement globally during this time cannot be ignored. The spotlight on businesses, investors and society as a whole is asking us to look at the institutional restrictions and biases that People of Colour face. The reconstruction, or in my view, the regeneration that is now called for, presents much to be optimistic about, particularly for those that exist within the impact investing world.

There has been an outpouring of philanthropic giving in response to the pandemic. While philanthropy can provide a vital cash injection in response to crises, the role of the impact investor however has the capacity to examine the systems that bring to life the immense inequity that these events expose, and to fund the evolved systems of the future. With regards to BlackLivesMatter, there were varying degrees of support claimed from the business community. However, this time, it was those that moved beyond condemnation of a man being murdered and took tangible steps in shifting internal (un)conscious bias to proactive action that showed true leadership. For investors, the time has come to step up and seize the opportunity to reshape the murky narrative that has made it so difficult for entrepreneurs of colour to access all types of finance.

There’s been a fear that the opportunity to really tackle systemic failings would be missed or, even worse, that investors would withhold capital altogether. Through interviews with some of The Conduit’s community, I’ve examined some of these challenges and explored what has emerged during these tumultuous times, what kind of pivoting (if any) has been needed by investees, what they’ve seen by way of the investment community’s response, and most importantly what can be learnt from their experiences.

Common themes for impact investors in 2020

  1. The winners: From home cleaning products to tech solutions to medical responses; there has been a surge in investment activity for particularly opportunistic investors and there have been a series of new investors entering the impact market.

  2. Those hit the hardest: Stepping in to help industries disproportionately affected, particularly in hospitality, tourism and retail industries presents longer term opportunities to support the reestablishment of these sectors. Assisting businesses to adapt to online opportunities has been crucial for survival, as has helping entrepreneurs navigate the complexities of government funding opportunities.

  3. Those that can pivot: entrepreneurs by their nature have an agile mindset and it has been key to support them to adapt to alternative revenue streams or diversify their portfolio to respond to the pandemic. For some, this has meant short-term adaptation for longer-term survival.

The investor response over the last few months has fallen into two camps: those that battened down the hatches to understand and manage their portfolio’s risks and those that mobilised swiftly. So, what systemic and tactical changes should impact investors be making in the wake of the pandemic?

It’s time to get creative.

What to do

Now’s the time to really examine the change that you want to enable and to look at consciously addressing the root causes for the socio-economic and environmental challenges that we see. The current climate calls for redressing the balance by examining the interconnectedness of the solutions that are required and the investment opportunity that these present.

How to do it

Patient capital shifts the focus from return of capital to return of outcomes as the main driver of investment decision making. However, it is rarely considered. For institutional investors there is opportunity in thinking more flexibly and shifting focus to outcomes-based financing (e.g. through social impact or development bonds) particularly while governments are struggling with the immediate capital investment response to the impacts of the pandemic.

Now’s the time to build unlikely partnerships and blended financial models. By bringing different types of capital together that usually exist in silos we can deploy a deep consciousness of the impact that can be achieved and change the way that investment models have been designed. Thinking outside of the usual funding parameters provides an opportunity to work with investees to shape models that work for them; for example, could equity be a better solution instead of piling on more debt?

Dig deep and look inwards.

  1. What change do you really want to create? What resonates with you and your values, and what kind of businesses really deliver that? These questions should be front of mind, particularly when the needs and opportunities are many.

  2. Examine your portfolio and challenge the conscious and unconscious biases that may exist in the leaders that you are backing. If they’re all white or all men (or indeed both), check your networks and broaden your scope of engagement because the numbers don’t lie – the businesses headed by under-represented leaders exist, they’re ready to scale, they over-perform and they’re looking for investment. You’re missing out by not looking beyond your traditional investment community whilst doing an obvious disservice to talented leaders and their thriving businesses.

Practical learnings to develop your investment portfolios.

  1. Recruit counsel that will challenge the mindset and investment decisions being made to ensure a more racially diverse portfolio. Talking about having solidarity with the BLM movement is no longer enough. If you are genuinely committed, this has to be reflected in your own management and decision-making processes. Set targets for diversifying your portfolios, for your management teams and your advisors to ensure diversity in the mindsets and experiences you have around you.

  2. Question and challenge your fund managers. Smart fund managers and impact investors will run scenario planning to pre-empt risks and find opportunities for new ways of thinking and operating. On the other hand, bad fund managers will tell you that everything is okay in a crisis. You really need to understand the risks and vulnerabilities that investment companies are facing and supporting them through.

  3. Find a balance between centralised and decentralised decision making. Have mechanisms in place, particularly for global investments, to mind-hive local knowledge for the context and challenges faced by investees and make sure these are disseminated across the organisation. This is particularly true for institutional investors that traditionally have had more bureaucratic systems in place.

Whilst the voices calling for more radical systemic economic change are getting louder, transformation takes time, collaboration and much patience. The Conduit community is active at all levels of socio-economic and environmental impact, but we know that the power of cash flows deeply affects what can be achieved and how. Now's the time for our investor siblings to rise up and change the dynamics that have held us back from achieving the future that we say we want.

Thanks to Conduit members: Paolo Fresia, 100% Sustainability; Levent Tuzun, EBRD, Eva-Maria Dimitriadis, Conduit Capital Partners, Gary Stewart, The Nest.

Written for: Conduit Insights

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