Impact Investment — How to think about impact and financial values?

Paul Lam
Paul Lam
Aug 8, 2017 · 6 min read

The world of innovation is warming up, but in the meantime, the old way of coordinating and managing our economies is also fading out. Ronald Coase once explains in his famous publication — ‘The Nature of the Firm’ that the existence of markets (invisible hand) and firms (visible hand) are two different institutional arrangements with its advantages to coordinate economic activities and direct resource allocation at the least transaction costs and the most efficiently. However, when information becomes more transparent and efficient due to the proliferation of technology and its application, transaction costs become much lower which makes the choices of an institutional arrangement different and less visible. In fact, disintermediation, decentralization, automation, shared economy, etc. are increasingly challenging our status-quo (since industrial revolution) understanding of how economic activities are organized.

However, the change in economic productions and institutional structure will also modify the distribution of benefits and create new winners and losers. The first industrial revolution has created new social classes and accelerates bi-polarizations which led to revolutions and planted the seeds for world-destructive wars. It has prompted leaders to reflect and embrace the responsibilities of the government owe to the people who are left behind and contributed to the postwar-welfarism — the first time when education and public health provision is deemed as a responsibility of government. It has also led to different regional cooperation (later the European Integration) as a way to overhaul the division.

The world is decoupling once again. In the midst of automation and platform economy, millions of drivers and workers are facing potential job losses permanently. In the meantime, people without access to digital/data skills, enough capital and relevant social network are facing a tough time to participate in the new economy, let alone benefit from it. While we are using ApplePay, Facebook and other apps which significantly increase our productivity and quality of livelihood, there are still billions of people have little or no access to basic internet infrastructure in the developing world. Facebook and MasterCard Foundation, for example, are increasingly eyeing on the opportunities in Africa to improve internet access and financial inclusion. These corporates are not only doing well, but they are also aiming to do good. The motives are way beyond purely Corporate Social Responsibility (CSR), but also to tap into the huge market potential.

While corporates and entrepreneurs are practicing CSRs and social entrepreneurship as a way to expanding their reach to new markets or as a way to disrupt and innovate, where do investors stand?Can we balance the equation of making impacts while delivering financial returns? Impact investments are very popular today and have become the new buzzword. But many people find it confusing. It is easily mixed up with philanthropy, socially responsible investments (SRI), charities, etc. They all look similar but are indeed different — just like monkeys are different from chimpanzees, baboons, apes, gorillas…


It was a great pleasure to share some thoughts at Japan Society around impact investments with top executives from great enterprises like Mitsubishi, PWC, Nomura and etc.

Sharing about impact investment at Japan Society in Mitsubishi’s London HQ

Impact investments are not only doing good; it’s also doing well. How can we conceptualize and synthesize impact into the conventional financial analysis?

  • Revisit the financial statement — wages, expenses, taxes are all items that we treat as a cash outflow (reducing the value of the company). However, where do those cash and value go? If we take a wider perspective, we will see those outflows are cash flow to workers, other value-adding services and public services. These are values not captured outside of the company which creates economic value. When a company sells a product at a discount, it does not reduce the use value of the product or service it sells to the user, but it leaves more ‘consumer surplus’ to the users rather than monetizing it as revenues.
  • Revisit the valuation and broaden the definition of return — investment decisions should be made when it has a positive net present value (financial) or when the financial return is higher than the costs of capital (or internal required return rates). Many projects may have a lower financial return than the cost of capital, but its economic return, when wages/expenses/taxes are added back to the calculation will yield a higher return that means the project has a positive economic value. One might rightly be sceptical about economic valuation because the project will still have a negative financial value which is ultimately what the shareholders care…
  • Create Economic Value first, financial value is how you slice the cake later — one who only focuses on financial value will miss the big picture of value creation and the high circularity between economic values and shareholder returns. When companies contribute taxes and investing in R&Ds, it will build up the capacity of the economy and the increasing productivity will not only benefit the company directly but also the wider economy that forms a positive circularity. If all businesses pay little to its worker, the disposable income of workers will reduce and ultimately affect the demands and total revenues the company can charge for the products. In such circumstances, the company will increasingly think in the shoes of ‘all stakeholders’ (more like a government) as it becomes bigger in size and face such dilemma. The proposals of ‘high-net-worth tax’ and ‘technology tax’ are most advocated by not anyone else but Warren Buffet and Bill Gates for a reason. We should not undermine their good deeds, but equally, we should recognize that the economic motivation behind the taxes: the benefits of avoiding social turmoil and anger against ultra-high-net worth individuals and technology due to job replacements will significantly outweigh the increase in the tax bills. Tax expenses, as a short term cash outflow, will ensure the long term economic value is protected and will ultimately protect the long term financial value.

Impact investments should:

  1. Embrace the circularity — better customers, better operations, better governance, better employees, better sustainability
  2. Create value for all stakeholders — Monetization reasonably and sustainably
  3. Sees what other people don’t see — disrupt and solve real problems, generate financial returns by creating real economic values, not only by financial engineering or exploiting balance sheet inefficiencies
  4. Long term vision
  5. Diversification and stabilization of the overall investment portfolio
  6. Require some Design-thinking, Be bold and stakeholder focused
  7. Be a deliberate, informed and ex-ante decision made instead of an excuse or way to rationalize poor business performances

If you want the copy for the full presentation please send a message to paulhylam@cantab.net

Paul Lam

Written by

Paul Lam

G20 Global Young Changer | Fellow of Royal Society of Arts | Entrepreneur | Impact Investor

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