Motivated by impact - EIU Perspectives - The Economist

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Motivated  by impact: A new generation seek to make their mark

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Motivated by impact: A new generation seek to make their mark

About this research Motivated by impact: A new generation seek to make their mark is an Economist Intelligence Unit (EIU) report exploring the driving forces behind the decisions of the next generation of business leaders and investors, with a particular focus on millennials. The findings are based on desk research and interviews with affluent investors and entrepreneurs conducted by The EIU and presented in series of articles, case studies and infographics. The research is supported by HSBC Private Bank. The EIU would like to thank the following interviewees who participated in the interview programme (listed alphabetically): •

 aissa Abou Adal Ghanem, M corporate projects manager, Holdal-Abou Adal Group



Stephanie Cordes, vice chair, Cordes Foundation



F arida El Agamy, general manager, Tharawat Family Business Forum

•  Eddie Holmes, CEO, Launch22 •  David Hutchison, chief executive, Social Finance •

Badr Jafar, CEO, Crescent Enterprises



Stewart Langdon, partner, LeapFrog Investments

•  Scott Farquhar, co-founder, Atlassian



Cameron Stevens, CEO, Prodigy Finance

•  Ben Goldsmith, co-founder and CEO, Menhaden Capital



Thomas Woolf, founder and CEO, EdAid

The EIU bears sole responsibility for the content of this report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. Adrienne Cernigoi was the writer of the report and Melanie Noronha was the editor.

© The Economist Intelligence Unit Limited 2016

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Motivated by impact: A new generation seek to make their mark

Motivated by impact The next generation of business leaders are taking over the reins of established family businesses and are looking to make their mark. Others are charting their own course, setting up innovative businesses to meet the evolving needs of a global consumer base. Young people are also blurring the lines between investment and philanthropy, seeking investment opportunities that will have a positive social impact on communities around the world, while also making a profit and using new tools to ensure their philanthropic gifts have a measurable impact. Driving these millennials is a new set of ambitions and desires, distinct from those of the generations that came before them. Advancements in technology bring the news of the world to their fingertips and provide them with tools to make a difference in distant parts of the globe. This has shaped their desire to make a material impact on issues that concern society at large and has manifested itself in increased support for initiatives facilitating affordable education, gender equality and environmental protection, among others.

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Research reveals that 87% of millennials believe that business success should be measured by more than just financial performance, and 93% believe that social impact is key to their investing decisions. In their entrepreneurial and philanthropic pursuits they are seeking to marry profit with purpose, and they are motivated by the size of their impact and their ability to measure it. In interviews with millennials and experts in the world of business and finance, The EIU has explored the motivations of a new generation of entrepreneurs, business leaders, investors and philanthropists. Our findings are showcased in a series of articles, case studies and infographics.

Motivated by impact: A new generation seek to make their mark

A family affair

The next generation of family business leaders have to contend with the rigours of a globalised marketplace and the need to leave a robust social, as well as financial, legacy

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hen Maissa Abou Adal Ghanem joined the Holdal-Abou Adal Group in 2009, she realised that the 69-year-old family firm needed a shake-up. “A family business is often run with a lot of passion and emotion, but [for us] there was a lack of cohesive culture between our brands and departments,” says the 38-yearold businesswoman. “Together, we needed to inject some protocols and discipline and instil our values across the organisation.”

40%

of family businesses globally will hand over the reins to a new generation in the next five years

That requires leadership, but perhaps of a different sort. Some 80% of next-generation business leaders say their leadership style will be different from that of their forebears, according to a 2016 Deloitte study of family businesses in Europe and the Middle East. Millennials have a style of management that is more open to dialogue, thanks to their greater ease with the flow of information and ideas, says Farida El Agamy, general manager of the Tharawat Family Business Forum, a network of family-owned enterprises in the Arab world. “Millennials are often interested in a less topdown approach,” she says. Such change may lead to conflict with parents, but this is par for the course with all generational shifts, she notes. Clear conflictresolution mechanisms, such as appointing a mediator or letting an elder adjudicate, can help, but as in any family “there’s more coffee involved than anything”, she adds.

She is part of the third generation to run Holdal, a retail and luxury-brand conglomerate in Lebanon, and the eldest of four siblings, who all work there too. Together they kick-started a ten-year plan to put in place a governance structure and formalise processes that, they hope, will lead to growth. “It’s about transforming the culture,” says Ms Abou Adal Ghanem, the firm’s corporate projects manager. “We aim to be the partner of choice in the Middle East and Africa by 2020 … and ensure the business is sustainable.” Family businesses matter. In the Middle East this structure dominates the corporate landscape, where family-owned enterprises account for 90% of firms, according to EY, a management consultancy. Globally, they also constitute some of the biggest household names—from Volkswagen to Lego—and generated more than US$1trn for Europe’s economy in 2013. Like Ms Abou Adal Ghanem, the new generation will soon have their hands on the tiller: 40% of family businesses globally will hand over the reins to a new generation in the next five years, according to a recent PwC survey of next-generation family business leaders. And while many cultures have the equivalent of the American proverb “shirtsleeves to shirtsleeves in three generations”, some of the next-generation leaders are trying their

hardest to buck that trend: 88% want to leave a stamp on the business.

