Teymoor Nabili
Welcome, once again, to Money Meets Mission, brought to you by AVPN, in association with Tech for Hello, and welcome to the latest Money Meets Mission dialog brought to you by AVPN in association with Tech For Impact. My name is Teymoor Nabili. Now, there is no doubt that the concept of responsible investing has become, if not front-page news, than certainly an increasingly important feature of the strategic thinking in financial circles. Corporations, global pension funds, retail investment funds, family offices, all of them are to a greater or lesser degree, factoring social and environmental impact into their considerations and their investment philosophies. Indeed, in some cases, environmental, social and governance criteria are becoming the dominant theme in investment strategy and the number of funds and companies calling themselves impact fund or something related to that has been climbing steeply, driven in large part by ever greater appetite from retail investors and also by some regulatory changes too. But what is impact investing? Where does it fit into the financial landscape and where is it going? How can we define not only the characteristics of an impact-focused investment fund, but also measure the impact and the success? Well, my guests today come from two impact investment companies with slightly different approaches and perspectives on the whole business. They are Mari Kogiso, the co-CEO of SDG Impact Japan and Kim Wonyoung, one of the founding members and the executive director of Crevisse Partners in Korea. It’s a great pleasure to be with both of you. Mari, let me let me begin with you if I could, let’s talk about impact as a concept. What is impact investing from your perspective?
Mari Kogiso
I think impact investing is really an evolving concept. It used to be quite narrow when we started working on impact investing, about 10 years ago. It was more about private, like equities, but not really public assets. But right now, anything that has impact can be called impact investing. But it’s great that there’s a bigger market and more people are looking at impact investing, but at the same time the definition of impact investing is becoming a little bit more unclear. I think that it’s maybe a good idea that we go back to the definition of impact investing – I believe that impact investing is investing not only looking at impact but also returns. And it has creating an impact as its objective, and also having impact measurement and management concepts. This is a basic definition of impact investing.
Teymoor Nabili
It’s very interesting that both of your company websites have very different language to what I certainly have become used to during my life in the financial world. You talk about values in terms of social value and well-being and diversity. Wonyoung, what does it does all of this mean to you? And is it possible, as some have said, that it’s all a little bit vague?
Wonyoung Kim
I get that question a lot. What is impact investing, and is it just some marketing terms or isn’t it vague? Well, I guess it is true that it’s not very clear to define what impact investing is. But I think the same for what venture capital or what venture investing is, right? So how do you define from a venture company to a non-venture company? There’s not a very clear line there. If you see in the history of how impact investing evolved, there was something called ESG investing or sustainability investing or sustainable responsibility investing. So, SRI is usually an investment that is made to a company that is doing efforts to reduce negative impacts of a company, while impact investing is an investment that is made to a company that is actively or proactively creating either social or environmental impact.
Teymoor Nabili
The interesting distinction that you made between what in the old days used to be ‘let’s avoid doing anything bad’ to now we’re getting much more into a conversation of ‘let’s be doing something proactively good,’ and I want to get into how we can actually define those more precisely. But Mari the vagueness it seems to me is gradually being whittled away. Because we’re not just talking about, okay, let’s do something good. There are definitions, there are regulatory considerations being brought in. And specifically in Europe, we’ve got sustainable financial disclosure, regulation becoming very much part of that conversation. And I think it’s something that you’ve built into your approach as well. Tell us what those considerations consist of, and how you are bringing them to bear.
Mari Kogiso
I think it’s great progress that has been made in Europe by SFDR. What they’re doing is by setting their EU taxonomy, they’re basically defining what impact means, because impact can mean many things. It can be environmental impact and social impact. There has been a lot of discussion that how we define impact has not been consistent or not very unified. There has been lots of progress and many evaluation institutions are now talking. And of course, EU taxonomies are coming up to define what is impact. One of the regulations that they have introduced this year is a distinction between so-called Article 6, Article 8, Article 9 funds to avoid SDG washing or ESG washing. And what they tried to define is if the fund is looking at ESG consideration, or having ESG consideration but not having impact as one of its objectives, or creating impact as one of its objectives, which is classified as an Article 9 fund.
