How Impactful is Impact Investing?

[Music] thank you so much uh for that kind introduction and you're quite right we have the most incredible panel here today and a reasonably short period of time in which we can unpack impact investing um so as his Excellency said you can see that through the global impact investing Network there's roughly one and a half trillion invested in things that brand themselves as impact how does that compare more broadly to ESG well ESG as a market is somewhere north of 30 trillion so it's still really quite a small segment what we'll try to do on the panel today is just unpack what is impact investing how does it Define itself similarly what are the options available to you should you be interested in Impact investing and then finally does it deliver any return um so maybe I'm going to start an open Jerome to you if I may uh just with the basic question of what is impact investing what does it mean well it's something that goes back 30 years and as most Frenchmen in the room who know about wine they know that you may take 30 years for a proper bottle to mature it seems to have been the case with impact investing that started under a different terminology in the '90s at the time we were referring to it as SRI socially responsible investing it sort of evolved in the early 2000 into what is now still used in the public market as ESG but it took until about 2007 2008 and it's very well documented on the internet so for those of you who don't know that I encourage you to Google rockerfeller Foundation impact invested Bellagio Italy because indeed under the leadership of of the rockerfeller foundation a group of individual including my partner Yan yadigaroglu at Capricorn got together with this mission to try to identify a new terminology to describe what they were doing being very Aline investor focus on scalable solution to Global problems and most of the participant contributed some money to start the movement eventually took a $40 million Grant from The Rocker Feller Foundation for this to become a real movement uh impact investing was then designed as a strategy an investment strategy that combines investment returns with environmental and social objectives with the One requirement that know you apply the same measurability of your environmental and social impact or the same waiting that you do to your financial performance now over time this evolve new terminology came about clearly what we Define today is the energy transition came in you know the tins are preco and today you know if you had to categorize what terminology is appropriate I think they all are maybe in the public market people still refer to ESG more than they do about impact at Capricorn where we are focus on you know Venture and private Equity it's a lot more about you know impact and a few words to Define what we think is important for people who are looking at that space the two terms that we use regularly one is really intentionality that is you got to be in it because you believe that you can have an impact and as I said make the world a better place and the other one which is extremely important for our clients is to be non-c concessionary that is you are there to generate a high return and finally in regards to what is really meaningful in our opinion in terms of impact it's a requirement that you provide risk Capital early capital and patient Capital as we've done with a number of companies that relate to the situation in the UAE since we were early investors and patient investors in iconic companies like Tesla SpaceX Quantum scape du Aviation Redwood materials and so on thank you J that was a really interesting introduction and maybe to unpack a little bit of what you mentioned so you talked about these terms measurability and intentionality and I know there's also the term additionality that comes in with impact investing and and AA if I might turn to you kind of these three terms are what's used currently to Define impact what's your read on them and how do how does how do you operationalize that in your investing process yeah absolutely and I think Jam's touched on the key three terms inter intentionality additionality and and measurability so intentionality really being that intent from the investor to contribute to a measurable environmental and or social outcome additionality being really that that counterfactual would that outcome have happened but for the investment from the investor or the company's uh existence itself and and that translates into asset classes into implementation in in different ways if if we stop on on midmarket private equity for a moment many of these businesses have never been owned by by impact by impact owners so these management teams aren't familiar with managing the these companies with that impact impact intentionality so some of what we do is really work with those management teams to bring them up that learning curve to indeed in attract that impact investment dollar and we do that from the pre-screening stage we do that through due diligence but but very importantly we do that through value creation so we we work with management teams to think about measurement Frameworks we worked with them to to understand about perhaps linking compensation to to to impact incentives and and the like no that's really useful thank you so much there's another term that that comes up around impact and Jonathan if if I can turn to you on this one so a lot of people talk around thematic investing can you explain a little of how impact and thematic kind of sit side by side from an axer point of view with flure so um at AXA I am we've now been investing in in the impact market for over 12 years um and our our thesis if you like started with what problems are we trying to solve so ultimately we've talked about intentionality additionality measurability for us it starts with the problem uh and we Face some pretty big problems in the world today we have climate change which we all are aware of the effects of we've got biodiversity and and nature declining and we've got huge social inequality when it comes to the provision of healthcare so if I start with defining the problem set we can then be much more accurate around what are the solutions to these problems so as an asset manager we've designed designed our approach and our product range and our strategies as specific thematic approaches to solve these problems um and we can talk a little about what those are so climate change you know one of the very attractive opportunities there is to help Finance the transition you know we need to do this from a thematic perspective but we can also cut it by asset class and clearly working in the private markets from Venture Capital through to growth Equity even into the real asset space these