Five Questions about SRI – Weekly Expert Interview with Tom Holland in Emerging Markets ESG

• To collect a catalogue of examples of SRI in practice in emerging markets;
• To raise awareness about SRI in emerging markets;
• To reflect on what SRI in emerging markets means to practitioners; and
• To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interview is with Tom Holland, Director, Maximpact, Monaco.

Emerging Markets ESG: How would you define socially responsible investment (SRI)?

Tom Holland: At Maximpact we’re focused on impact investing, which we see as one kind of SRI among others. We define an impact investment as one that is impactful and beneficial for the planet and its inhabitants; and that includes people and their communities as well as animals and other living things. By definition, an impact investment also generates a financial return, so our site concentrates on deals that have potential to deliver more than one kind of benefit. We believe it’s possible’ ;and we think it’s necessary if we’re going to find sustainable solutions to the challenges we face now and in the future. It’s a new asset class, and there’s still a lot for us all to learn. To encourage innovation and increase deal flow; one of the issues limiting the growth of the sector; we’ve purposefully adopted a wide definition of what counts as an impact investment. We list many kinds of deals from many kinds of funds, intermediaries and entrepreneurs, some of them new to the field. Maximpact’s platform is there to build bridges between diverse parts of the impact sector and invite new players into the arena.

Emerging Markets ESG: What distinguishes SRI from mainstream investment?

Tom Holland: Normally, mainstream investment doesn’t take the social or environmental element into account. Financial return; and that means market-rate return; is everything. In SRI, including impact investing, there are other kinds of benefits, and these are just as important as the financial returns, sometimes more so. Impact investing is unique among different kinds of SRI because by definition it requires that both financial and social or environmental returns are measured. Financial measurements are of course already well developed. Now, systems that measure social and environmental impact; including GIIRS, IRIS and PULSE; are being honed and developed as the sector matures. What the sector needs at this point is more practice, trial and error, opportunities to field test these systems and find out which ones really work. At Maximpact, we’re trying to increase the amount of impact investing, bump up the number of deals and encourage cross-sector collaboration. All of these things will feed the development of better metrics, which in turn will help make social investing of all kinds more effective and consequently more attractive to investors.

Emerging Markets ESG: Which extra-financial theme; environmental, social or governance; is the most challenging for companies in emerging markets to manage?

Tom Holland: I would argue that governance is the most challenging extra-financial theme in developing countries on two different levels. First, there are the challenges of dealing with the systems inside a given country, and sometimes these can make both developing enterprises and delivering social and environmental benefit very challenging. Governance in this sense is an element of infrastructure and therefore presents a fundamental challenge for companies, one that has to be tackled in order for them to succeed.

On another level, the decision-making structures and systems of the companies themselves can be a challenge in the world of impact investing whether they are working in emerging markets or not. There are well-established governance models for companies that mainly generate profits. Equally, there are excellent governance models for nonprofits and other kinds of charitable organizations. With impact investing, the governance models are just beginning to emerge. How do you set up an organization that delivers on two very different fronts at once? Who are your shareholders? How do you deal with multiple stakeholders, a situation that is common in a world where a lot of the deals are highly collaborative, involving cross-sectoral investment, and where many have impacts that effect whole communities or geographical regions? Again, the answers will only emerge with more experience and more research.

Emerging Markets ESG: Which extra-financial theme; environmental, social or governance; is the most challenging for investors in emerging market companies to analyze?

Tom Holland:This varies. The challenge is case by case, which could be company-specific or country-specific. For example, if we have educated and informed staff on the ground in a particular country, as well as a system of metrics such as the ones mentioned above, we can obtain useful information. If we are working in a new country we may need to collect our own data from scratch, or look for it from out-of-country sources, or simply tap into the expertise of organizations that have experience in a given locale by forming collaborative arrangements with them. Openness to collaboration will be one of the keys to successful impact investing. It also looks as if there’s a trend toward big development organizations like the UN and major philanthropic institutions making more of their data public, which would be a very good thing for impact investing and social investing in general. Let’s hope this movement continues to gain momentum. More, better data would give us the raw material we need to find ways to invest capital where it’s most needed.

Emerging Markets ESG: MaxImpact is a meta-portal. Who are you trying to reach and what impact would you like to see?

Tom Holland: At Maximpact we have what’s been called a “big tent” approach. Listing with us is free, though all our users are vetted. Our reach is global. There is no size requirement for deals, and no size limit. This is something we are proud of. We’ve adopted a broad definition of impact so that we can be inclusive and invite all kinds of users to list with us. Right now on site we have deals listed by individual entrepreneurs, green technology companies, philanthropic organizations, social enterprise hubs, CSR funds, impact investment funds, family foundations, large foundations and many others. A number of these are among the impact investing pioneers; they’ve been supportive of Maximpact; but some are trying impact investing for the very first time, just dipping their toes into the water. We think that’s great. We’re here to open up the field and draw in more investors. Because we believe that this is how the impact investing sector will grow and how it will perfect its market mechanisms and overcome some of its early infrastructure shortfalls.

To answer your question simply: We’re trying to reach all kinds of investors, anyone who has capital to invest and wants to do good with it while making a return. Impact investing, like other kinds of social investing, is part of a broader cultural shift towards using the power of business to meet social and environmental needs. People all over the world see the sense in using capital to do more good; and people see the need for change as urgent. At Maximpact we want to be instrumental in bringing that change about. We’d like to see more investors take up the practice of impact investing and devote more of their capital to enterprises that deliver the kind of goods and services that people and the planet need in order to create a better, more sustainable future for all of us. Maximpact’s mission is threefold: 1. To create a more sustainable future by accelerating the rate at which we do good for our planet and its inhabitants; 2. To support the growth of impact investing by providing a place for entrepreneurs, intermediaries and funders of all kinds to list impact deals and ventures regardless of size, sector, location or type; and 3. To foster a better future through sharing, collaboration and co-investment in the impact investment sector.