Written by Kate Tsoi
As part of the “Dream Impact Turns 3” Anniversary Event on November 13th, Dream Impact hosted two panels on impact investment with a group of seasoned impact investors and impact ecosystem veterans in Hong Kong. We have summarized some key takeaways from both panel discussions below, courtesy of our speakers.
Approaching impact investments – key questions to consider
Impact investments for social enterprises highlight the importance of recoverable capital versus typical grants which are irredeemable. The expectation of repayment fosters accountability and commitment to scale, so that the capital can be recycled to support other emerging businesses. As a social enterprise, how do you decide which type of capital, or form of repayment, is appropriate for your business? Debby Fan, Director at Social Impact Partners, suggests this is where you will need a solid business plan, including a roadmap on how to scale, and the financial and non-financial (such as human capital and technology build) resources you would require to “get there”. For example, if your business is likely to ramp up and break even within a few years, accessing loan capital may be preferred; however if you anticipate a much longer incubation period, then you might consider raising equity capital.
How do impact investors conduct due diligence?
Early-stage due diligence questions from impact investors tend to be more human-oriented – who is the founder? What are the motivations behind launching the business, and what is the business solving for? As the due diligence process advances, investors will dig deeper into the components of the supply chain such as pricing, reliability and quality of product supply, any digitalization in place, and the size of the target market/beneficiaries served. The entire due diligence process could be quite vigorous, as it not only encompasses the evaluation of portfolio companies and financial returns, but also understanding how the founder(s) think of impact, their impact goals and commitment to generating positive environmental and social outcomes.
Are impact measurement frameworks and impact metrics necessary?
Michael Au, Managing Director of District Capital, acknowledges that it could be daunting to adopt an impact measurement framework or report impact metrics when you are a lean startup already working day and night to raise funds and build your business. Instead of seeing it as “extra work”, an impact framework can help you articulate your startup story, the theory of change, and better understand where you sit within the impact matrix. For startups that are looking at impact measurement for the first time, Jo Chan, Investor Relations at AngelHub, and other panelists tell us it can be as simple as..
- Determining your top 3 “impact KPIs”, and the next 3 impact goals you want to achieve. These will help guide your strategy and anticipate upcoming challenges;
- Identifying the Sustainable Development Goals (SDGs) that are relevant to your business, and how you are shaping your future plans to achieve such goals; or
- Applying impact measurement frameworks that are readily available and widely used globally on a high level, such as IRIS metrics and the IMP.
Leading the way: how impact investors are influencing the rest
There is often skepticism surrounding the returns of impact investments – how do we convince traditional investors that impact investing is “worth their money”? Katy Yung, Managing Director of Sustainable Finance Initiative (SFi) says, “Show them the returns!” Unlike a decade ago when impact investing might be relatively unproven, there are now an increasing number of impact PE shops and fixed income funds who have been able to meet the same level of market returns while being impactful. These firms are leading the way to help mainstream investors understand that one does not have to forgo financial performance to achieve environmental and social good. In fact, Leonie Kelly-Farley, Head of ESG and Impact Advisory at Ogier, pointed out how the current state of COVID-19 has also proved that there is financial value in resilience – ESG can serve as a powerful non-financial dataset to help investors evaluate their investments, and highlight the hidden risks behind companies that do not consider ESG factors and the broader impact to their people and supply chains.
The role and importance of impact ecosystems
The impact investment ecosystem includes five primary segments: the supply, demand and intermediaries of impact capital, government and regulatory bodies, as well as other ecosystem providers such as research houses and advisory firms. All of them are striving towards creating a sustainable economy, whether in the form of investments across asset classes, advising or implementing ESG strategies, or advocacy and policy making. As we start to see a larger pipeline of startups in Hong Kong, Andre Kwok, Founder of Good City Foundation, believes that ecosystems play a critical role in supporting these startups and identifying the important and necessary ones to help achieve scale. Andy Ann, Co-founder of GoImpact, concurs by pointing out the importance of bridging impact investors looking for deal flows and entrepreneurs seeking additional capital. This is done not only by channeling impact investments, but also mobilizing “expansive capital” and creating shared value such as industry networks, shared property and operational capacity building. In particular, governments and universities have a role to play in nurturing the next wave of talent that are well-versed in ESG and sustainability, who can carry with them diversified skillsets to drive greater impact at the management levels of all corporates and businesses.
Bringing it all together…what’s next?
Today’s society calls for more “impact individuals” to take action. While each individual can have a different definition of what “impact” and “good growth” means, rather than having to harmonize what these terminologies entail and what the metrics are, perhaps it is more important to focus on the solutions and actions. “For purpose” may become the common language of the impact investment ecosystem and the broader sustainable economy in the future, where companies would no longer be defined as for-profit or non-profit, but only “for purpose” and “non-purpose”. On the other hand, as global wealth gradually shifts into the hands of the more impact-minded younger generation, people are putting money in where their beliefs are, impact and non-impact investors alike. Moving forward towards a decade of collaboration, Francis Ngai, Founder & CEO of SVhk reminds us of “less talk, more action.” It is time for us to start questioning the purpose of our businesses and capital, and the impact we’d each like to make as part of the ecosystem.
Where are you in the impact matrix?
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