are the assets where we can really claim ownership of the impact the intentionality the additionality just like we do on the financial side we have a business plan we have expectations around Financial return we're active managers of assets we need to apply the same philosophy on the impact side nature is declining why does that concern us as Society 50% of global GDP relies on nature so we need to start investing in solutions to reverse and protect the decline of Nature and and finally Healthcare we've seen the effect of a global pandemic we saw that that was Global we saw it was interconnected between populations and so the inequalities that existed during that period and have now been exposed as vulnerabilities going forward are key focuses of of what we what we do an impact so just to to conclude we're in the the capital of capital here um we talk a lot about financing the transition and and the sort of environmental Capital that takes natural capital is a phrase we need to be aware of but also let's not forget the social side Social Capital human capital and the impact that we need to have there also thank you so Jonathan just I I want to pull up one point that you were talking about maybe Bridget with a point that Ava was making we talk about additionality we talk about private markets and I read um an ft moral money survey that was looking at the fact that most people have a view that impact investing is Venture Capital private markets that's how you prove additionality so so maybe AA I could turn to you on on this point is there a role to play in listed markets or is this just private Market activity no it's it's a great question and I think for for context Apollo uh manages around 500 billion in in credit assets around 730 billion overall so has a significant presence in in the credit markets I think beyond the equity asset classes we've been discussing this clearly use of proceed bonds I think that's a that's a framework which is well established which is well well recognized as being as being impactful and I think perhaps broadening um the the question and thinking about the impact investing but also investing for impact uh I'll give you an example of of a financing that we recently completed with with a key strategic partner in in Europe uh we have a long-standing relationship with many many blue chip companies this financing was was with was with Air France and in fact Air France um and and Apollo had conducted a number of refinancings and had been looking at ways to integrate and impact lens a sustainability outcome into these broader refinancings so we we financed a 1.5 billion facility secured against the Loyalty program and together we we ring fenced a portion of that financing to uh allow for Air France to commit to produce sustainable aviation fuel now that that aligned with their own objective to have 10% of saf in their fuels by 2030 now it's it's an interesting example because it's not a typical use of proceeds bonds return is the same across the the financing so at Market I think to the point around that that was being made by by John uh but it's it's an example of investing for impact beyond the already established framework of and investing to innovate I guess as well is is kind of the Clear Point there um maybe fa if I can bring you into the convers a so You' heard me in my introduction I talked about kind of ESG or sustainable investment being kind of north of 30 trillion there is a lot of recent criticism that that's not having any real world impact at all um and and I'm just curious from your perspective and also um in your role as chairman of of Eiffel what what are your thoughts on that is it only because there's a small amount of money put on impact and that's only where the real impact is happening could you give me your views that's that's a great question uh um ATL we we really focus on impact and the energy transition so I hope that what we do has a real impact but of course you're right there is a risk of impact fatigue or SG fatigue because the I mean all this Capital has impact but uh it's slow and it's probably not sufficient uh and our our motto ATL I mean the way we see impact investing is uh that impact should not be a detractor of financial performance but should be a performance enhancer and that's really how we construct our strategies um earlier this year we've we've run a study uh in our impact private debt portfolio it's a scientific quantitative study 150 companies 1300 data point uh and we try to determine the link between the uh the impact initiatives we Implement in our portfolio companies uh to make them progress towards the ESG objectives and the financial performance uh and we we found that in 83% of the cases the net impact so the benefit minus the cost because of course for the companies there is a cost of implementing transition measures Etc in 83% of the cases the net impact is positive simply because the the companies are uh that have progressed on their impact Journey are are just uh you know winning more public tenders that incorporate ESG criteria are finding you know recruiting easier uh and are more resilient to to environmental factors so there is a there is a positive uh you know virtual Circle there that we try to implement in all our all our strategies and maybe I can give you two two more examples of you know in our other strategies positive links between between impact and financial performance um the the first one is that we we we try to focus on the the impact Capital that we raise on uh sectors and segments where there is a funding Gap and for example in our energy transition infrastructure funds instead of investing in the mega renewable energy projects that you know attract a lot of capital from Global Investors we tend to focus on the on the smaller more granular Regional projects of course uh this has this has more impact in terms of additionality and uh but it has also better financial performance because these projects are less competitive uh and so in our infrastructure funds we Finance more than 4,000 energy production units across Europe 13 gwatt which is more or less the consumption the the electricity consumption of of 10 million households so you can see the the impact is m is massive there and the financial returns are are there as well U another example is um to focus impact capital on uh Frontier or Innovative segments uh and one example of that is that back in 2019 uh in the energy transition space investors were mostly focusing on electricity wind and solar we decided to launch a fund dedicated to Green gases and molecules which was very Innovative and new at the time uh the thesis was that basically uh okay electricity had to go from 100% fossil to to fully renewable but the same for gas and it had not