Teymoor Nabili
Just to be absolutely clear about what that is. Article 6 basically is, you have nothing to do with impact investing – you’re not an impact investor. Articles 8 and 9 have slightly finer definitions of what it means to do impact investing. Within that, I think your approach has been to go for Article 9, which is the most concise and the most precise definitions and expectations. But what does it mean for you in actual practice terms? Tell me, when you’re looking at investments, what does Article 9 bind you to? And what is it that you think you’re delivering for a retail investor who says ‘I’m looking for the best product here’?
Mari Kogiso
I think it’s just, as Wonyoung said, the difference between Article 8 and Article 9 is if it’s really looking at positive impact being created by this fund. That is how we can define that the fund has creating impact as it objective. So that needs to be measured, and that needs to be defined. The current situation is lots of ESG funds have a methodology called ESG integration, which is having ESG as one of the tools to evaluate your company, but not necessarily really measuring the impact that has been created. So the difference between Article 8 and Article 9 is if you really define the impact clearly, and measure it or having activities to create these movements. For our fund, we have a very big engagement portion that we are not trying to define and measure, but we try to work with companies to create the impact. We evaluate a company and if the company has some problem with human rights, we try to work with the company to improve that. And we believe that we can improve the return profile, not only the impact the profile, by doing so.
Teymoor Nabili
Wonyoung does that EU methodology, that framework make sense to you? Is it something that you filter in and factor into your decision-making process?
Wonyoung Kim
Definitely. One thing I would like to add is, in order to understand the difference between an impact investment or SRI investment or any commercial investment is actually the company, the deal that you’re investing into. For example, if you’re investing into a company, let’s say that the company provides peer-to-peer lending services to low-income people. In that case, this company provides their services and creates revenue, this company will create more impact on the side of the beneficiaries by providing productive loans so that these people can use those loans to create income. So, when we are dealing with the actual practices of making decisions on whether to make investments or not, we really have to understand the deal and their business model, their structure and their value chain and how their input is converted to outputs, and in the end into outcome and impact.
Teymoor Nabili
We’ll get into the precise details of how you assess these things in a minute, Wonyoung, but I just want to ask, for a final question as we examine the broader ecosystem, how do you differentiate what you do from what the rest of the impact investment market does, from what Mari’s approach to these whole things is? And do you think that the evolution of these differential elements is going to continue in the broader market, as more and more money starts targeting impact investment
Wonyoung Kim
Yes, impact investing can range from below market rate to above market rate, it can be in the form of venture capital, or it can be in the form of private equity. It can also be in the form of, of course, venture philanthropy. What we do in the impact investment scene is we are more venture capital approach. So we like to look for companies in early stages, who have a very innovative technology, and a very clear idea how they can use those technologies to create impact. Another approach that we have is blended finance, where we would like to bring the private capital and also the grant or the concessional loans together to create impact.
Teymoor Nabili
Blending different elements for a different outcome. But just define it for me very quickly and more precisely, a venture approach to impact would appear in many ways to be inherently contradictory.
Wonyoung Kim
Well, I think differently, because in order to create an impact, you need innovation. And this innovation usually comes from technology. Without the technology, there cannot be much innovation. And without an innovation, it’s hard to create a social or environmental impact. The more we look into these companies with technological innovations, we see a higher chance of these companies actually solving problems with the better services and products, or even with lower expenses or costs, meaning that they can provide the same service or better service to their customers.
Teymoor Nabili
Mari, one of the points Wonyoung made there was a suggestion of returns as being a factor under consideration. And that’s why I put that point about venture and social impact. Because in the popular conception ‘venture’ as an investment term is normally associated with, for want of a better term, predatory activity. Prioritizing profit over anything else. And that’s where I saw perhaps an inherent contradiction. But you tell me where your view is, in terms of your approach, where do you fit upon that spectrum? Are you to the venture side? And tell me how you think about what how that spectrum plays out?
