“As big businesses begin to measure their impact, they begin to show it is fundamental to their future business models.”
Sir Ronald Cohen
COVID-19 has undoubtedly further highlighted the social challenges across the world, as the economic recession’s aftermaths are expected, yet not fully known. This is a good time as ever to examine whether financial focus is now shifting towards Impact as an opportunity for companies, and how technologies that intentionally tackle social and environmental issues are becoming business models with strong returns.
“Because COVID is shaking our habits and beliefs it opens the door to discussion to whether we should change our whole system,” says veteran investor Sir Ronald Cohen, chairman of the Global Steering Group for Impact Investment and the man known as “the father of British venture capital”.
“This is part of a process taking place in the world in the past decade,” writes TechForGood CEO Omri Boral, “in which the approach of organizations, investors and countries towards social and environmental issues is changing from seeing them as a problem to becoming an opportunity.”
Impact Investing has been around for a long time, most prominently since the 1960’s as companies and governments began engaging with the concept through private equity and debt investing in developing economies. Social impact investments first emerged in the UK around entrepreneurs such as Cohen during the early 2000s, with innovations like social impact bonds. He says that the reason for Impact’s great emergence now, though, is because of the growing awareness of climate change and human suffering reaching a breaking point. “The negative consequences of the economic system are becoming so huge now, in terms of the environment and also society, that they are just too big even for governments to be able to cope with them, and so I think people are understanding that our system has got to change by doing business differently and investing differently,” he says.
The term “impact investment” was coined in 2007 — an approach that deliberately builds intangible assets alongside tangible, financial ones.
“The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, clean technology, microfinance, and affordable and accessible basic services including housing, healthcare, and education.” –the Global Impact Investing Network
While The United Nations Conference on Trade and Development is predicting that foreign direct investment globally could drop by 30% to 40% from 2020-2021, others remain optimistic for the opportunities the pandemic entails. The Global Impact Investing Network (GIIN) projects that the sector faces significant opportunities for expansion and is poised for growth driven by increasing interest from for-profit and philanthropic impact investors.
According to its survey released this month, the impact investment market has reached $715 billion in 2019, with an estimate of about 1,720 organizations now involved in managing funds for those who want to make a financial return from investments that also have beneficial social or environmental outcomes.
“We definitely see continued growth in impact investing beyond what’s captured in the survey,” GIIN CEO Amit Bouri told Karma. “There’s an increasing interest from institutional investors in particular, but also high-net-worth individuals, private banks and a variety of other players who are thinking to make more impact investments than we’ve seen in the past couple of years.”
While analysing the sources of capital for impact investing in the past year, the report found that diversified financial institutions provide most capital but foundations are the fastest growing source, with an annual growth rate of 25%.
“It’s clear that more and more individuals are thinking about how their investment capital can play a role in creating a more inclusive and sustainable future for themselves [and] future generations,” Bouri says. This is also backed by other research findings, such as the International Finance Corporation (IFC) which noted that the impact investing market is “growing and maturing”. In its latest report, the private sector arm of the World Bank Group estimated that in 2019 between $505 billion and $3.5 trillion in assets “were invested for impact through a wide range of funds, assets, and institutions.”
Addressing global challenges will create tremendous economic value, according to Good Tech Lab. Estimates find that solutions for the UN’s Sustainable Development Goals (SDGs) represent a $12 trillion annual market and 380 million new jobs by 2030, while the removal of 1000 gigatons of CO2 from the atmosphere could create a $45 trillion net financial gain by 2050. “Business as usual is no longer an option,” they conclude.
In her reporting for Devex, Adva Saldinger explores whether COVID-19 is in fact a moment for growth in impact investing or a flight from risk: “Some see an opportunity for financial industry transformation and impact mainstreaming, while others worry that money may flee for what some investors perceive as safer investments.” Indeed there are concerns over liability risk during these volatile times, but experts and investors are quoted saying that the outbreak could be a turning point for global financial systems, and that specifically impact investors remain opportunistic, looking to see how they can deploy their capital despite the challenges. “I don’t know how long that will last, but so far I have not seen a complete door shut,” Meredith Shields, the Sorenson Impact Foundation’s director of impact investing told Devex.
