Responsible investing: Going beyond philanthropy

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 31, 2017 - August 06, 2017.
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A social enterprise behind the creation of the first sign language dictionary in the world and another that aims to tackle global food security by helping smallholders have one thing in common. They are a new breed of business entities with unproven business models that would be out of the reach of much-needed philanthropic dollars if not for the emergence of impact investing.

Hong Kong-based family investment group Carlton Mansfield Capital is one of the firms that invest in this type of business. “There has been a major shift in the global investment landscape — everyone is looking to be more conscious of the type of investments they make and how they can be more sustainable. This played a part in the head office’s decision to explore philanthropy, either by way of a foundation or the next best thing, which is closer to actual investing, but with a focus on impact,” says executive director Durrie Hassan.

“Some of the earlier opportunities in China revolved around technology intersecting with the philanthropic sector. Setting up a foundation for the head office has always been a long-term goal, so that prompted the decision to set up the impact investment division. The division helps diversify our portfolio and naturally, this allows us to assess different exciting opportunities.

“This further enables businesses and social enterprises that are conscious about the work they are doing. Also, I figured that it was a better way to deploy our capital.”

Impact investing has evolved from being a subset of socially responsible investing and environmental, social and governance (ESG) investing, where the strategies go beyond avoiding sin stocks to focusing on positive outcomes for the environment or community. By combining traditional grant-making approaches and leveraging the power of markets, impact investing is an alternative to philanthropists who reject the notion that there is a binary choice between investing for profit and giving money to a social cause.

This can be seen in the Global Impact Investing Network’s (GIIN) latest data. According to GIIN’s Annual Impact Investor Survey 2017, released in May, the 205 respondents invested some US$22.1 billion in nearly 8,000 impact investments last year and plan to increase the capital invested by 17% to US$25.9 billion this year. The report says 208 respondents currently manage US$114 billion worth of impact investing assets.

Supported by the momentum impact investing has built in a few short years, there was no difficulty initialising the impact division for the firm, says Durrie. Carlton Mansfield is a medium-sized family office with investments in the greater China region.

“My primary work for the past two years has been to develop the firm’s venture philanthropy and impact investment division,” says Durrie. Through this arm, he has focused on investing in scalable companies that promote environmental sustainability, education and social inclusion in Asia-Pacific and Southeast Asia.

Prior to joining Carlton Mansfield in Hong Kong, Durrie worked in project management in Malaysia. It was during this time that he became a part of the Global Shapers Community, a volunteer-led organisation under the World Economic Forum. It was through the Global Shapers Community that he discovered companies like Agrea and ShuR, where he serves as a board member.

Agrea is a social enterprise working out of Marinduque, an island province in the Philippines. The company aims to help eradicate poverty among the farming and fishing communities, alleviate the effects of climate change and establish food security in the Philippines.

“The reason why we choose to invest in Agrea is because in Southeast Asia, there are a lot of crop growing economies and as the world’s population grows, it is something that we need to be aware of and find solutions to how we can continue farming in a sustainable manner,” says Durrie.

Tokyo-headquartered ShuR Co is a Skype-based sign language interpreting business. The company created the world’s first online sign language dictionary called SLinto.

“This is a company where we see the intersection between technology and social inclusion. ShuR has developed a kind of Wikipedia for Japanese sign language users. The idea behind it was when a new spoken word comes out, such as Tesla or Samsung Galaxy, there is no official sign yet. So, this platform allows sign language users to crowdsource or submit what they think the sign should be. Then, the community agrees on the signs. With this, they can develop the sign language,” says Durrie.

“The company also developed the first sign language keyboard, using a regular keyboard layout but with each key corresponding to different components of sign language. It is a model that I think can be scalable in any other country with its own unique sign language.”

Carlton Mansfield has also invested in the BSD Code and Design Academy based in Hong Kong. At its core, it is a coding academy that works primarily with school children. They teach science, technology, engineering and mathematics (or STEM) using an interdisciplinary and applied approach.

