The world is changing. We are experiencing rapid urbanisation, a shift in global economic power, demographic and social change, resource scarcity, technological breakthroughs and climate change. With over 2 billion of the worldʼs population still living below the poverty line, it seems that philanthropy and aid are not capable of offering a satisfying resolution to the many challenges. We are going to need a new approach. What can an international financial centre like Guernsey do for future generations?
To answer this question PwC invited investors, leaders, decision-makers and other stake-holders to come together on today’s inspiring event named Finance for Good. On this occasion we had the pleasure to welcome the founder of Acumen, Jacqueline Novogratz, who took the effort to visit the island to share her inspirational stories on patient capital. She was accompanied by development specialist Justin Sykes, who stepped in to explore Guernsey’s opportunities to become the global financial centre for impact investment.
What is meant by; finance for good, impact investment or patient capital?
The Global Impact Investing Network (GINN) explains the terms as “Investments which are made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return”.
Implementing impact investments into current investment structures will mean that the private sector will become a critical player in providing access to the capital needed to solve some of the biggest problems we are facing today. Ideally, the term impact investment will stop existing within the next 20 years as all investments should include a clear intention of generating measurable social or environmental impact – aside from its expectation of possible returns.
During today’s event Jacqueline Novogratz gave some excellent examples of patient capital – the term used by Acumen. Acumen is known to be the world’s school for social change where anyone anywhere can gain the skills and community to amplify their social impact. They “solve problems with people, not for them”. Examples of enterprises that have been started with the support of Acumen are; Ansaar management company, ideo.org, kheyti, filamujuani, jacaranda health, the youth development foundation, and RRP.
The astonishing element of Patient Capital is that it takes pieces of ideas to create viability. Would you rather help to build a school? Or would you rather help to build a viable school system? Do rapid returns really matter in this context? There are plenty of good examples of investments with a positive impact in which investors have had to be a bit more patient in receiving returns. Think of projects in delivering drinking water, ambulance services, solar energy lights, etc. It all comes down to dignity. Apart from capital, people need opportunities, security, and a choice [read for example Development of Freedom, by Amartya Sen], aspects of life we too often take for granted.
Jacqueline explained that with more sell phones in Africa than in the US, with 70% of all sell phones in Kenya being smartphones, with people deciding they prefer to have internet over a toilet, technology has been connecting everyone across the world. However, such developments have come hand in hand with a sense of disconnection. Think of pollution, disease, environmental problems and terrorism. What we have been doing is separating sectors and dividing nations. Jacqueline believes that good change begins with standing with the poor, and by using the tools of capital to help recover connections. A good way forward would be to start building a dignified system of healthcare and education.
People make invest decisions based on where they see direct impact, we look at an output which is stated in numbers. We look at how many farmers were helped, and how many students graduated. However, we need to start looking at whether those farmers are actually better off, and whether the quality of education is to standard.
In order to reach the extremely poor, we have to be creative. Jacqueline explains that it starts by standing with the poor and recognising potential where others see despair. It demands ‘investing’ as a means, not an end, and daring to go where markets have failed and aid has fallen short. Principally, by catalysing entrepreneurship, we can create a world without poverty.
What do the stats tell us?
Whilst inspired by Jacqueline, there are many questions left unanswered. How big is this market? Is there a growing interest? What do the stats tell us?
For an estimation of the size of the impact investment market we reached out to the Global Impact Investment Network (GIIN), who showed us that 15.2 billion USD has been spent on impact investment, divided among 157 investors, in 2015. Just more than half (59% to be precise) of those investors have been looking for market returns. The GIIN is expecting a 16% growth for this year and industry forecasts predict that the impact investment sector could grow up to US$1 trillion in AUM by 2020. This would represent a significant global asset class. The net asset value of all funds under management and administration in Guernsey stands at approximately 250 billion pounds (US$325 billion) which represents 0.3% of the approximately US$80 trillion of global assets under management. This excludes assets within trusts, family office and philanthropic investment structures or other forms of direct investments, for which hard figures of Guernsey’s total AUM are not publicly available.
Other statistics involve changing business models. For example, there has been an increase in the reporting on ESG activities to investors, and – according to a PwC survey – 86% of their questioned CEOs claim to have changed how they measure success and what they hold themselves accountable for. It seems that the impact measure of investments is gaining importance among investors on the spectrum of financial and impact returns. PwC survey showed that 76% of the questioned CEOs indicate that business success isn’t only about financial profit. However, for the one’s interested in the financial returns only, Barclays has reported that the difference on return between ESG and normal financial returns has only been 0.4%. The difference between ESG and Impact investment will be further explained on impactguernsey.gg.
On a last note on the financial performance of impact investments, The Symbiotics Microfinance Investment Vehicles (MIV) confirmed this last year by showing that impact investments have shown stable and predictable absolute returns with low volatility and low correlation to mainstream markets. Investor returns weighted across all MIVs of around 4%. The GIIN / J.P Morgan 2016 impact investor survey confirms that the financial returns of impact investments are broadly in line with the comparative universe.
What does Guernsey Offer?
Guernsey offers a mature financial services centre with well-regulated, compliant and trusted jurisdiction with world class expertise in banking, private wealth, investment and insurance. Secondly it offers a transparent regulatory and legal framework which gives investors confidence in making investments via Guernsey. Furthermore, Guernsey offers strong government support for the further development of the impact investment industry including agile policy development, promotional activities, an attractive tax regime as well as potential seed funding. And lastly, Guernsey offers knowledge and expertise. Guernsey has a strong expertise in financial innovation and an increasing capacity in the field of impact investment including fund management/administration, governance and advisory services. From our viewpoint, we have much of what we need.
