Over the past decade or two there has been a growing realisation that investing is not solely about making a financial return. It is also an opportunity to make a difference. There are many examples where that is reflected in what is becoming known as “shareholder activism”, where shareholders vote against unpalatable practices by management in an effort to guide the company down a path acceptable to shareholders.
At the same time, another investment philosophy has come to the fore; one which focuses on the impact of long-term investing on society. Although this investment philosophy is relatively recent, it has gone under a number of names. The one which we are most comfortable with is impact investing.
The strategic thinking behind impact investing is that they factor in not only the financial benefits of the investment, but also measure the positive societal benefits. A simple example will aid understanding. Consider an investment manager with capital to invest. Conventionally they will look to invest into bonds, equity, property, money market etc. dependent on where they see value. Their focus will be on trying to maximise their financial returns with the lowest possible risk – that is conventional portfolio management theory. This focus is likely to be for the duration of their investment horizon (five to ten years).
A high impact investment, whilst still focusing on financial returns, will specifically look to make investments that deliver a social good. A social good is typically some goods or services which benefit society or which uplifts society. Good examples of these types of investments are the building of low cost housing, sanitation, schools, waste management, and access to finance whilst at the same time creating sustainable new jobs for people. The investment rationale then is to not only consider the conventional risk and return framework, but to also specifically measure, monitor and report on the larger social impact of the investment.
A high impact investment, while still focusing on financial returns, will specifically look to make investments that deliver a social good – Evan Jones
The main investment thesis then is that, by uplifting society, the investment will have a positive long-term social impact. In this context we are talking very long term – so the thinking is around creating a better society for our children or our children’s children. If this method of investing is successful, by combining the dual elements of a financial and a social return, as an individual invested into these funds, you should end up living off your retirement savings (which have grown at an acceptable risk) in a better society (which has been enhanced because of the nature of the investments that you have helped fund).
Over the past six years Cadiz Asset Management (CAM) has been at the forefront of socially responsible investing in South Africa. Not only was CAM one of the first South African investment companies to sign the United Nations’ Principles for Responsible Investment, we were also a founding member of the Codes for Responsible Investing in South Africa (CRISA).
CAM has offered institutional investors the ability to invest into the Cadiz High Impact Funds for the past six years. The Cadiz High Impact Funds have invested into business that not only delivered good commercial returns (returns consistently in excess of various benchmarks, including the All Bond Index, inflation + 3% and Prime), but importantly to provide tremendous social impact, uplifting the plight of the most needy – these include investments into affordable housing, schools, transport, health care, sanitisation and many more.
Up until 2012 our High Impact Funds were aimed primarily at the institutional market. In 2012, to address concerns around the perceived riskiness of these investments (despite our funds having never suffered a missed interest or capital payment from any of the loan counterparties), we secured a variable guarantee (up to 50%) from the US Agency for International Development (USAID) which expires in 2020. We are in the process of fund raising on a closed ended fund which will utilise this guarantee. That closed ended offering is scheduled for implementation in June 2014.
In 2013 we also launched, off the back of our High Impact investment skillset, an Enterprise Development Investment. This fund is aimed at corporates and their owners. This unique investment offers companies the opportunity to earn the required Enterprise Development (ED) point in terms of the Department of Trade and Industry’s B-BBEE scorecards, by shifting their ED spend from an income statement expense to a balance sheet asset. It also provides a massive social benefit by targeting investments into black owned businesses, which deliver high social impact.
Not only have all our High Impact Funds delivered solid financial benefits to our investors with very low volatility of returns (the underlying investments are prime linked), our investors have earned significant social returns. The graph entitled “Cadiz High Impact Composite Social Impact statistics” sets out the high level social impact statistics for all our funds since inception in February 2008 to June 2013.
It is therefore clear that high impact investments do not equate to charity or donations. It, if well managed by a reputable team, is capable of delivering on its dual mandate. That mandate is to provide good financial returns together with high social benefits: in short, to do good and to do well.