5. ANALYSIS AND FINDINGS
5.1 I MPACT INVESTORS ’ APPROACH TO THE DUAL OBJECTIVES
In our theory section, we learned that impact investors might have different expectations regarding financial return and social return. As we find this important to investigate, this section will explore the investors’ approach to the two objectives, as it is relevant for the
rest of the analysis. Thus, this section contributes to answering the first part of our research question: “How do impact investors approach the dual objectives in the investment process…”
5.1.1 Strong interest for the pursuit of the dual objectives
Among our interviewees, we find a strong motivation to create social impact, alongside a financial return. We find that all the investors explicitly aim to address social and/or environmental challenges with their investment, despite coming from different investment backgrounds. Many of the investors mention that they got involved with impact investing due to a need of doing something meaningful, to serve a greater purpose.
Malene Bason (2019) says that she “always sought for something more than just numbers”
and when she was introduced to impact investing, her thoughts were:
“It is still investments, which is my whole experience and career, and which I also like, but it also gives me something else, and it gives me a higher purpose than just generating some
extra money.”
(Appendix 2.2, q. 3)
Moreover, several of the investors question the responsibilities of investors, whereas the common opinion is that the actors within the financial sector have a responsibility to contribute to society. Hence, they stress the importance of deploying capital to form a society that maximises “the common good”, and not just financial wealth of individuals.
As Silje Veen (2019) puts it:
“We created an investment profile that says that the investment is only good when it benefits both us and the society.”
(Appendix 2.5, q. 2)
Additionally, we find that the investors believe screening for social impact would be an integrated part of the investment process in the future. These findings further indicate that impact investors oppose the notion which has dominated the capital markets for
many years – that the responsibility of business is solely to maximise profits for shareholders, guided by Milton Friedman. However, while this confirms that there is motivation to invest in companies that prioritise both the social and financial objectives, the next sections will explore how this is approached in practice.
5.1.2 Different investors, different preferences
Within the impact investing setting, there are a lot of different investor types. We find that the investors’ approach to the dual objectives and return expectations in the investment process, varies based on investor type. Hence, for better understanding and clarification, this section will start by providing an overview of the investors and their structural differences.
Investor types
Impact investment represents a class of investors that can operate as individuals, as groups of investors, or as institutional, venture capital funds. Through our interviews and secondary sources, we learned that impact investors are mostly private equity/venture capital funds, angel investors and family offices, which is consistent with literature on the subject.
Private equity and venture capital funds invest with capital provided by others, and hence they have their own principals, and a multiple agency relationship exists; fund provider (principal) – fund (agent) – venture (agent). Because they have a responsibility to their principals as they invest on behalf of them, they must demonstrate competent behaviour from the very start of their investment process to signal that they are high-quality organisations (Van Osnabrugge, 2000). This implies that these investors will feel the pressure to present impressive qualifications, by delivering both a good financial return alongside social impact. This assumption is confirmed by our interviewees. Furthermore, we observe that they adopt a more formalised and professional inclusion of the social objective, as they have to report on the performance of the investees themselves.
Conversely, we find that business angels and family offices invest their own money, according to the interviews. These investors are usually high-net-worth individuals or families, which secure financial returns through their mainstream investments (Veen, 2019). Intuitively, one would thus believe that they are not under such pressure to behave in a certain way, as impact funds are. This is confirmed by two of our interviewees, Espen Daae and Ingrid Stange, a family office and a business angel, respectively, who state that they do not have to justify their choices to the same extent as venture capital funds. Hence, these two investor types are freer with regards to the integration of the social objective.
They can either choose to give more attention to the social objective, or less. Further, they can adopt the methods they find suitable for the integration of the social objective into the investment process. Silje Veen and TD Veen for example, operate quite differently than Ingrid Stange and PfC, whereas TD Veen acts more as a “nice” venture capitalist with the financials in focus, opposed to PfC, which operates more as a venture philanthropist the social impact is valued the most. However, through both primary and secondary data, we find that their balance between the social and the financial differs based on the respective company’s preferences.
Return expectations
We find that the general requirement among the investors is a financial return of above the principal, which is in accordance with the definition of impact investing. Nevertheless, as with social impact, we also find differences in expected returns across investors. Based on the return expectations of the investors in our sample, they can broadly be divided into two categories, where one of the groups steers in the direction of philanthropy/venture philanthropy, while the other group is more towards the financial side of the scale. Firstly, social impact is valued more than financial returns among one group of our respondents.
These are the investors the literature identified as impact-first investors (Findlay &
Moran, 2018), who are willing to undergo concessionary investments, meaning that they are prepared to sacrifice financial returns to achieve social benefits and high impact (Brest & Born, 2013). Stange (2019), an impact-first investor, elaborates:
“Social goals are always clear, but now, when we have this formal family office kind of process, we also look at what could be the financial returns, and if the financial returns
are not expected, we could still do the investment, but then we are aware of that.”
(Appendix 2.3, q. 8)
On the other hand, we find the investors that are defined as finance-first investors. We observe that this group of impact investors is less willing to compromise financial returns for social impact. As mentioned, venture capitals and private equity funds, who invest on behalf of their principals, are more pressured to deliver both social and financial returns.
These investors are among the group of investors in our sample that prioritise the financial objective. Furthermore, we find that more investors can be placed in the finance-first category. For example, TD Veen prioritises the financials but highlights that they in some cases can accept a lower return if meaningful impact can be created. The financial advisors we interview also state that the financials are weighted the most in the investments they advise on. What we observe in overall, is that even though the finance-first investors prioritise the financials, they are all willing to some extent to sacrifice financial returns if the impact prospects are highly impressive. Further, they also say that the definition of impact investing is not purely based on philanthropy, so one should be able to expect a return, it is just subjective where the distinction should be and how to weight the two objectives. As Veen (2019) contends, if people within the field are competent enough, they should be able to provide both a financial return along with social impact, as in many cases, they are closely connected.