The Crux of Impact Investing

“I want to do something with purpose” has been heard frequently over the past three years. What does it mean to build a “purpose driven startup”? Hasn’t this often been empty talk, and the word “purpose” itself, degenerated into an unbearable buzzword? Let’s go on a journey through time and space to search for answers to these questions.

Let’s start with a very practical day-to-day example: The purpose of insurance is to protect people from risks that could have serious consequences for them. Thanks to competition in the market, we buy insurance at good terms. No sensible person would want to drive without car insurance, therefore car insurance has an important “purpose” for the user, and one is very grateful to the insurance company and therefore basically to every employee of the insurance company. But the prototypical Berlin hipster, who likes to take the elevator to the fifth floor to the gym, thinks that this is “not purpose driven enough”. He is looking for more. Okay. And his buddy has just founded an impact fund, which is even better, “because you can scale yourself there”. Okay. And if we start looking here now, we find that impact funds are not only for young hipsters on the move, but also private equity grandees who, after decades of 100% focus on shareholder value maximization, have mutated into saints and are now flying by private jet to Davos to discuss climate change with Greta. EUR 500 billion have already been invested in impact funds. ESG is the flavor of the time and certainly often (or in most cases?) misused as a marketing formula to attract capital.

So much for one side of the story. Yet the other side is certainly also the fact that much of our planet is not in balance and that change is accelerating in many areas. “ESG” is also a matter that we venture capital investors have to address (see what btov does here).

Some say: Every investment is an impact investment, because capital is a resource/energy which enables or generates effects. Others say: In the scientific literature there is quite a lot of agreement about what impact investing is. When asked, Dr. Peter Wuffli, Chairman of the elea Foundation, commented:

“Three criteria must be met:

1. intentionality: there must be the intention of a social/environmental objective. Random effect is not enough. Telecom companies like Vodafone, for example, are not impact investments, although they have an incredible impact.

2. additionality: an impact investment must make a difference to normal commercial investments. For example, wind farms are “normal” infrastructure investments despite their positive impact of promoting renewable energy, because they would be made even without the “impact label”.

3. measurability: the impact must be clearly defined and measurable (e.g. based on the 17 UN sustainability goals).”

What is intentionality, and isn’t that thin ice? Peter Wuffli refers to the ethics of intentionality with the counter-question whether we do not owe this to Kant. We now are thrown back to the epoch of enlightenment.

Anyone who thinks this through to the end will probably come to the conclusion that “philanthropic investing” is probably how many would like to interpret the term “impact investing”, but then get muddled up. Philanthropic investment is urgently needed where there is not yet a functioning market for companies and investors. The elea Foundation has been showing how this works for 15 years (just some days ago Vanina Farber and Peter Wuffli have published “The elea Way — A Learning Journey Toward Sustainable Impact“ if you are interested in deepening this thoughts).

This is a thin line, because SDG №1, namely fighting poverty, is achieved above all when there are as many profitable companies as possible. And that means that shareholder value cannot be demonized — quite the contrary. In Africa, too, you may have profitable companies without women in top management positions but putting gender equality in top management at first priority while not caring about profitability is likely to kill the business in the long run and hence create no value to anyone. Having said that — startups founded by women are more likely to become successful then the ones founded only by man. But this is another story…

That leaves the buzzword battle over “hands-on investing”, “value-add investor” and, in the case of impact investing, now also “capacity building”. These terms all mean the same thing. What is hidden behind them is probably always well intentioned, but can often destroy value. There are many investors who stand in the way of entrepreneurs. It may therefore be that “total hands-off” by investors is better than “hands-on”. And yes, experienced investors can help with contacts and know-how — this happens too.

To sum up the long story? Peter Wuffli is right from our point of view and because three fingers are pointed at us when we point to someone else, we are all challenged — also, and perhaps especially, in the small everyday things. And it would probably suit us all to be moderate — in all directions. For example, if someone talks about the “sin of tobacco” in ESG discussions, we wish them a wonderful evening with friends, good food, excellent wine, and possibly that person will enjoy a good cigar if he or she likes. We will not end in hell if we savor here and there. And it may save us from becoming hypocrites too.

And while we are on the subject of “doing it yourself”: Let’s test ourselves while shopping. The btov startup “Armed Angels” has implemented the following action in November: You as a buyer can choose between a 30% discount or save a piece of rainforest. End of the trip into the past. And now let’s do and be the future.