“The academy operates in Hong Kong, Bangkok and the US. In the US, it found that its syllabus resonates well with children on the autism spectrum as well as those with learning difficulties. So, that is something we are looking at in terms of education and social inclusion,” says Durrie.

These companies are financially sustainable and have developed a track record over the last two years. The most important things to look at before making an investment in such companies is the founders, their teams and their culture, says Durrie.

“We generally spend a lot of time understanding how they operate because their ideas and products may be great, but without the right founder or team to execute them, such companies have a very short lifespan. So, the investment decision is primarily driven by understanding the founders and their passion,” he says.

“I discovered this type of investments through the World Economic Forum. Through my volunteer work and by travelling for the Global Shapers Community, I met these founders. I find platforms such a great tool to identify young people who are working on some amazing things.”

Durrie says while market-rate returns are achievable in impact investing, investors should bear in mind the returns may vary depending on the nature of the investment. “In every investment, you will need to do your due diligence to estimate the financial return and have an understanding of what the product is, what the services are and what scale the company is at. You will have to assess these if you are going to invest X amount in the company. Is the company going to enter new markets, hire a bigger team or get more clients?

“The due diligence from the financial side of things remains the same for every investment. However, when it comes to impact investing, the capital tends to be more patient and flexible, meaning that investors are aware that it will take a longer time to see returns and at a bare minimum, the return could be the just return of your initial investment.

“The financial returns will not purely match those of traditional financial investments. So, if you are getting a return of about three to five times, that is already pretty good. It is also because you lump in the measure of social or environmental impact when you do your initial analysis.”

Durrie stresses that impact investors must look at the social impact of the business and how the company can be scaled. He says there are many frameworks and tools that could help aspiring impact investors determine what works best for them.

He recommends getting in touch with the impact investing community, which he says are more than happy to share their experiences. “Be open when considering the different measurement objectives for the phases of your investment cycle, particularly in the post-investment stages of monitoring and evaluating the impact. Some investors focus on the expected double or triple bottom-line return while others may focus heavily on systemic change. These two outlooks require different approaches

“It is a very exciting exercise. You learn a lot and you can actually see how capital helps people in so many different ways. That is usually what you use to define and validate the impact that you are achieving.”

Carlton Mansfield is currently doing the groundwork for investments in ocean conservation and plastic waste management. Apart from direct investments in Agrea, ShuR and BSD Code and Design Academy, the firm has invested part of its 20% impact allocation in global ESG funds.

“We dedicated 20% of our total investments to impact investing as we are still in the pilot stage of deciding whether this is something we want to fully develop and commit more capital to. Other capital has been channelled to thematic investing,” says Durrie.

“We look at anything that has strong ESG issues, so it ranges from companies that include diversity in their appointments to a strong supply chain that is sustainable. Also, we look at companies that are energy-efficient or vary their carbon footprint. They range from being super sustainable to trying to be sustainable. For any systemic change to happen, you must support anyone who is trying to get into that.”

He says the firm’s foray into impact investing faced no difficulties, but the challenge came from having to develop a scalable and impactful approach to the portfolio. “Our due diligence showed that we could do both. There was a significant number of compelling opportunities that warranted the work we do now to generate positive impact and financial returns. I think that individuals and firms would do more to create positive impact if the right opportunities and approaches were available.”

While Durrie believes that impact investing serves as a way to help cash-strapped social enterprises with much needed capital, it does not negate the need for philanthropic capital. “I acknowledge that pure philanthropic measures should be applied when needed. The very act of impact investing imparts not only capital but also business advice that helps create financially sustainable social enterprises. This generates activities and outputs that increase employment, skill development and, ultimately, systemic impact,” he says.

“I believe that both approaches have to exist as there are constituents that can only be reached with traditional philanthropy. The charity ecosystem needs to be developed further because there is a significant overlap in efforts and too much competition for grants or donations. Having said that, I think the development of impact investments will help catalyse change in the charity sector.”