Why Impact Investing is Great News for Renewables.Over the past decade, social impact investors have provided solar energy solutions

Why Impact Investing is Great News for Renewables

From the Vatican to Goldman Sachs, more and more investors are joining the trend towards deploying capital in socially and environmentally responsible ways.

 

Over the past decade, social impact investors and entrepreneurs have provided solar energy solutions to people at the base of the economic pyramid and generated financial returns on par with conventional investments.

 

 

August 12, 2016

By Nick Chronias

renewables

In July, global wind and solar company Mainstream Renewable Power closed a $117.5 million equity financing package as part of its funding commitment to Lekela Power — a $1.9 billion joint venture between Mainstream and private equity manager Actis that will build 1.3 GW of solar and wind power capacity across Africa over the next three years.

 

We worked on Mainstream's equity deal as the private placement agency, securing commitments from a high quality group of institutional investors.

There was strong interest for this deal among such investors, and it is not a one-off: there is a rapidly growing trend among investors towards making sure their investments carry not just financial returns, but also have a positive social and environmental impact.

 

Impact investing, as it is known, is a growing sector and is already responsible for more than $109 billion in assets in 2014, according to the Global Sustainable Investment Alliance. These assets range from equity stakes in real assets such as renewable energy power plants through to loans for emerging market businesses, as well as investments in social enterprises in developed economies.

 

More recently, the Global Impact Investing Network's (GIIN) annual survey of those working in the sector this year spoke to 156 fund managers responsible for $74 billion of impact investments. The survey found that fund managers planned to raise nearly double the amount of money for impact investments this year: from $6.7 billion of funds raised in 2015 to a target of $12.4 billion in 2016.

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Meanwhile, major financial players like Blackrock and Goldman Sachs have reportedly ramped up their impact investing offerings in response to client demand. Even the Catholic Church is getting in on the act: last month the Vatican hosted its second impact investing conference, following an inaugural event in 2014 that was launched by Pope Francis himself.

 

 

So why is there such momentum behind impact investing?

 

 

Firstly, it is important to understand what ‘impact’ is, and what it is not.

 

What Is Impact Investing?

 

Philanthropy is as old as capitalism itself, but while some impact investors may accept lower than market rates of return or offer "patient" capital that is available for longer than the typical 5-10 year terms of traditional private equity, impact investing is not charity.

 

These are competitive investments with competitive levels of returns: the Wharton Social Impact Initiative claims that the pooled internal rate of return (IRR) of 170 impact investments made by private equity funds was 12.9 percent.

 

Impact investing is also not just another phrase to describe the broad criteria used to classify investments as either meeting environmental and social governance (ESG) or being socially responsible investing (SRI): for example, products that avoid investing in tobacco companies or weapons manufacturers.

 

Rather, impact investing means backing ventures and projects that intrinsically have a positive social or environmental outcome as part of their business models. Indeed, the term impact investing was first used by the Rockefeller Foundation a decade ago to refer to market-based solutions to social problems.

Reflecting these origins, the majority of impact investments to date have tended to focus on investments with positive social outcomes.

 

 

However, following the COP21 Climate Change agreement in Paris last year, more and more investors are turning their attention towards putting their money into initiatives and technologies than can help prevent the increase in the earth’s temperature from exceeding more than two degrees Celsius above pre-industrial times.

 

According to GIIN’s 2016 survey, when respondents targeted environmental impact themes, the most popular theme was renewable energy, with 47 percent.

 

This was closely followed by energy efficiency on 42 percent, and clean energy on 39 percent.

 

 

Why Is Impact Investing Growing?

 

We are still at the beginnings of the impact investing movement. To date, the anchor investors in this space have predominantly been high net-worth families or government funded development finance institutions (DFIs).

 

However, where these trendsetters have gone before, the broader investment community is now starting to follow.

 

This is partly due to the impact investing sector now building up a reasonable flow of data on just how these investments perform, making more fund managers and banks inclined to look into them.

 

 

But it is also due to the changing attitudes of the investors themselves. In a recent interview with the Financial Times, US Trust investment strategist Jackie VanderBrug claimed that 58 percent of baby boomers say that social and environmental impact is important, while “93 percent of millennials will say that.”

 

With the millennial generation set to experience the biggest transfer of wealth ever in history — $30 trillion — impact investing may well become THE growth financial sector of this century.

 

 

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Impact investment

 

Addressing social and environmental challenges, while generating a balanced return

 

Triodos Investment Management is a globally recognised leader in impact investing. We manage direct investments on behalf of private and institutional investors, ranging from sustainable energy infrastructure to microfinance institutions.

 

 

We take a 100% positive approach to the money our customers invest with us. We use it only to finance organisations working to build a sustainable future for individuals, the community and the environment.

 

Responding to society’s greatest challenges

 

We are convinced that financial solutions are crucial to successfully addressing many of today’s greatest challenges, in the areas of climate change, access to finance, and sustainable development in general.

 

We have developed financial solutions that contribute to finding solutions to these challenges while generating balanced financial returns.

 

 

Understanding the market

 

Our 20 years of success in impact investing has been built upon our in-depth market and sector knowledge and our highly developed understanding of the role of finance in society.

 

Leading in transparency

 

We offer transparency on the projects and companies we invest in, taking the view that our investors are entitled to understand exactly how their money is working for a higher quality of life, and how the return on their money is generated.

Find our more about our approach to impact investment:

Energy and Climate

Triodos Investment Management has over 20 years' experience of investing in renewable energy. This makes us the partner of choice for many investors and renewable energy entrepreneurs.