Governments are expected to emerge from COVID with much greater debt and more social issues such as higher levels of unemployment and poverty. “How will they be able to deal with it if not through private investment?” Cohen asks. “They have to attract part of this $200 trillion investable money, and get companies to bring solutions rather than create problems. It could be that governments will mandate, as part of the recovery measures, that every company has to measure its social and environmental impact.” This will be the trigger to change everything, and will happen out of necessity, he believes, especially thanks to technology, which will also allow the most effective measurement of product impact.
Why Tech?
Technology is a rapidly developing area of the investment market, and unsurprisingly it is the fastest growing industry out there, expected to last that way in the years to come. Directing this booming sector of the economy, which is at the heart of almost everything we do and experience these days, to doing good while reaping profits is a win-win situation more investors are eyeing.
Tech best sub sectors include cloud computing, machine learning/A.I. and big data. Technology leads the pack of the top industries primarily because of its overlap with other thriving sub-industries such as transportation tech, fintech, and health tech. Here are some interesting numbers:
- At 44%, the tech sector soaks up nearly half of venture capital investment.
- Tech products and services command a high profit margin of 12.4%.
- Output in tech is set to increase from $356 billion in 2016 to $482 billion in 2026—a 135% increase.
- The Forecasted 2016 to 2026 job growth stands at 120%.
All this growth and power come with great responsibility. Enter Impact Tech. Now it’s a big world of impact and technology out there, so let’s start by putting terms in context:
- Tech for Good: companies or projects that are concessionary in nature, might make a big impact in local communities but might not make as much money as a VC would require from its investments.
- Responsible Tech: generally used for companies integrating environment, social and government factors (ESGs) and not necessarily creating a positive, direct impact.
- Impact Tech: the intentional use of technology and science to benefit people and the planet. When applied to the VC world, impact tech seeks both competitive financial and social/environmental returns. *Source: Good Tech Lab
“There are a host of exciting tech companies that are improving health, democratizing the political process, advancing education, alleviating poverty, and literally saving lives — and making money while they do it. These are going to be the most exciting companies in the coming decade.”
—Impact.tech
So naturally, by bringing on board the most thriving industry out there, the world of impact has much to look forward to by “doing well while doing good”.
“Today, technology is the water on which every ship sails,” according to Cohen. “You can’t have a business that doesn’t think in terms of technology anymore.” Impact is heading the same way, he believes, and tech brings with it great power to be able to solve social issues as an enabler and a driver of things at scale. “I see Tech for Good as one of the main drivers of the whole impact market.”
Still, some conservative views believe that if you major in sustainability you have to sacrifice something else on the other side, and do not connect between investing in social initiatives and making money. However, the impact investing strategy actually creates more value to both its stakeholders and shareholders: according to available data, consumers prefer purchasing products from a brand with a social purpose; employees are more likely to stay with their employer if they are strongly connected to its mission; and research shows a 30% increase in growth and productivity for companies with a sustainability strategy as part of their purpose and product.
“There’s a lot of market education to be done, so far institutional investors have it in their minds that if you’re making something that has an impact then you’re making less money and therefore if they invest in you they’re acting against their fiduciary duties and shouldn’t be allocating any capital to impact,” says Cecile Blilious, Head of Impact and Sustainability at Pitango Venture Capital. “It will change when we create more education, show the success stories, the exits, the financial returns, when we have role models of major funds who say ‘yes, we make these investments and our portfolio is actually successful and these companies are even more resilient and successful than others, particularly in times of challenges like COVID-19.”
Based on Pitchbook data, $2 billion have been invested in impact tech startups in 2019 alone — a 10X increase in the past 5 years — and the industry has been growing by 50% accordingly (as opposed to 20% growth of the traditional VC industry). There are around 200 Impact Tech VCs in the world, about a quarter are impact tech startups valued at $100 million or more.