Guernsey has an incredible opportunity.
Foreseeing enormous growth in the Impact investment sector, Guernsey must participate. If Guernsey is going to make any sort of dent in the world’s problems then we will need the involvement of the private sector and access to capital to make real, sustainable change happen. It is certain that Guernsey is an experienced manager of international capital flows. Flows which for example include the one’s used for the infrastructure of CO2 improvements. With only about 20 years to do something about Climate Change, this is a massive opportunity. Businesses themselves are already signing themselves up to become more CO2 friendly. Given that impact investment can be considered an alternative asset class, Guernsey need not implement wholesale changes to become a global hub but rather could harness and re-focus its existing assets, infrastructure and financial sector expertise and pivot its messaging to enable the island to develop itself into a jurisdiction of choice for the impact investment industry, and to be a conduit in providing capital for social and environmental good.
Imagine if Guernsey finance organisations began to speak to their clients about impact investment opportunities and focusing on social and environmental benefits alongside financial returns? Viewing 0.3% market share of global AUM to be a floor for the potential market share when it comes to the global impact investing market. This floor of US$3 billion (GBP2.3 billion) represents a sizeable source of business for Guernsey. If efforts are made to cultivate a significant global hub for at the least European, African and Asian impact investment, it could be possible for Guernsey to capture up to 5% of global impact investment AUM. 5% of this market would represent US$50 billion (GBP38.5 billion), which by 2020 could plausibly account for up to 10% of Guernsey’s net asset value of all assets under management.
Impact investment generates remunerated economic activity amongst a number of players across the finance sector’s value chain, including for example insurance companies, fund administrators, corporate service providers, law firms etc. This expertise could create economic value-add for Guernsey in direct correlation to increasing funds under management, but it could equally generate smaller sources of economic value-add as an exported area of specialist expertise, through advisory work to non-Guernsey domicile clients and structures. Above all, in an increasingly competitive and restrictive offshore financial services marketplace globally, it is the opportunity to innovate and diversify Guernsey’s existing range of services that is the true opportunity on offer from developing an impact investment economy.
On the back of any decision to build impact investment capability into the finance sector, Guernsey can seek to repurpose latent assets (pension funds, treasury, corporate balance sheets, deposits etc.) already on-island as well as attract new capital and business to Guernsey. Such a proactive approach will also serve to address negative and incorrect perceptions of Guernsey in the light of the Panama Papers scandal and instead present a strong, positive message of the island being a world-class centre for responsible finance or “Financing for Good.” Such a centre would be built on a clear value-proposition of higher levels of transparency and more substantive expertise than other jurisdictions. Guernsey has the chance to establish a strong impact investment community which will beneficially impact a wide range of associated players in Guernsey’s financial industry. Furthermore, local entrepreneurs could gain access to outcomes driven finance and support leading to initiatives that create a positive impact in the community. On a final note, by redirecting their money through Guernsey domiciled funds, philanthropists can benefit by leveraging the impact their money can generate through financial return on investment. Include impact investments across all asset types. This way the financial services sector can become the centre of positive change. We need to go back to the first step with your clients and say “I can give you an ethical return”.
Next steps. How can we move forward with Impact Investment?
Here is what we can do to start the establishment of a strong impact investment community:
- We need to create awareness of Guernsey as an international financial centre with impact capabilities. For example by stocktaking its track record in impact, developing a brand story and promoting itself through its promotional bodies including ensuring its presence at international conferences and in key industry bodies and networks so that Guernsey is present, visible and has the ability to meaningfully contribute the development of the asset class globally (including ongoing efforts in defining reporting standards). This action can be supported by a survey to understand what is already happening in Guernsey, what the level of activity is, and what the amount of money in management is.
- The second step is to develop a specific and unique Guernsey “offering” which would enable market actors to consider Guernsey as a preferred jurisdiction for impact investment activities. Elements of such an offering could include:
- Developing a specialist Guernsey financial sector ‘one-stop shop’ impact offering drawing on existing capabilities (lawyers/ accountants/ banks/ advisors etc.) working together may be one way impact related business to the island.
- Developing and introducing propriety and specialised market infrastructure which facilitate global impact investment flows via Guernsey.
- Possible the tweaking of existing legislation (suitable revisions to the Funds Law, Trust Law, and Company Law etc.) create a demand pull for impact businesses to come to Guernsey.
- Design a Guernsey specific ‘impact reporting’ system to log a clear and transparent audit trail of where impact funds have been invested and what impact has been achieved, including potentially leveraging FinTech expertise on the island to develop this.
- Education. The Impact Guernsey website could start educating professionals and sharing information and (local and global) news on impact investment.
- Thirdly, we will need an official government position. We need publications and policy papers, articles, etc. Furthermore, we need resource allocation. We have a story, now we need the capacity to sell the story. Guernsey must reinforce its image as an impact hub by growing its sector capacity and welcoming more impact firms to the island as the social proof effect kicks in and the impact community flourishes. To this end, Guernsey can lead by example by working with the States and the Finance Sector to design and set up a number of Guernsey-based impact funds (focusing on both the international and domestic market) in order for the island to ‘walk the talk’ which will give greater credibility to our story.
- We are going to need to start asking the crucial question: “have you considered impact investment?” Don’t offer investments and philanthropy, offer a combination of both.
“do whats right, not whats easy”
* This page is provided only for informational purposes. It does not constitute investment advice. Past performance does not guarantee future results. Investments and strategies discussed herein may not be suitable for all readers, so readers should consult with financial, legal, tax or accounting professionals before acting upon any information or analysis contained herein.