The Challenge of Impact Investing

Karoline Hansen
Apr 24, 2019 · 4 min read

A reoccurring challenge in impact investing from a financier’s perspective is to form a consortium of like-minded co-financiers to finance impact businesses. As many financial parties prefer not to, cannot or are not allowed to finance companies or projects by themselves, other financial players are needed to join them in co-financing impact.

Yet it is often difficult to find a financial party who is able to finance on the same terms and conditions. This is frequently the case, for example, because one financier will measure risk differently from another one, causing misalignment. Another important question that arises is: Is there a need to sacrifice some market rate of return in order to make real impact?.

Therefore, it is important to create more transparency. There needs to be a common understanding of the investment focus of each financier as well as how risk is measured. One way to initiate this transparency is by bringing together the different parties in a nexus where two-way conversations and open discussions can happen.

On March 6, Circle Economy hosted together with PDENH, ABN AMRO, Pymwymic, SHIFT Invest, SET Ventures, and Social Impact Ventures, the event “Co-Financing Our Future”: the first event of its kind to bring together key financial players to discuss impact investing, share knowledge around the topic, and build meaningful connections towards co-financing impact.

ABN Amro’s Circular Building, Circl

KEY INSIGHTS BELOW:

On Quantifying Impact:

The ultimate objective for quantifying impact is to have a standardised way of measuring impact that becomes the new status quo for new investments. However, the workshop highlighted the need, and much room, for growth and alignment on impact measurement. One of financiers present was already liaising with accountants to sign off on impact measurement. Yet, most participants came with no experience.

On Forming a Consortium:

Currently, when forming a consortium of financiers, it is organised in a reactive way. That is to say, a prospect company is the one contacting the financier and only then will it be considered how to finance and who best to join. Rather the goal should be that financiers become proactive. They should already know which other investors are like-minded and able to finance on equal terms and conditions.

On Circular Business Models:

One popular model is the Product-as-a-Service where the relationship between the producer and customer is transformed into customers effectively becoming business partners. Customers no longer pay for ownership, but rather for the benefits of a service. The producer has a strong interest in educating suppliers and customers alike, to ensure that materials and equipment are handled efficiently and are returned to the producer. The customer relationship becomes the story of co-creating a circular world.

One of the main challenges that come with this business model is to understand that instead of having a one-off revenue, you have monthly instalments. It is difficult for banks to finance this new and innovative model because it requires a different way of risk assessment and loan structuring. It requires a change in mindset.

Changing Contexts

Young people joining companies today are questioning the status quo and increasingly demanding change and transparency from the business world. There is more and more pressure on companies to merge financial and non-financial reporting into one cohesive and holistic account, and to report on the real costs of doing business.

Investors’ behaviour is also changing. They are increasingly starting to demand full disclosure on all information surrounding the projects they are considering investing in. In order to enable decision-making, they are looking to understand not only the economical benefits they stand to gain, but also the social and environmental benefits involved. Often times, they want to invest into something they believe in; something they identify with.

Circular Business Models Workshop

It is exciting to see where all this takes us! The next edition of “Co-financing our Future” will be scheduled in fall 2019. Are you an impact investor and do you want to be sure not too miss the next event or are you interested in other activities of the Circle Economy Finance Program, please fill out this form. Let’s cofinance impact!

Thanks to PDENH and ABN AMRO in making this event possible.

Karoline Hansen

Written by

Circle Economy

Circle Economy’s official blog.

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