Everybody wins

PORTFOLIO POINT: Impact investing, where investors combine profit with altruistic purpose, is a burgeoning asset class.

The desires to make money and make the world a better place would seem, at first glance, to be mutually exclusive. But there’s really no reason why you can’t do both at the same time.

This is the so-called “blended value” wrought through what is sometimes called impact investing, one of the new investment trends gaining traction by filling the pages of business journals and MBA coursework across Europe and America.

Impact investing – also known by the names triple-bottom-line investing, social investing or profit-with-purpose – is not about avoiding companies that do “bad” things, as with many ethical investment funds; nor is it about corporate social responsibility (CSR), where companies will attempt to offset their sins through charitable distributions or internal policies.

Instead, impact investing is about seeking out the companies that are contributing to the solution, not the problem, and investing in them via debt and equity. Over the past few years, many investors have found innovative ways to do this and provide tangible, profitable solutions to challenges such as climate change, poverty, crime, inequality and disease.

Ultimately providing solutions to problems is what business and capitalism is all about and for this reason I believe that impact investing is one of the safest, fundamentally sound and sustainable strategies around. In a world full of problems, finding solutions, not hiding in ersatz safe-havens such as gold, is the best approach.

Source: JP Morgan, Rockefeller Foundation

Unsurprisingly, the most fertile fields for impact investing are in emerging markets, particularly at what development economists term the bottom of the pyramid: the world’s poorest billion people. This gives additional scope for risk – poor places tend to encounter more geopolitical and economic uncertainties than rich ones – but, thanks to the GFC, emerging and frontier markets have also been some of the most profitable over the past decade. What’s more, many of these markets are close and accessible to Australia.

I recently wrote about two of these markets – India and Indonesia (see Asia’s other giants) – and my argument, that these countries will need additional infrastructure and thus face an investment boom, is very much in line with the solution-oriented philosophy of impact investing.

But it certainly doesn’t end at India or Indonesia.

Venture funds such as Leopard Capital and Sarona Asset Management have achieved strong performance off the beaten track in markets such as Cambodia, Bangladesh, Laos and Sri Lanka. Niche investments in areas such as microfinance and microinsurance have also provided sustainable returns for charities such as Opportunity International Australia (see Under the radar: Microfinance) and Leapfrog Investments.

Global asset managers are cottoning on, too. Beyond charitable bodies such as the Rockefeller Foundation and the Gates Foundation, major financial institutions such as Morgan Stanley and Prudential have significant presence in the space. Consultancies and investment banks such as Citigroup, Deutsche Bank and McKinsey are also active in providing services and access to capital.

Within Australia the sector is a lot smaller, with domestic impact capital at a fraction of what it is in similarly-sized European nations, but this is expected to change. Like the Netherlands, a particularly strong impact investing hub, Australia’s pensions sector has a number of prominent not-for-profit organisations at the helm – in our case the trade and credit unions – and the financial services industry as a whole has made a number of precursory moves into the impact investing.

A recent seminar hosted by the National Australia Bank (NAB) floated the idea of a fused “fourth sector” (a combination of the second sector – business – with the third sector – charity) but Australia is still at early stages of the impact evolution already seen elsewhere. According to a JP Morgan survey on recent impact investments, there were no such deals taking place in Australia despite it having the world's fourth-largest investment market.

Source: JP Morgan, Rockefeller Foundation

But some tentative moves have nonetheless been made.

Outside the otherwise established ethical investment space – which negatively screens stocks for CSR, rather than positively screens them for impact – Social Ventures Australia is a prominent Australian impact investor, albeit one with a not-for-profit remit and a relatively narrow focus on eight Australian charities. Headed by former Macquarie banker Michael Traill and former Colonial First State boss Chris Cuffe, Social Ventures could herald the launch of similar funds.

Australia’s other obvious impact investors are its emerging pool of green energy funds. While increasingly pigeon-holed into an asset class of their own, clean and environmental venture funds are impact investors insofar as they are seeking to combine financial returns with a social good. In a similar vein, several healthcare technology funds and startups can be considered impact investments due to their aim to deliver better human as well as capital returns.

The line between impact investing and any business that has a social good (which most businesses do, in a sense) is an important issue in this emerging asset class. Legislators in the United States are attempting to define the boundaries through the resurrection of the non-state benefit corporation, now more commonly known in the industry as 'B Corporations’. These types of companies, many of which are offered tax breaks among other inducements, differ from other socially conscious businesses in what they set out to do in their company charter and how they are quantitatively evaluated for impact.

The failure of impact investing to take hold in Australia can be partly attributed to our lack of any similar legal structure, plus the tax office’s problematic ownership of the classification for tax-exempt status (which often means not-for-profit becomes non-profit). Most of all, however, the lack of a universally accepted impact reporting standard means serious fund managers will usually find it easier to just negatively screen companies (where measures like carbon emissions are more quantifiable) than to positively screen for impact.

With the Deloitte and PricewaterhouseCoopers-backed Impact Reporting and Investment Standards project and other initiatives in train, however, this is forecast to change in the near future. And as impact moves from a niche sector generally concerned with things such as microfinance institutions, social housing projects and green energy start-ups to a much broader asset class, the opportunities for retail and wholesale investment are forecast to expand significantly.