started on the on the gas side um this innovative tasis uh enabled us to attract impact investors uh and it was difficult to to attract more traditional investors but the impact angle of the fund was a was a key driver and of course the fund uh has been has been performing very well it's a I mean typical double digit infra Equity returns uh and it has had a massive impact by deploying uh you know biome methan units all across Europe thanks for Brie I'm going to pick you up on performing very well and maybe Jerome open this question over to you I think look there is definitely a perception that impact requires patient Capital it's quite high risk and to some extent it can be quite philanthropic so maybe Jerome I'll I'll start asking for you and then Jonathan I'll come over to you because you touched on natural Capital this real perception that is there any return is this a viable investment strategy to can can can I make return on this well we have dealt with this for 23 years now you know for those of you who don't know Capricorn he was started in 2001 by my partner Jeff Jeff score who was one of the two founders of eBay and who had age 29 found himself at the helm of $6 billion and who dedicated you know that money to making the world a better place so he created a foundation uh with the idea of know handing large grants to a number of topics which in the end in the investment from Capricorn we did invest so we Equity gender Equity Capital inclusion and so on over the years the foundation has had a real impact I would say the two are complimentary yet the return that we were able to generate at CAPIC with those long-term investment early Capital risk Capital patient capital in the end have allowed the foundation to have an even greater impact by having more money to distribute U so I feel that you philanthropy has to rely on some funding some permanent funding and that's the investment side of what you could achieve with an impact fund and a little on natural Capital how do we make return there with pleasure and I just want to just rebound on one point on impact investing is not philanthropic we have to be so clear and if there's one message that I beg you to take away from this panel is that this is a a market Rate Financial return activity the excuse that we that we could look to the lack of track record or the lack of uh potential return in these activities is why we get into a period of stagnation as as a market the definition of impact is that we are making new investments into new topics into Innovation into things that didn't exist before so they do carry different risk profiles but if we look at that as a reason to not move and put the label that impact is concessionary on then we really don't actually unlock the billions if not trillions of dollars that we need to solve the problems that we've described in this panel so we're all Global asset managers with institutional clients they expect market rate return and that that's a really important Point natural capital is a fantastically interesting area so we see that decarbonization as a trend is being applied across all asset classes real estate infrastructure private Equity Venture Capital but actually one of the most efficient places in terms of the cost to avoid or remove carbon is by investing in nature Itself by investing in the ecosystem service sequestering carbon through the growth of biomass through planting trees through restoring and sustainably managing Petland Wetland restoration and these units these ecosystem services or these outcomes are becoming more and more attractive to corporate buyers and the most familiar Market that we can refer to there is the carbon credit market so we've seen through the cop movement increasing movements to unlock Mass financing into this space and one of the levers to do that in naturebas Solutions is carbon CR credits so corporates that have committed to decarbonize to reduce their own emissions and then are looking at climate contributions they can make along the way the carbon Market is now evolving we're seeing potential for a 100 times increase in the demand for carbon credits and as we heard earlier there is a funding gap on the supply as asset managers we we like the combination between supply and demand imbalance and this is driving the price of carbon up so as financiers this is a very attractive place to be not to mention the impact on biodiversity and nature which is going to be incredibly important in the next decade as we' been focused on climate change in recent years that's really interesting yeah the basic economics of supply and demand so maybe just to close out Fae and Eva if you could just also answer my question of are there Financial returns here and does it have to be patient capital I think those would be my two questions sure um very happy to uh we look for collinearity in our investments into the point that John was making we would not be entering into this space unless we believe that market rate returns were available and were achievable so what collinearity means is that the impact is intrinsic in the business model of the company and that in each value creation lever there is an impact lens so specifically an example we have a company which is producing recycled cartons and two of the valuation levers very simple ones being cost and revenues in the cost lever we're creating energy efficiencies we're reducing water usage um and the like so there's very a very clear sustainable outcome related to to the cost lever similarly on on the revenue lever we're increasing the penetration of these recycled cartons that are used to wrap fresh fruits and the like and bringing that to to underserved communi so this is certainly an area where we believe there are there are market rate returns achievable across our climate platform where we have over a decade of of experience we are to to similar to to for we are well well north of a 20% net irr uh so those market rate returns are are achievable and for bre in 30 seconds yeah I think to offer a positive conclusion I think impact Investments can even have better returns than traditional Investments simply because the impact actions that we Implement will will strengthen the companies uh will strengthen their resilience to face uh environmental changes social changes and so uh impact is in fact better than non-impact financing yeah and I think that's echoed by the data so the compound annual growth rate of impact investing is sized to be around 20% just north of 20% since 2019 so it is absolutely a strategy that can give you return thank you so much to my panelists for covering this topic in a reasonably short period of time I think that's been a great education for everyone thank you all for being a great audience as well thanks [Music] oh