Impact tech investors include Bridges Fund Managements, DBL, Accion, Elevar equity and Patamar, among others. Blackrock, the American global investment management corporation, has already allocated $200 billion to Impact investments, while giants such as Unilever and Nestle point at Impact as one of their central business growth avenues, backed by data and metrics. “During coronavirus times people are appreciating even more the possibility of investing in companies that are doing good and not just making money,” says Melina Sanchez Montanes, a recent MPA/MBA grad at Harvard Kennedy School and Dartmouth Tuck School of Business, who completed a research on the impact tech market around the world.
Montanes had mapped the trends which point towards the growth of the industry: from the millennial generation which will inherit around $30 trillion over the next decade in the US and are more aware to allocating funds to more sustainable companies; through women empowerment and their socially and environmentally consciousness to investing strategies (normally the proportion of women in finance is about 18-20% and in the impact world it’s 50-60%); to investors and corporates creating new products and prioritizing creating value for all stakeholders.
The generational point is worth lingering on. Like many trends across the globe, impact tech is being fueled by the young. According to a survey by Deloitte, 47% of millennials say that the “purpose of business is to ‘improve society/protect the environment,’” up 30% over the last two years. “Disappearing is the worldview popularized by Milton Friedman, where the sole purpose of business is maximizing shareholder value through profit. Put simply, the next generation entering the workforce will no longer be satisfied with single bottom-line companies.”
The younger generation began to express its preferences as consumers by deserting companies whose values they did not relate to. And in terms of employment, “they didn’t want to work for investment banks or fossil fuel companies,” Ronald Cohen says, “so it made investors aware of the potential dangers for the investments they were making, and then businesses became very much aware as well.”
A good example is the young firm Fifty Years, an entrepreneur-run early stage venture capital company based in San Francisco, which backs startups that aim to be both massively profitable and make a serious dent in achieving one of the SDGs. Their Impact.tech monthly event series brings together scientists, entrepreneurs and investors who all wish to use business as a force for good.
The SDGs, a series of 17 objectives created by the UN in collaboration with the public and private sector in order to achieve targets by 2030, from ending poverty and hunger to facing climate change and improving industrial innovation, are said to hold economic opportunities reaching over $12.3 trillion. A research by the Champions 12.3 coalition shows, for example, how every dollar invested in decreasing food waste yields 14 dollars, an obvious business profit.
It was these objectives in mind that, during the pandemic, the private market took social responsibility by addressing the needs of their stakeholders and not just their shareholders, according to Chen Shmilo, the managing director of 8200 Impact, a social accelerator in Israel born as an initiative of the alumni of the elite IDF intelligence unit 8200. “This wasn’t done just for public relations purposes, but rather as a result of the Z generation’s expectation of private entities to incorporate social responsibility into their business considerations,” he says. “This model has been proven to be effective and has even brought about better financial results. This demonstrated change in the way big corporates think and act will impact venture capitals as well. Therefore, I believe that more private money will find its way more easily to Impact tech investments.”
A Global Impact Tech Alliance
As the problems become more business critical and society critical, tech becomes one of the drivers to achieve the UN SDG roadmap targets. Out of the need to universally enlist tech to the cause, new ventures are forming to create one language under one impact tech umbrella. The Global Impact Tech Alliance (GITA), which was established coincidentally just before the pandemic broke by veteran impact-VC investors Leehe Skuler and Cecile Blilious, aims to share knowledge and connect the different actors of impact and tech around the world.
“Harnessing technological innovation to global challenges, especially those represented by the UN’s SDGs,” on the one hand, while maximizing both financial and social/environmental returns on the other, leverages both worlds, says Skuler, who leads GITA as its CEO.
What Skuler wants to see is a bridge of the existing gap between VC and mainstream impact investors in order to scale up Impact VC. Success, she says, will take place through growth and will be measured if the impact VC world investing in early stage technologies will grow from $1 billion to $50 billion in 2030.
Cecile Blilious and Leehe Skuler
GITA identifies four points of activities: 1. A large database that will offer a data-driven understanding of what needs to be done, 2. Standardized impact tech tools, how to evaluate a startup and their potential impact, 3. Training and education opportunities to be easily accessed by all impact tech entities, and 4. Getting the industry together through partnerships, events and cooperations.