Considering the newness of the sector and the dearth of official information on impact investment, I’ve attempted to compile a very subjective list of Australian stocks that may fit the criteria as impact fund managers or impact investments themselves. The list includes companies that require further evaluation and analysis, but at a broad level, these are all non-blue-chip entities that I believe set out to make the world a better place, have an edge over larger commercial or government rivals and are immediately available for investment on the ASX.

You may not agree with my list, and any such judgement is of course based on a very individual set of values, but I’ve tried to ask myself where I’d get most impact for dollar and whether an investment in these companies was not only ethical, liquid and commercial, but could make the world a better place.

-Impact fund managers in Australia
Name	ASX	Impact	Cap (m)	Price	Average target	Change 1 year
Acrux Limited	ACR	Treatments for hormonal deficiencies	$572	$3.44	$3.87	109.81%
Bionomics Limited	BNO	Cancer/nervous system treatments	$196	$0.62		95.24%
Biota Holdings Limited	BTA	Influenza anti-virals	$218	$1.20	$1.82	-9.77%
CBD Energy Limited	CBD	Renewable energy and storage	$73	$0.16	$0.20	23.08%
Cardno Limited	CDD	International development services	$600	$5.62	$6.75	41.97%
Ceramic Fuel Cells	CFU	Innovative solid fuel cell technology	$132	$0.11		-41.57%
Clover Corporation	CLV	Functional foods and infant nutrition	$49	$0.30		13.46%
Carbon Energy Limited	CNX	Underground coal gasification	$217	$0.31	$0.39	-26.19%
Coffey International	COF	International development services	$88	$0.66	$1.00	-46.31%
CVC Limited	CVC	Investor in renewables	$114	$0.89		14.10%
Carnegie Wave Energy	CWE	Renewable wave energy	$94	$0.11		10.00%
ChemGenex Pharma	CXS	Cancer treatments	$216	$0.69	$0.62	86.49%
Dyesol Limited	DYE	Dye solar sell products	$91	$0.63	$1.60	-49.60%
Energy Developments	ENE	Renewable and low emission energy	$409	$2.61	$3.84	3.57%
Geodynamics Limited	GDY	Geothermal energy	$94	$0.28	$1.10	-50.00%
Hunter Hall International	HHL	Investor in ethical companies	$148	$5.65	$5.17	-8.45%
HeartWare International	HIN	Treatments for advanced heart failure	$92	$1.90	$3.36	11.11%
Hexima Limited	HXL	Biotech focussed on crop yields	$28	$0.35		20.69%
Infigen Energy	IFN	International wind energy assets	$305	$0.40	$0.60	-55.06%
ImpediMed Limited	IPD	Bioimpedance technologies	$103	$0.66	$1.05	-1.49%
Nanosonics Limited	NAN	Disinfection and sterilisation products	$191	$0.84	$1.35	51.35%
Prana Biotechnology	PBT	Treatments for brain degeneration	$57	$0.21		27.27%
Pacific Energy Limited	PEA	Hyydrolectric and biofuel assets	$156	$0.45	$0.54	42.86%
Prima BioMed Limited	PRR	Cancer immunotherapy/immunology	$267	$0.33	$0.62	120.00%
Pharmaxis Ltd	PXS	Therapies for respiratory diseases	$662	$2.90	$3.75	-6.45%
QRxPharma Limited	QRX	Treatments for pain management	$237	$1.89	$2.59	61.11%
Sunshine Heart, Inc	SHC	Treatments for moderate heart failure	$52	$0.05		45.72%
Silex Systems Limited	SLX	Solar PV panels	$665	$3.91	$8.86	-32.35%
Starpharma Holdings	SPL	Microbicides for STDs	$320	$1.30	$1.90	107.20%
Sirtex Medical Limited	SRX	Treatments for liver cancer	$306	$5.49		6.40%
Tissue Therapies Ltd	TIS	Technology for wounds, tissue repair	$73	$0.49	$0.69	172.94%
Universal Biosensors	UBI	In vitro diagnostic test devices	$207	$1.30	$2.53	-16.13%
Unilife Corporation	UNS	Retractable syringe technology	$213	$0.78		-37.85%
Wasabi Energy Limited	WAS	Renewable and low emission energy	$64	$0.03		81.25%

Further, this list is not an exhaustive one, nor is it likely to remain the same for very long, but it is a start. We will endeavour to cover some of these companies in more detail and inform you of other impact investments – public and private – as we find them. I have previously covered two – Sirtex Medical (see Health sector's sleeper) and Hexima Limited (see Food for thought). If you know of any yourself please send us an email.

The opportunity for the marriage of profit and purpose is a powerful one and one that could help solve many of Australia’s and the world’s social and environmental problems. As with any asset class – or indeed any marriage – there will be ups and downs and also controversies, as we have seen already with several microfinance lenders in India that have found the balance of profit and principle problematic, but the upside, as they say, is greater than the downside.

After all, by doing well by doing good, you not only have an intrinsically more sustainable investment strategy, but you could help make the world a better place.