Impact deep dive 1
Welcome to our special Christmas newsletter series!🎄Every Sunday this month, we’ll share the insights we collected during the 4 masterclasses from our April Impact Deep Dive.
💭 This is more than just sharing content; it's about giving you access to groundbreaking perspectives that can shape the way we understand and contribute to the impact sector.
A big thank you to our amazing team who organised the entire Impact Deep-Dive series back in April and gathered all insights into this special newsletter! 💛 Quentin Renaud, Amicie Favre, Ghita Benjelloun Benkacem, Rebecca Ravenni, Clément Favre, Clara Wat, Anaïs Roussel and Justine Pelisson.
State of the art: Today,
Impact Investing: 10/12,
Responsible Entrepreneurs: 17/12,
Regulations and Next steps: Christmas day
🌱 The state of the art
Define Impact and explore differences and synergies between CSR, Impact-native, ESG, Positive Future… Well, you name it! ✨
Impact. What does that mean in practice? Everyone has their own take on what impact means, so we will try to understand how it all connects. This opening session aims to level out the field and ask industry experts about their focus, the principles they rely on, and the targets they set. It will be a unique opportunity to get insights you have never heard.
Enjoy the read! 🌞
Presentation of our guests
Victor Mora is the Investments director at 50 Partners Impact - a singular model as it is both an accelerator and a fund. While mainly driven by the SDGs, they have refined their investment thesis over time and learned to assist impact startups through their own challenges in the best way. Victor has been the cornerstone of the model’s success. In short, 50 Partners Impact is committed to supporting entrepreneurs who are using innovative business models to address some of the world's most pressing social and environmental challenges - for instance, Each One, Tom & Josette and Aktio.
Grégoire Cousté is the executive director of the Forum for Responsible Investment (FIR) and a key player in the development of responsible investment in France. FIR is a French association created in 2001 that brings together investors and investment professionals committed to promoting responsible investments. Its mission is to promote responsible management of financial assets by integrating environmental, social, and governance (ESG) issues into investment decisions.
Carole Cazassus is the investment Director at Inco Ventures, a group that was created about ten years ago and includes three activities: a training activity for people far from employment, an incubation activity for startups with social and/or environmental impact, and a venture capital activity that invests in startups with a significant social/environmental impact (Phénix, Lita, Each One).
Together, they will share their visions of responsible investment and explain how investors can have a positive impact on society and the environment.
How to define impact and how to implement it?
📜 Definition
Victor and Carole agreed on the definition of impact: It is aligning the actors to perform financially and in terms of social and environmental indicators. The impact part of businesses is inherent to their business model (how it is built; its structure creates impact) → Entrepreneurs should not have to choose between creating financial value and having a positive environmental and social impact.
❓Example: At Inco, they financed an ed-tech company that creates language training dedicated to refugees → Everything is created for the beneficiaries so the impact is easy to understand.
It is difficult to compare the magnitude of the impact and to create a unique framework to define it because there are many ways to have an impact:
Reduce carbon emissions
Reduce waste
Include minorities…
💡 To understand better the impact, it is best to start from the pain, to try to identify the scale of the issue and whether it is a relevant one. And then understand the solution and the strategy along the way.
For Grégoire, the core definition of impact is based on 3 pillars :
Intentionality (ie, whether the impact is deliberate)
Additionality (ie, an impact that would have not occurred without additional resources or capital otherwise)
Measurement (ie, the commitment to measure and report real impact indicators)
When using this definition, it is complicated to implement it for listed companies because you can’t be sure about additionality since those companies have a lot of different shareholders.
⚖ How to quantify impact?
Carole: During the due diligence, they check various aspects of the company and, at the same time, assess the company's impact. The company has a 15-point framework, 3 of which are ESG points. They use this framework to analyse effectiveness, efficiency, additionality, and so on. They assign scores to the various points, which helps them make the final investment decision and draw up a business plan attached to the shareholders' agreement.
They have impact KPIs for each company, but they can sometimes aggregate them at the fund level which is very interesting for their Limited Partners (LPs) because they can sell the fact that X number of jobs are created and X number of tons of CO2 are saved by investing in the fund.
🔉 How about the listed world?
Grégoire: Responsible investment is different for listed companies. They used to work with ESG but problems have emerged: an average of the criteria could be taken into account and companies could have a global positive note.
❓ Example: With good social and governance indicators, companies could be destroying the environment and because of the average, still have a global positive note.
Another way to measure impact for listed companies is about double materiality: companies look at the impact of the portfolio financially but also socially and environmentally.
💡 It is important that the remuneration of the executive or the asset manager is based not only on financial performance but also social and environmental performance.
🎨 What is the difference between ESG and impact?
Victor: It is 2 different perspectives and strategies.
Impact businesses depend on the purpose of the company → they are trying to solve an environmental/social issue.
Other businesses using ESG are doing “Business as usual” and implementing strategies to do “Business good” regarding the supply chain, governance, employees’ happiness…
💡 It all depends on the purpose of the company. Impact companies tend to solve big social/environmental issues.
❓ Example: Renault is a company that has for purpose to help people get around. They are selling goods that are not saving people’s lives directly
🎯 Impact trends in emerging countries VS Europe
Carole: Emerging countries face problems such as a lack of financing options, unlike Europe. Also, the types of problems to be solved are not the same.
❓ Example for financing a fintech solution:
In Africa, they are tackling the impact of creating financial services (bank accounts, etc.), in a country where these services are not compulsory and sometimes don't even exist.
