Proven Financial Instruments And Strategies Beyond ESG

JP Dallmann

CEO, ILA & Partners



Investors are always looking for new opportunities where to allocate their funds across the spectrum of capital. This is in most cases a sophisticated process that includes strategies and many stages to evaluate potential instruments to reach a decision that requires investment management capabilities at several levels.  It is normally a challenging ask from a traditional perspective, but when looking at it from a Sustainable & Impact Investing prism it becomes even more challenging to find opportunities as an investor. This goes hand in hand with the difficulty to find role models for best practices as Investment Managers, in order to launch attractive and impactful products that will attract the right value-aligned investors.

In order to help the transition of capital into Sustainable & Impact Investing (S&II), there is a real need to learn more about such best practices, so we democratize impact faster and at scale.

The good news is that there are some proven financial instruments and strategies that could inspire investors and managers to replicate or create their own solutions. 

Grants are a mechanism searched for and used by many companies and entities to finance their projects. It is a challenging process that begins with trying to find the best fit that can take you into a journey of endless application forms and submissions, hiring service providers, and several stages that can ideally open a world of possibilities. Unfortunately, some may say that it has some benefits, but many more may argue that it is a short term solution to fund long term problems. This is where it is good to know about organizations that are solving for such critique. One such organisation leading the way is Co-Impact. They offer grants between $10-25 million over 10 years that go towards proven solutions that are backed by strong evidence and long track records.

Silvia Bastante de Unverhau, Co-Impact’s head of philanthropy, highlights the importance of larger, longer-term and less restrictive grants to shift organizations beyond a cycle of continuous fundraising for small philanthropic gifts. She says this can “enable systemic change” and help non-profits to plan effectively for the future.

We need to look at this type of example to understand the mechanism we can use to replicate such Approach.

Venture Philanthropy & Convertible Equity

Venture impact philanthropy investing has been in the news in the last years, mainly as a new approach by investors in the United States. That said, in Europe there are organizations deploying capital at this leave for over a decade. One of the difficulties at this level is that of assigning valuations to early-stage social ventures. Some philanthropic impact investors are using convertible equity to enable them to become a partner with aligned interests with social ventures. Rather than creating complications by overvaluing and undervaluing a social venture during its early years, convertibles allow social enterprises to focus on executing their business models.

One such organization is the elea Foundation for Ethics in globalization. Their CFO, Adrian Ackeret, explains how they can assist with strategy and once the business gains traction, professional investors can help establish a valuation of the social enterprise during the Series A or Series B. This model allows this type of investors to become long-term partners with such social ventures.

Investors Collaboration & The “Missing Middle” 

At the next level in the spectrum, we come across what experts refer to as the “missing middle”, which is beyond microfinance (and venture philanthropy) but below where local banks would be interested to finance. This is a key area where investors can demonstrate the additionality of their investments. It is a critical point for companies with proven models that are looking to scale, likely to be using technology to grow and serve larger numbers of customers and locations, which find it difficult to access private capital. Luckily, there are organisations that have been developing financial instruments, products and solutions to support companies at this level.

One such organisation is Bamboo Capital Partners, the Luxembourg based Impact Private Equity Investment Firm. Managing partner Florian Kemmerich explains that the firm’s “flexible” strategy allows them to take the lead on various early stage investment rounds, typically taking between 20-40% ownership and obtaining a board seat. This strategy also enables them to work collaboratively with management and crowd-in other investors and local asset managers. 

Environmental, Social & Governance (ESG) and Greenwashing 

One key point that remains at the top of the considerations when raising and receiving financial investments from impact investors is how to attract capital, as well as how to overcome hurdles to raising money for innovative solutions to tackle social and environmental challenges, beyond ESG. So understanding investors and what they are looking for is critical. 

At the same time, there is also a real urgency to deliver the United Nations Sustainable Development Goals (SDGs) by 2030, while there are concerns over the large inflows to ESG funds, particularly during 2020 and now in 2021, in regards to potential Greenwashing & Swashing – one of the latest terms in relation to Social Greenwashing in particular.

Community And Collaboration Are key 

One common theme across all these strategies and beyond, is how collective and collaborative approaches can help scale and drive transformative change and speed up the rate of change. We could further suggest that the inclusion of end-clients and local communities is also an essential element in the impact investing process that should not be overlooked, where a “bottom-up” approach to match the investor-led fund strategies is fundamental.

Transparency & Reporting 

Finally, we need the right level of transparency on impact management and measurement, including the challenges to formulating the right frameworks and deciding on tools and third party providers, a vital issue that will be covered in future articles.

There is a A ray of hope

Expect more to come following these encouraging examples. 

For more insights into Impact Venture Philanthropy and Private Equity, you can listen to my interview with Vanina Farber and the Founder of the elea foundation, Peter Wuffli, and separately with Florian Kemmerich on the IMPACT LEADERS podcast.

This article belongs to Forbes.com, you can find the original article here