80%

of next-generation business leaders say their leadership style will be different from that of their forebears

For Ms Abou Adal Ghanem, consulting the family council on the new strategy took a year, which included “putting her ego in her pocket”. She explains: “My father has resilience, wisdom and a humility the young generation doesn’t have. [The next generation] has the fire and passion. We have no fear, but we also have to prove ourselves to internal and external stakeholders and adapt to a changing environment.” The next generation is also more serious about firms’ responsibilities towards wider society, according to Badr Jafar, the 36-year-old CEO of Crescent Enterprises, a UAE firm with roots in oil and gas that has sprawled into logistics, private equity and more.

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Motivated by impact: A new generation seek to make their mark

“There has been a cultural and generational shift in the understanding of what the ultimate purpose of business is,” says Mr Jafar, a second-generation leader. “I think there is a more authentic appreciation now behind the value creation that comes from a focus on social impact in addition to maintaining healthy financials.” Alongside expanding the group’s activities, Mr Jafar founded the Pearl Initiative in 2010, a growing network of some 40 firms across the Arabian Gulf which aim to drive up standards of corporate accountability, internal governance and transparency through sharing best practice. That, along with a sound business, is the legacy he hopes to leave behind. “Corporate governance is so important for family businesses to generate positive economic and social impact, [and that depends] on cross-generational health,” he says. “That is both our biggest opportunity and our biggest threat.” Still, the most significant shift for the next generation of leaders may be outlook. The prevailing environment and pace of change shape each generation; that pace, however, has picked up in a globalised world, says Ms El Agamy. According to the 2016 Deloitte study, a shift in a firm’s business strategy will arise from the need to adapt to more opportunities and competition, as well as the desire to expand into new markets in the next five years.

My father has resilience, wisdom and a humility the young generation doesn’t have. [The next generation] has the fire and passion. “We are disrupting [Holdal’s] business model because we see the world is changing so fast,” observes Ms Abou Adal Ghanem. “We need to diversify the risk. But whatever change we make, the how remains as important as the what.” With traditional markets in Lebanon and Syria, the group has had to look further afield with plans for Egypt, Iran and Iraq. But it is also branching out into different industries, such as healthcare, guided as much by the heart as the head. Ms Abou Adal Ghanem’s brother is leading a push into green technologies—“his passion”, she says—thanks to his previous experience in the sector before he joined Holdal.

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“The global mindset of millennials is a huge factor,” notes Ms El Agamy. If millennial leaders want to be happy with their legacy, they will have to leave behind a business with a strong international standing, whether in terms of a worldwide reach or one that compares favourably in a global marketplace. “The orientation of success is becoming more global,” she asserts.

Motivated by impact:

A new generation of business leaders and entrepreneurs Driven by a desire to make their own mark, young affluent individuals are charting a fresh course for established brands. We present three prominent examples to illustrate how the next generation of business leaders are making an impact by reaching out to new, global audiences, improving corporate governance and breaking away from the traditional way of running the family business.

Rethreading the craft Antoine Arnault

Brewing up a storm

Siblings in search of summer

Catharina Cramer

The Jafar Brothers

Age: 39

Age: 38

- CEO Berluti - Chairman of Loro Piana - Son of LVMH CEO Bernard Arnault

- Managing Partner, Warsteiner Group

The beginning of craftsmanship 2007 – Launched Core Values campaign A series of photos of celebrities which showcase a rethink of the brand’s heritage with a focus on travel and the personal journey

2010 – Launch of Les Journées Particulières A shift in PR strategy, by giving public access to the LVMH Group’s ateliers, wine stores, private houses and historic boutiques

“When shoes have a soul” (Berluti slogan) Revenue increased from €30m in 2011 to €150m in 2016

“I see myself as a family entrepreneur — someone who is leading a company with a history but who is also looking for new ways forward.” Catharina Cramer

A fresh brew 9th generation of one of the biggest brewers in Germany

First female to join Warsteiner’s executive management team, at the age of 26

- Badr Jafar – 36, CEO, Crescent Enterprises - Majid Jafar – 39, CEO, Crescent Petroleum

Brotherly concerns The family business model in the Arab world “Global statistics show that only 30% of family businesses survive the transition between second and third generations, simply because of being unprepared.” Badr Jafar Youth unemployment “It drove the Arab uprisings three years ago, and will continue to cause unrest if left unaddressed.” Majid Jafar

