FM471 Sustainable Finance & Impact Investing

Greg Fischer
LT 2022
A bit about me

• Practitioner
‒ 10 years private equity transaction experience
‒ Chief Economist at Y Analytics (TPG/Rise Fund)
‒ Currently: Partner & Director, Sustainable Investing & Social Impact, BCG

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‒ Serve on various boards related to impact & impact measurement
• Academic
‒ MIT PhD in Economics under Esther Duflo & Abhijit Banerjee (2019 Nobel
Laureates in Economics); Princeton undergrad under Angus Deaton (2015
Nobel Laureate in Economics)
‒ Former Asst Professor in LSE Economics Department
‒ Research focused on credibly measuring impact
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This course will help you answer the following questions

• How do different investors & businesses think about investment &

impact?
• How do you think about investment & impact?
• How can/should/must we measure impact?

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• What is the difference between impact and ESG?
• What are the range of private market approaches to impact? How
do these interact with public markets? With policy?
• How can you make an impact?

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Course structure

• Frontier topic
‒ Academic work in this area is nascent
‒ Readings will be drawn largely from contemporary practice
• What I expect from you

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‒ Prepare concise answers to case work (“PREPARE”)
‒ Read and be prepared to discuss “READ” items
‒ Participate in class discussions
‒ Supplemental material is there if you want to dig deeper

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Assessment

• Class participation (10%), HW (30%), & In-class Assignment (60%)

held in either LT W11 or ST W1
• Class participation will depend on both attendance (either in-
person or on-line) and active participation during both lecture and

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case discussion, facilitated by cold calls
• The homework grade for Part II will reflect an equal-weight of the
case write-ups, which will be done in groups
‒ Groups will be randomly assigned within each section

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The Big Picture

1. Introduction: Origins, definitions & the case for impact

2. Impact investing, measurement and ESG reporting
3. Private market strategies

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4. Climate investing and carbon markets
5. Managing impact
+ Blended finance, SIBs & alternative impact structures or
Philanthropy, public policy, DFIs, other agents of impact
+ Careers in ESG & sustainable finance

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The Big Picture

1. Introduction: Origins, definitions & the case for impact

2. Impact investing, measurement and ESG reporting
3. Private market strategies

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4. Climate investing and carbon markets
5. Managing impact
+ Blended finance, SIBs & alternative impact structures or
Philanthropy, public policy, DFIs, other agents of impact
+ Careers in ESG & sustainable finance

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Today’s Key Concepts & Questions

• Revisit: What is the purpose of the corporation?

• What is the history of sustainable finance & impact investing?
• What is impact investing? What is impact?

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• How can firms & investors have an impact?
• Financial Inclusion at Omidyar Network

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Shareholder Stakeholder
CapitaliSm CapitaliSm
Recent History of Responsible Investing

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Source: International Finance Corporation, (2019) “Creating Impact: The Promise of Impact Investing”

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The global market for sustainable investing continues
to grow rapidly
Assets Under Management

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Source: Global Sustainable Investment Review 2020

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… although definitions and data remain a challenge

$2,281B

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$352B $715B
$286B

GSIR GIIN IFC

2020 2020 2020
Source: Global Sustainable Investment Review 2020, GIIN Annual Investor Survey 2020., IFC The Global Impact Investing
Market 2020

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The impact investing market is very fragmented

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Source: GIIN Annual Investor Survey 2020

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And concerned with a wide range of issues
What matters most to thematic and impact investors?
(%)

Climate change 72 23 95
Water solutions 57 23 80
Plastic waste reduction 36 34 70
Circular economy 47 23 70

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Gender diversity 44 23 67
Education 43 24 67
Health and nutrition 41 25 66
Community development 46 19 65
Multicultural diversity 25 29 54
Faith-Based values 15 19 34

Yes No, But under consideration

Source: Morgan Stanley Asset Owner Survey 2020

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Impact investing field in undergoing a transformation

Large institutions (e.g., DFIs) Boutique impact investing firms Commercial Private Equity firms

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Impact funds focus on companies at various states of
growth

Incubation/seed Early stage (Series A–C) Growth stage Buyout and later stage

• Idea stage; impact area • Proof of concept done; • Proven business model with • Fully operational
Description identified; limited proof of critical need to develop clear growth path and plan, company, proven societal

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concept business model in proven solution to drive impact
• Very small investments to alignment with impact measureable impact • Large investments to fund
develop prototype & goals • Medium to large growth and operational
enable launch • Small to medium investments to accelerate optimization
investments to fund growth and scaling—up— • Impact KPIs optimization
commercialization—e.g., e.g., securing market share and mitigation of
establish positive cash via new sustainable potential negative
flows products externalities

Example
Players

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IFC: Impact investors have three observable attributes

• Intent to achieve social and/or environmental goals through

investment
• Credible narrative for how investment makes contribution to goals
• Have system of measurement linking intent & contribution to

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improvements in social & environmental outcomes

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IFC’s Operating Principles for Impact Management

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There are other definition of impact investing

• The Global Impact Investing Network defines 4 key criteria:

‒ Intentionality
‒ Use evidence in investment design
‒ Manage impact performance

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‒ Contribute to the growth of the industry
• Paul Brest: “Actively placing capital in enterprises that generate social or
environmental goods, services, or ancillary benefits (such as creating jobs),
with expected financial returns ranging from the highly concessionary to
above market”
• Rockefeller Foundation: “Investments made with the intention to generate
measurable social impact alongside a financial return”

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One view of the impact spectrum

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Source: Rockefeller Foundation. “Impact Investing: An Introduction”

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 Why do these definitions start with intent?

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 What do you think characterizes an impact investor?

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 How can a firm have a social or environmental impact?

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One view: The IMP describes 3 ways firms can have an
impact

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 How can investors have an impact?

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Investor contribution

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 An alternative view:

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Every investment is an impact investment. Whether positive, negative
or neutral, every investment has an impact.

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The Impact-Weighted Accounts Initiative

• Aims to create accounting statements that transparently capture

external impacts in a way that drives investor & managerial
decisions

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“Taking 3000 companies and measuring environmental impact in dollar
terms: 450 companies create more damage in a year than they create profit
and 1000 of these companies create damage equivalent to one quarter or
more of their annual profit. Together, they create $4 trillion of damage in a
single year. Most importantly as investors, a correlation has already emerged
between companies that pollute more, and lower stock market valuations.”
– Sir Ronald Cohen

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Three dimensions of potential impact

• Enterprise impact
‒ Products & services
‒ Own operations
• Investment impact: cost and availability of capital

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• Nonmonetary impact
‒ Improving the enabling environment ‒ Technical & governance assistance
‒ Finding positive impact opportunities ‒ Expanding investor base
‒ Aggregating capital & invest services ‒ Securing enterprise’s social mission

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The counterfactual is central to understanding impact

• The counterfactual represents what would have happened if a

particularly investment or activity had not occurred
• Impact is the difference between what actually happened and this
counterfactual

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• But even when you know what you want, finding a good
counterfactual can be challenging
• Often, it can be equally challenging to know (or agree on) what you
want to find*

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What is a “credible narrative” for impact contribution?

• What is contribution vs. attribution?

‒ Warning: this is another area with terminology turf wars
• Generally, contribution measures all results that have taken place
and to which an investor contributed

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• Attribution attempts to measure just the outcomes/impact that can
be reasonably linked to an investor’s own activities

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