In France, the problem is not the same because everyone has access to a bank account; it's compulsory. Inco has invested in Lita, for example, to make it easier for impact businesses to raise funds (a type of additional financing solution for entrepreneurs) and to give more people access to private equity (new types of financial products).
Companies and good practices
🤑 Do companies with good practices have more profits and a better return on investment?
Grégoire: For listed companies, academic research shows that there is at least the same performance between responsible funds and nonresponsible funds. Taking into account ESG and sustainability can sometimes help outperform.
💡 In the long term, they are convinced that by investing responsibly funds have better performance because companies are better prepared for the future and there is a better mitigation of risks.
In the listed equity world, the way you evaluate a company, and the way you manage the portfolio is quite different but there is a revolution that is taking place, especially with the double materiality; companies are seeking more impact but it is still not their first purpose.
👋 How to encourage companies to follow good practices?
Carole: Through a direct approach, a place on the board of the company is a way to encourage good practices. They use this strategic position with their voting right → to VETO any decision that may change the impact course of the startup. They help the company to stay focused on its impact and to help them make the right choices for the business.
Through an indirect approach, they mentor the entrepreneurs on the ESG approach (the way they hire people, the gender gap, the carbon print, …).
💰 Is it easier for impact startups to raise funds?
Victor: It depends on the size of the market addressed by the startup; if you take a social impact startup with a low market size, not all investors will go into this kind of company. Instead, they are likely to look for other topics that are more in demand like reducing carbon footprint or energy savings where the market is more favorable.
💡 The new revolution will be an impact one and all entrepreneurs will have to tackle these issues.
💶 Is it possible to have extra-financial criteria to value a company?
Victor: For early-stage companies, the implementation of extra-financial strategies can have a direct impact on valuation, as capacity and resilience are the result. Implementing an ESG/impact strategy reduces the risks on the business model and has an impact on valuation.
💡It is very important for entrepreneurs to implement extra-financial criteria
How about regulations?
🚥 What is the status of the initiatives that are emerging?
Grégoire: Many initiatives that are emerging are complementary:
“Climate action 100+”: an initiative targeting companies that are very intense in terms of carbon to engage with them
“Net 0 alliance”: a climate-focused initiative aimed at a wide range of investment players (asset owner, asset manager, provider…)
“PRI”: an international initiative created to recognize the Principles for Responsible investment
Other initiatives are biodiversity-oriented
All the initiatives are important, it is necessary to think holistically, not just environmentally but also socially. The limit today is that there are so many that even the big asset owners can't participate in all these initiatives, so there's a problem of convergence in the future.
💡 Initiatives have become the norm and it is mandatory for certain asset owners to participate in some of them.
🌄 A more and more complex landscape of regulations
Grégoire: It's a good thing that Europe wanted to regulate processes and clarify the offers to build a green taxonomy. But at the same time, it's a nightmare for many players. They have a lot of work to do, particularly in terms of compliance, and some of the regulations are not precise enough (article 9). Most players would like to put this behind them and tackle the real issues (climate change, biodiversity, responsible driving, etc.).
💡 There is still a big effort at the European level to clarify the regulations
🌗 Thoughts about Greenwashing
Carole: Greenwashing results from the fact that the market is very dynamic when it comes to ESG/impact, it's a hot topic → the more greenwashing there is → the more it will show that we will have more and more responsible financial products.
In recent times, numerous regulations have been introduced to prevent 'greenwashing'. Management teams are required to disclose a great deal of data and carry out important administrative tasks. This means more work, but it's good news that there are regulations on sustainable financial services; it shows that retail investors are demanding them, which creates a very dynamic environment.
Additional thoughts:
👨🦲 What is the LP perspective about impact?
Victor: Impact investing is young, it arrived in Europe 20 years ago, and they are in the first generation of impact funds. From the point of view of the private investor, there are different types of LPs:
Impact first
Performance first
Sometimes they want both
It depends on the fund's strategy and the decision-making process of each fund. It can be about proving that it's possible to have an average rate of return while having an impact, or putting impact first. At 50 partners, they allow the LPs to participate in the selection process and assess the impact. In particular, the LPs decide on the carried interest (the bonuses that go to the management team) based on the impact performance to align the interests of the management team and the investment.
Carole: INCO's LPs are involved in the selection process. They choose the impacts to be addressed by the fund. They could be more diversified, but they have criteria for certain types of impact that they must address. For example, well-being at work is not a priority in their selection of impacts.
💪 How to act at an individual scale to have an impact?
Grégoire: Stay involved! There's sometimes a lot of bad news on different issues, but not fighting for things like biodiversity or climate change is pointless. We may be disappointed by the government, or other decision-making bodies, but we have to keep fighting, even on an individual level, it's very important.
Carole: Get involved, Get involved. Today, we can be overwhelmed by news and events. We need to find something we enjoy (saving money and investing it in a sustainable product, getting involved in an NGO...) and move forward little by little, we don't need to do every part of our lives properly. We're lucky today to have different tools (applications, etc.) that make it easier for us to do something and make a big impact.
💡 DO YOUR BEST !
That’s it for now!
💸 Next week: Impact Investing
See you next week to talk more about the specifics of Impact Investing in which we’ll mention topics like:
Key metrics and criteria to assess the impact with the challenges these involve,
Navigating the need for external impact metrics to report at different levels and the unique impact goals of each investment,
More about the relationship with LPs and the different ways to finance impact,
Compliance and risks mitigation