Establishers of change A concoction of her own The Blooom Award, a prize that celebrates young artists – part of Cramer’s strategy to branch out to new, young audiences

Badr Jafar Founder of The Pearl Initiative – an independent, not-for-profit institution to improve corporate accountability and transparency Majid Jafar 2013 Visionary of the Year at the CEO Middle East Awards

Sources: Fashion Market Secrets, Haute Today, Luxury Daily, Business Wire, New York Times, EY, Campdenfb, Warsteiner Group, Contact Centre Solutions © The Economist Intelligence Unit 2016

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Motivated by impact: A new generation seek to make their mark

Social capital

We meet two millennial entrepreneurs using their business savvy to do good and explain why enterprise in the 21st century has to pass the “mum test”

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hen Eddie Holmes was 20 years old, the Prince’s Trust—a UK youth charity—gave him money and mentoring to help his start-up. Things went well until four years ago, when relations turned sour with his business partners. Bereft of his company, the young entrepreneur returned to the charity. “During that time I found a lot of reward in mentoring [other entrepreneurs],” says Mr Holmes, now 32. “I realised what the trust did was good, but they weren’t tackling some other important issues, such as how expensive office space is.” A canny businessman, Mr Holmes spotted a gap in the market. The difference was that this gap was an unfulfilled social need. So Mr Holmes set up Launch22, an incubator, to provide subsidised desk space and mentoring, with 30% of spaces allocated for free to less advantaged entrepreneurs. It offers belowmarket rental rates, leaving more in a start-up’s kitty: it costs £60-260 (US$80-345 at current exchange rates) a month to join the London branch, depending on membership type, compared with some £600 (US$795)a month charged by other incubators, according to Mr Holmes. The real impact comes from the formal and informal mentoring on offer, which helps build entrepreneurs’ social and intellectual capital. Since 2014 more than 250 businesses have passed through its doors, according to Mr Holmes. Launch22 is just one example of a growing trend. Young entrepreneurs are increasingly concerned with the societal repercussions of their activities: Deloitte’s 2016 Millennial Survey found that 87% of millennials polled across 29 countries believe business success should be measured by more than financial performance. At the same time, enterprise is

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not the enemy—three-quarters also believe business has a positive social impact. Coupled with disillusionment with traditional charity—“I wouldn’t want to be reliant on the largesse of others,” says Mr Holmes— the result is a move to find ways to do good, and to do it well. For young entrepreneurs this can manifest itself in social enterprise, although debates rage over what precisely that means. Models under the banner range from income-generating, non-profit entities to for-profit outfits with an explicit strategy to achieve social change. However, all these organisations operate with a “double bottom line”: using business tenets to solve a social or environmental ill in a financially sustainable way. There are an estimated 70,000 social enterprises in the UK contributing £24bn (US$32bn)to the economy, according to the State of Social Enterprise Survey 2015.

87% of millennials polled across 29 countries believed business success should be measured by more than financial performance, according to Deloitte’s 2016 Millennial Survey. Another entrepreneur is tackling the issue of tuition fees. Thomas Woolf, 36, launched EdAid in March this year to offer an alternative to the sky-high interest rates of between 3.5% and 15% on student debt that put many off university. The debt of UK students, to the government and banks, adds up to £20bn (US$27bn), according to market researcher YouGov. Mr Woolf speaks of his own experience,

Motivated by impact: A new generation seek to make their mark

£20bn

3/4

The debt of UK students owed to the government and banks

of millenials believe business has a positive social impact

EdAid is a blend of profit and purpose. The crowdfunded money is channelled into a foundation, a registered charity, which recycles repayments into more loans. Although the company takes a 5% fee, this only covers EdAid’s processing costs, notes Mr Woolf. The for-profit part of the business will come later, by matching employers with graduates. “The data we get over time will be valuable to us,” he says. The entrepreneur characterises EdAid as a technology business. For this reason, making a profit is necessary to attract—and retain—tech talent, he argues. Still, the social mission is at the heart of the idea. “Financial services tend to punish the poorest. The cheapest rates go to those with the most money,” explains Mr Woolf. “People are frustrated by the lip service that’s been paid to social impact by the largest organisations.” But marrying profit with purpose is not without its challenges. Warren Buffett, the famous investor, believes that “it’s too tough to serve two masters”. Launch22’s Mr Holmes agrees: “You’ve got two competing journeys, both of which require the same amount of effort.” Still, for a millennial generation of entrepreneurs there is what Mr Woolf calls the “mum test”. “There’s a shift in the way of doing business,” he says. “If you can call your mum and tell her what you’ve done each day, and be proud of that, then you are most likely running a decent business.”