Mari Kogiso
Actually, we work on both fronts. We have an ESG impact fund, investing in public companies, but we also work on a venture impact fund. And we’re also looking at technology. So I very much echo what Wonyoung said, because investing in impact has been seen as a trade-off. Returns and impact have been a trade-off. But I think that trend is really changing, because even the public companies don’t see ESG as a risk or cost anymore, because it’s something that they have to deal with. And to deal with it they need innovation, they need a new way to work on how to create a new market, to look at both return and sustainability at the same time. This is a shift that I’m seeing very much, not only in the venture world, but even with public big companies that are more looking at innovative ways and different ways, using AI or technology or blockchain or introducing a new innovation to meet their sustainability goals.
Teymoor Nabili
How do you think the industry is going to evolve Mari? A few years back, as it’s been developing, most of the money that was going into so-called impact investing was coming from the developmental financial institutions, not really private sector money. Now we’re seeing a lot of private sector money coming in. And most of it seems to be going into big projects. I mean, we’re seeing very little at seed stage, we’re seeing most deals above a million dollars and more in terms of financing. You see the architecture or the elements of the industry beginning to change from that basic framework?
Mari Kogiso
Well, there’s a risk appetite of big corporations, right? Especially, Japanese corporations are very very conservative. Are they really going into venture or a more riskier investment because it has impact or not? I’m not very sure about that. But looking at how the money is flowing into the tech sector, and the new venture sector, I think there’s a need for new technology and new development. So maybe it will not change in one or two years but we’re obviously seeing the beginning of the change. One example might be there’s a lot of green bonds or sustainable bonds coming into market. I think these products are much closer to the impact concept than public equities. But they’re really flowing more money into new inventions. So there will be more of a direction being created, even by big companies or the whole sector.
Teymoor Nabili
Wonyoung from the perspective of how that market begins to evolve, do you see a change in the characteristics? And you mentioned a moment ago, philanthropy, do you think that we’re going to come to a stage where some of these impact funds are going to start crowding out the philanthropy sector and the nonprofit sector?
Wonyoung Kim
Yes, before I get into that, one of the visions that I have as an impact investor, is that maybe in the future, 20, 30, 40, 50 years from now, we’ll call financial enterprises and social enterprises, just enterprises. What I mean by that is the concept of enterprise will change in time, where considering either social or environmental impact becomes something very natural for the corporations to pursue. And at the same time, one of the things that I observe in the impact investment scene is that there are traditional impact investors who in the past defined themselves as impact investors. But now, more and more investors are coming in from the commercial side, also taking in part of the impact investment as either their fund strategy or either in their portfolio. I think this is a very notable change that’s happening in the market. So now, there’s less and less boundaries between impact investors and commercial investors. It’s like now impact investors are also looking into many tech companies, and at the same time, these commercial investors are also looking into many impact companies.
Teymoor Nabili
We’ve been skirting around the issue a little bit, of returns. Defining and securing market returns. Mari, there’s a very prevalent narrative in the market these days from a lot of people calling themselves impact funds, saying that impact funds return as much and often more than ordinary funds. Do you think that’s the case? And if it is the case, why do ordinary funds exist at all? Because it would seem to be slam dunk, if you can get impact and better than market returns, then why isn’t everybody doing it?
Mari Kogiso
There’s a lot of argument in the market, or discussion, that is the ESG fund creating more profits than non-ESG funds. ESG funds have been doing really well in the last few years, really outperforming the current fund. It changes, depending on which period you take, the result can vary. And the result can also vary depending on what product or what kind of area/industry you are looking at. So it doesn’t really make sense to just have a very yes or no answer. Impact investing is very broad, and it can be very impact-first or it can be very profit-first. So it’s a broader perspective, not only a binary concept. I really think that people should understand that anything creating impact is now called impact investing. It can be something like charity, very close to charity, or it can be something very close to just commercial return. For me, it doesn’t really make sense to discuss that, whether impact investing is creating more profit or not, anymore.
Teymoor Nabili
What are your thoughts on that Wonyoung? It’s easy to talk around the subject but to a lot of people who are very well versed in it, it’s a very simple binary. If you can make more money in impact investing, given the prevailing climate crisis, why isn’t everybody going into impact investing, rather than investing in fossil fuel?
