IMPACT INVESTING: BACK TO THE ORIGINS OF INVESTING
“How would you like to earn money and make tangible improvements to society at the same time? This is exactly what impact investing offers to investors”, explains Bertrand Gacon, who heads the Impact Investing team at Lombard Odier.
Financing the real economy
Investments with a strong social impact do not always find favour with investors and projects that are most beneficial to society are not always viable investments. The aim of impact investing is to combine these two aspects, to the benefit of both society and investors.
“Impact investing is based on a whole new philosophy that, in short, consists of investing to intentionally bring about a beneficial social impact while seeking solid returns,” explains Bertrand, emphasising that this is not about philanthropy, “because these are financial investments, and therefore we must generate returns.” While philanthropy involves donating money to good causes, impact investing uses economic mechanisms to generate lasting social benefits. “This means two things – an impact investing solution must generate financial returns, and it must fit into a portfolio in terms of diversification, risk management processes and transparency.”
In a way, this approach takes us back to the original purpose of finance, Bertrand believes: to advance the development of society by providing funds for projects that can improve it. “And as with all projects that change the world in profound ways, and all investments made in concrete projects, we must be patient; investments of this type are always more or less long term.”
A two-fold requirement
Aware of the potential of impact investing to harness innovation and power social reform, professionals are working to build their expertise in this area. “For projects such as these in which economic models are reinvented, Lombard Odier brings several innovations that we use as a basis for research and development and to explore the future of impact investing,” says Bertrand.
Investors need to proceed in the same way as they would for conventional investments – in other words to “meet the fund manager, analyse their investment process, identify the risks and understand the companies in their portfolio by visiting them if need be. The sole difference is that the social impact is also assessed. This to ensure that the social impact, as claimed, is real and measurable, applying the same degree of rigour as we use for the financial aspects,” notes Bertrand.
Microfinance – a priority sector
Microfinance is one of the most accessible sectors for impact investing. “This is because it is the oldest, and therefore has the longest track record,” Bertrand explains.
“It also provides a major boost to entrepreneurial activities, ensuring financial inclusion. It mainly consists of providing banking services that allow micro entrepreneurs to fund their businesses. This is an excellent way of making a positive impact on society,” says Guillaume Bonnel, Fund Manager for Lombard Odier.
“Microfinance is a perfect illustration of the objectives behind impact investing,” adds Bertrand. “The idea is not only to create new economic models that are both profitable and have a strong social impact, but also to grow them to become fully-fledged industries. In Azerbaijan, Kazakhstan or Peru, microfinance has become an essential part of the financial sector, sometimes serving more clients than conventional commercial banks. Globally, microfinance is now organised as a distinct economic sector in which a whole host of specialist providers have emerged – microfinance rating agencies, brokers, financial data providers and many other occupations that meet market needs.”
Creating opportunities that have positive knock-on effects is precisely what impact investing aims to do, Bertrand argues. “For example, in Uganda, there is a company that leases solar panels. Just remember that without this, when night falls, everything grinds to a halt. So with this equipment, hospitals, schools and businesses can continue to run. Rural electrification, which is made possible through microfinance, promotes social development at several levels in areas that are crucial and interconnected, such as education, health, the economy etc. The ultimate success here is to ensure that businesses and finance are part of the solution rather than part of the problem.”
* Lombard Odier’s Impact Investment products might not be available in all jurisdictions and/or to all categories of clients.
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