According to GITA Chairperson Blilious, who has been impact investing for over 20 years, Pitango is the first fund in the world to adopt the methodologies of the SDGs into mainstream investing. “During the years I’ve been doing impact investing I’ve felt quite lonely and frustrated that there wasn’t enough information and a real community that spoke our language,” she says. “I believe that if we don’t get tech into SDGs right now we’ll never make it by 2030. Tech has a real power to address the global goals and to be able to make a huge difference in the ways we live our lives both on the social and the environmental side.”
During one of GITA’s latest webinars, researcher Montanes showed how FinTech, Healthcare and ClimateTech are currently the main impact tech sectors.
Some examples include American AgTech company AeroFarms, which does indoor vertical farming and is valued at $500M, focuses on reduction in carbon emissions and land usage, is backed by impact investors but also traditional ones such as Goldman Sachs and GSR ventures; Indian LEAD school, a seed EdTech startup trying to make education accessible to every child in India; Goodbag, a climateTech startup in the accelerator stage which uses reusable bags with a chip that encourages users to use them via a reward system; and Lulalend from South Africa which is a lending platform for SMEs.
According to her data, Montanes says impact tech VCs have yet to realize exits: around 100 startups have been acquired (and a few IPOs) with an aggregate value of around $90 billion (excluding $18 billion of Tesla’s IPO).
Israel, a hub for Impact Tech?
Israel has the highest number of startups per capita in the world, making it a potential global leader for positive impact via technology excellence.
“Israel’s ecosystem is unique for its tight links between the industry, entrepreneurs, investors, supportive acceleration institutions such as 8200 Impact, academy and governmental agencies such as the Israel Innovation Authority,” Shmilo of 8200 Impact says. The program, founded in 2013 by the top of Israel’s Cybersecurity professionals, has become the first acceleration program in Israel for social technology startups that aim to solve significant social problems through technology in a wide spectrum of fields. “Some of our alumni companies have managed to complete successful investment rounds with local VC’s that have decided to dive into this wonderful world of Impact tech investment,” Shmilo adds.
Recently there’s been an abundance of Israeli startup companies dealing with accessibility, sustainability, Edtech and AgeTech, he says. “Additionally, we’ve been approached in the past few weeks by VCs and investors from abroad that appreciate the vision and spirit of many Israeli entrepreneurs to do good by doing well. We hope to see the implications in the near future already.”
Israeli companies at the frontiers of technology and system entrepreneurship include the Bridges Israel-backed N-Drip which introduces an efficient drip irrigation system that addresses problems of food insecurity and water scarcity, and Kando’s wastewater management system enabling real-time pollution control and tracking; 8200 Impact program alumni Soapy Care, that develops a smart hygiene device to reduce the spread of diseases and has become extremely relevant in COVID times; and the AI for Good initiative: a collaborative effort of Microsoft and the TechForGood for-profit company supporting the further expansion of the impact tech ecosystem. The first of its kind program in Israel aims to provide resources and support to purpose-driven ventures to make an impact in environmental sustainability, accessibility, humanitarian action, cultural heritage and health via AI solutions. “I think that for the local ecosystem it’s a statement when a giant like Microsoft enters the for good sector. They did it first in the UK and are now focusing on Israel,” Boral says.
Experts believe Israel can be at the forefront of tech innovation and provide the answers to big socio-environmental issues. “If we harness the creative thinking, tech ingenuity and entrepreneurial prowess, Israel has the potential to become a global leader in creating social and environmental value through technology,” Boral writes. “This global economic recession might just be the opportunity to transform our biggest challenges into our greatest growth engines, which will be the driving forces out of the crisis and beyond.”
In his new book Impact: Reshaping Capitalism to Drive Real Change, to be released July 2nd, Cohen describes how impact investing is now setting a new normal in the investment world. “As big businesses begin to measure their impact, they begin to show it is fundamental to their future business models.” Furthermore, he predicts we are facing an actual revolution, one that takes time but will eventually disrupt every business model and will transform our lives forever.
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