Wonyoung Kim
Well, to begin with, I wouldn’t say every impact investment will make more money than the commercial, traditional investment. In the range of returns that impact investments can make in different asset classes, there are impact investments that target above market returns. But however, at the same time there are impact investments that are just targeting market returns or below market returns. It’s hard to say that every impact investment makes a better return. But at the same time, what I want to say is there are impact investments that make a good above-market return investments too.
Teymoor Nabili
Alright, so for both of you, where is the line? Mari, tell me, what’s the balance between impact and financial returns that you’re trying to strike?
Mari Kogiso
I would say that it really depends, right? Because if you look at the short term, many people might say that really focusing on the short term, market situation or demand and supply, all these things make sense to create return. But if you look at a longer term, look at the climate or the social situation, you never can say that at this point impact investing will not be creating as much return, looking at the situation evolving, like the social or climate situation. It really depends how you define investment finance.
Teymoor Nabili
I’d like to know how you define it. You said it depends on how you define it. So I want you to be specific about your position on this.
Mari Kogiso
Oh, okay. As a proponent of impact investing, I want to echo Wonyoung, that impact investing should be creating much more return in the end, because the companies don’t exist anymore, they cannot create any return. If we look at the longer term, I think that impact investment has a very important role. And as you said people should be really looking at impact investing as their choice for a longer-term investment.
Teymoor Nabili
So Wonyoung, for you, where’s that balance between the impact and the financial return? And how do you present the balance to the investor? How do you demonstrate the value of the impact side of your offering?
Wonyoung Kim
Well, first of all, I would like to say that, instead of looking for a balance between impact and the financial return, which of course seems like they’re on the other side of the scale, what we’re looking for is integrated return, where financial return and impact comes together. We’re not saying every business is in that structure. But there are many, many businesses out there, where the more revenue, the more impact is created. So that’s where we come in to define that.
Teymoor Nabili
Sure. But is there a point when you’re looking at a potential investment, and a company that is in a business, an industry, a process or a product that has sustainability characteristics and environmentally friendly characteristics, and the financial profile. At what point do you decide the financial return isn’t quite great enough, because they’re spending too much time focusing on the environmental side of things? How do you how do you weigh up the case in individual situations?
Wonyoung Kim
Very good question. So again, we think that impact investment is a process. It’s not a single evaluation or criteria that we see, oh, that’s an impact investment. We go through the due diligence processes in our venture investment lifecycle. And then, while doing that, we look for, are they targeting the right type of or a specific type of SDGs? Do they have indicators that can measure and manage their impact? Is the company really focusing on impact? Is it written in their company’s business plan, or is it written in their company charter or registration? We have interviews with the CEOs or founders, if they are just saying that they are pursuing impact, or do they really mean what they say? So through the whole processes, while making the investment decisions, we look at different aspects. And while doing that we have more and more confidence whether the team is making an impact or not. I wouldn’t say that we look at a single indicator, or a single index or a single criterion and say, oh, that’s an impact company. It’s hard to say that.
Teymoor Nabili
Mari, the way that Wonyoung is talking there makes me think about what we were talking earlier on, about the European regulations. The European system is very much focusing, at least for the moment, on issues of transparency and disclosure. And Wonyoung, as he was saying there, so much of what you guys do is to look for that as demonstration of intent and purpose. But what about the other side of that equation? Which is, after you’ve made the investment, two years down the line three years down the line, and you’re assessing the return, how do you assess what that impact has been? Because you can measure the profit fairly easily. How do you measure the impact of the actual attitude towards ESG criteria?
Mari Kogiso
That is very much evolving. I think there’s a certain reason indicators have been created, and it’s becoming more and more consistent globally. For example, SASB and IIRC have been merged. And also, TCFD is becoming very much a norm, when it’s coming to climate. For Japan I think that the new regulation has come in that a public company going into so-called prime market, it used to be the Tokyo Stock Exchange first category, will need to work on TCFD. And as more companies, as more participants, work on the same standard, they’re going to be a consensus in the market, which they should be looking at. And I think that great part of TCFD is it’s not just looking at indicators, it’s looking at scenario analysis. And it also looking at the story. I wouldn’t recommend just looking at indicators and waiting for indicators, but the corporation, everybody, needs to develop their own path. How they reach to their impact, like what is their materiality, how they should look at sustainability. Not like CSR, but as a business, because that’s what they need to do.