Our investment approach

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Reducing Energy Poverty Not only For Solar And Impact Investors

July 25th, 2016 by Sponsored Content

 

By Ned Tozun

 

 

One day, a friend of Bala Suleman, who lived near Kano, Nigeria, was raving to him about a new portable solar light he’d started using. Suleman, a chicken farmer, was skeptical but open to learning more about his friend’s new acquisition.

 

“When I saw the way it was constructed and the quality of the plastic, I was completely convinced of the great value it can bring and bought two lamps straightaway for my stall,” Suleman recalled.

 

With his new solar-powered d.light lamps, the output of Suleman’s chicken farm grew by 30 percent. The light scared away predators and allowed him to feed his chickens in the evening. He was able to produce 15 more eggs a week from the same flock.

 

 

Suleman is one of the 2.3 billion people living around the world in energy poverty, who lack access to reliable electricity or live off the grid completely. Of this population, over half spend about $27 billion annually on mobile phone charging and lighting with kerosene, candles, flashlights, or other fossil fuel-powered technologies.

 

India-Studying-by-Kerosene-1

Burning kerosene to light homes and businesses has serious drawbacks. Breathing kerosene fumes is equivalent to smoking two packs of cigarettes a day. Structural fires and severe burns are common, resulting in fatalities 13 percent of the time. Meanwhile, kerosene fuel costs 40 times what the average American pays for energy, making it a significant hindrance to economic advancement for individuals and communities.

 

 

Studies from India indicate that electrification, from anything from solar lighting to microgrids, increases incomes up to 38 percent and literacy rates as much as 74 percent. As the burden of high kerosene costs are removed and families have access to reliable energy, significant economic potential is being unlocked globally. Yet we’ve only begun to enable this growing market.

 

Over the past decade, social impact investors and entrepreneurs have provided solar energy solutions to people at the base of the economic pyramid and generated financial returns on par with conventional investments. But, for the vision of economic development in emerging markets to be fully realized, the industry needs more conventional funds and large investors to finance companies improving energy access in emerging markets.

 

 

This is why Catholic Relief Services and the Pontifical Council for Justice and Peace highlighted the significant impact solar solutions have made around the world its recent Vatican II Social Impact Investing Conference. The Vatican is interested in how lifting developing world families up the energy access ladder can tap into their under-realized economic potential. The answer needn’t be complicated or expensive; access to energy can begin with one small, low-cost solar-powered task light.

 

India-Studying-by-d.light_

 

The widespread adoption of mobile phones in Africa in the mid-1990s provides an apt analogy. Mobile phones didn’t take off until telephone providers developed inexpensive handsets and operators began selling airtime in smaller, more affordable units. once products matched their needs and budget, people throughout the continent adopted mobile phones, bypassing centralized infrastructure and opening up new opportunities for communication, business, and trade.

 

Today, solar products are doing the same with energy access. As of mid-2015, over 13 million brand-quality portable solar lights had been sold worldwide, budding into a $300 million market.

 

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Social Impact: Real Markets, Real Returns

 

The market of off-grid families and businesses is ripe for opportunity. In this space, businesses and investors can make strong returns and have a tremendous impact on the quality of life and economic futures of individuals, villages, and entire countries.

 

In its Impact Investing Benchmark research, Cambridge Associates and GIIN found that fully realized and closed impact investment funds outperformed their conventional peer group by 10 percentage points. Later funds that were not yet fully realized also showed returns on par with conventional investment strategies.

 

The University of Pennsylvania Wharton Social Impact Initiative found that impact investing private equity funds (both realized and unrealized) yielded approximately a 13 percent return between 2000 and 2014. When the social or environmental mission of the company persisted after the investment exit, returns were comparable with non-mission-aligned exits.

 

These and other studies are debunking the myth that strong financial returns and social impact are incompatible. Investors with financial returns as their guiding principle no longer need to wait for real examples of international social-benefit companies that are scaling successfully and providing commercial-level returns. The evidence is clear and continues to mount.

 

As the market grows exponentially, more working capital from traditional funds is needed to provide greater numbers of people with energy and economic opportunity. Historically, sizable investments in energy have funded centralized infrastructure like government-backed grid expansion. However, in today’s emerging markets, the most efficient and scalable model is decentralized energy delivery. Small, individualized solutions are more affordable and empower families to control their own energy usage.

 

Many solar energy businesses are leading the way with cutting-edge technology and comprehensive distribution networks, and millions of families in developing countries are poised to adopt these new, truly life-changing solutions. But the industry needs more institutional investors to provide working capital to take advantage of the rapidly approaching inflection point.

 

The story of Bala Sulman and his chicken farm is just one of many entrepreneurial stories in the developing world, where a few solar lamps significantly improve the bottom line. Imagine the economic prosperity that could be realized if more people in Suleman’s village or the surrounding community made the same transition. Growing numbers of successful entrepreneurs can burgeon into a small business sector, raising untold numbers of households out of poverty and into greater economic mobility.

 

Investments in off-grid energy today will have a ripple effect for generations to come, delivering returns to investors and collectively improving macro-economies. The opportunity is at hand to power the arrival of these markets onto the global stage. Keep up to date with d.light on Twitter and Facebook.

 

[This post has been generously supported by d.light.]

 

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ABOUT GIIN

The Global Impact Investing Network is a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing around the world.

 

Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors' specific objectives.

 

The GIIN builds critical infrastructure and supports activities, education, and research that help accelerate the development of a coherent impact investing industry.

 

The GIIN is registered as a 501(c)3 organization.

 

Read about our Values and Guiding Principles.