Teymoor Nabili
But Wonyoung, I mean, that this is the problem, isn’t it? There are so many bodies, there are so many acronyms, and there are so many different assessments for the general public and for the industry as a whole. Surely we need more precision, we need better metrics to use. Are we getting to that point?
Wonyoung Kim
I think we are. I’ve been in this scene for more than 10 years now. For the time being, what I see is that now we have something called UN SDGs as a common consensus to set our goals, as an impact investor or as a company. We have now something called IMP, Impact Management Project, where it helps you provide a framework to define impact. We now have something called IRIS+, which is basically a catalog of indicators, how to measure these impacts. So now we have these frameworks and tools that we can work with, that other organizations or institutions are also using. So that is sort of coming to a consensus. And at the same time, one of the things that I see that is also happening within our companies, when we make our investment decisions, and we actually make the agreement with the company, we do ask them to provide us with impact reports. It’s just like any investor would request a financial report to be submitted, you’re asking these companies’ impact report to be submitted. I think these are very strong evidences that impact is not just a marketing term or jargon. It’s what is actually happening in practice.
Teymoor Nabili
All right, let’s finish off with a couple of predictions if we could. Mari, where do you think the biggest gaps are that need to be addressed, and where most attention is necessary in the coming years?
Mari Kogiso
I think that the market has really changed, and as a result there are lots of bright aspects. Especially I see that lots of the so-called Z Generation is more looking at investment not just for creating profit, but to create impact. I think that whole concept of impact investing is now really changing. But the biggest gap, if I look at the market in Asia, there’s a lack of human resources who has been really working on impact, but also understanding financial markets. So there has been a gap, a huge gap between the social sector and the financial sector. And now it’s really starting to merge, but we need more people who understand both sectors and who can really develop new products or new concepts of impact investing.
Teymoor Nabili
Tell me the difference between the way you approach this business and the way you think Wonyoung approaches this. From this conversation that we’ve had, can you identify qualitative and philosophical differences in your approaches?
Mari Kogiso
Well, I really kind of echo almost everything that Wonyoung says. I think we are very much similar because I also work in the public market product, but I also work in the venture product and we’re both looking at technology, which we think is really important. But can you think of anything Wonyoung?
Wonyoung Kim
Well, let me speak in terms of the challenges that we have. So, of course, compared to the traditional commercial market, or commercial capital market, impact investment is still young and new. Meaning that we still need a lot of advocacy about impact investing. We need many, many funders, LPs who are willing to actually put their money into this impact investment as well. And also, because by investment we don’t necessarily just mean equity investments. There can be loan investments, there can be grant investments, so different organizations coming from different backgrounds, like either DFIs or foundations or government bodies, or VCs, PEs, I think we need to work together in order to find a way to create a better impact and make the money flow from the existing traditional commercial market to the impact.
Teymoor Nabili
Okay, fantastic. As a final parting thought, do you think that we will reach a stage, eventually, when the impact sector does become bigger than the non-impact sector?
Wonyoung Kim
Well, I think it’s going to actually combine. It will come together. So there will be a point where we’re not going to distinguish between impact investment and just investment. It’s just going to be investment. It’s just like we are saying that there’s different industry investments, different asset class investments, that’s going to be all compiled into an investment basket.
Teymoor Nabili
Mari, do you agree with that? We’re going to see a global awakening to the value of merging these ideas?
Mari Kogiso
I totally agree. And it’s not only happening in the investment, but it’s happening in all economic activities already where companies operate. They have to look at sustainability aspect, not just return. It’s already happening that there’s less and less gap between impact and no impact product. It’s already quite merging.
Teymoor Nabili
All right, fantastic. It’s been a pleasure talking to both of you. Thank you very much indeed for sharing your thoughts with us on this episode of Money Meets Mission, and best of luck in the impact sector.