which inspired the idea: “I was the first in my family to go to university, and I was the first generation to have student loans. It’s a very personal mission.” EdAid offers a peer-to-peer solution: crowdfunded loans— from friends, family and corporate backers—which students pay back, interest-free, once they start earning. Mr Woolf estimates that his system will cut the repayment period by half by jettisoning compound interest. So far 40 students have got to their total; he hopes to reach up to 1,000 in the company’s first year before ramping up to 15,000 students by year three. © The Economist Intelligence Unit Limited 2016

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Motivated by impact: A new generation seek to make their mark

The other 1%

Technology entrepreneur Scott Farquhar, co-founder of the Pledge 1% movement of corporate philanthropy, explains why doing good is good for business and why every young start-up should put a philanthropic stake in the ground

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The old model of business was to work hard your entire life, then go and do something good for the world. But in the same way Generation Y [those born in the 1980s and 1990s] wants to mix work and play, they want everything to happen together, and the same applies to philanthropy. The technology world is more Gen Y-focused, so you might see more corporate philanthropy in this sector because of the demographic of founders and employees.

ith 56% of millennials saying they would never work for an organisation whose values they didn’t believe in, the next generation is challenging firms to look beyond the bottom line. We talk to Scott Farquhar, the 36-year-old co-founder of enterprise software firm Atlassian that was valued at US$5.8bn when it went public last year. Its profits are not the only thing on the rise: the firm has been growing its philanthropic credentials, too. Atlassian is one of the founding members of Pledge 1%, a collection of more than 700 companies dedicating 1% of equity, 1% of staff time and 1% of their products to their communities. Why did you help establish the Pledge 1% movement? A couple of decades ago there were many institutions other than business through which people could engage in philanthropy — through the church or social organisations, for example. Those institutions are not as strong now, so I think it is business’s duty to provide a way in which employees can give back. I read about [US-cloud computing firm] Salesforce, which had been pledging 1% of their equity, time and products and thought it sounded like a very easy thing to do. All those elements were worth zero at Atlassian at the time, but we knew that if we were successful, one day we could give back. Then in 2015 I wrote down my goals for the year. We’d been so successful with Pledge 1% internally, I thought it would be an easy medium for us to spread the word of corporate philanthropy. What role has technology played? Technology businesses aren’t naturally more philanthropic. But they do have a chance to grow incredibly quickly, so the timeframe from pledging to turning into real cash can be under a decade.

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56%

of millennials saying they would never work for an organisation whose values they didn’t believe in

$5.8bn Value of Atlassian when it went public last year

>700 companies dedicating 1% of equity, 1% of staff time and 1% of their products to their communities

$6bn

© The Economist Intelligence Unit Limited 2016

Amount that would be raised if all unicorns pledged 1%

What has been Atlassian’s impact to date using the Pledge 1% approach? The part of the programme that probably makes the most difference is the equity element, because once you’ve chosen to do it, you can’t back out. If just the unicorns [pre-IPO companies valued at more than US$1bn] pledged 1%, it would be worth US$6bn alone. We can have a significant impact. We have also given away about US$100m worth of software—some 35,000 product licenses—to non-profits for free. One NGO [non-governmental organisation] that uses our products is Mercy Ships. The non-profit sails a ship around the coast of Africa, offering surgery to people who have non-life-threatening, but serious, illnesses that wouldn’t otherwise get treated. Mercy Ships uses our products to help co-ordinate all the operations on the floating hospital. At Atlassian we have donated more than 10,000 hours of foundation holiday days to volunteering, which—based on an eight-hour day—is more than five years of skilled time. What are the upsides for enterprises of the pledge? One benefit is attraction of staff. The pledge has been so successful that our staff members say it is one of the top three reasons why they join. Younger workers value this a lot more than older employees; it has become a competitive

Motivated by impact: A new generation seek to make their mark

advantage for us in comparison with companies that have no system of corporate philanthropy. The other benefit is keeping staff. Research shows that companies with corporate citizenship programmes have 2.3 times the employee retention. Starting Pledge 1% is one of the best decisions I ever made. Having a great company culture allows you to attract great people and—beyond any commercial reason—it is fantastic to see employees have an outlet for giving back.

The most successful approach is when you have one passionate employee who rallies others. One cause we support is Room to Read, a non-profit for improving literacy. We have sent ten employees each year to Cambodia, where the schools we support are located, to see the impact we can have. One employee came back and encouraged others to donate US$1 a day from their own pay checks. Some 700 employees have signed up so far.

Starting Pledge 1% is one of the best decisions I ever made. Having a great company culture allows you to attract great people and – beyond any commercial reason – it is fantastic to see employees have an outlet for giving back.

Staff time

What do you hope to achieve through the movement?

Equity

Products

What are the challenges with implementing the pledge? There are some bureaucratic hurdles. We have been working with governments around the world to try and resolve tax incentives. We want people to be able to make a pledge when the company is worth nothing but get the benefits later when the company is successful. The pledge’s most difficult target to reach is 1% of employee time. Atlassian gives all staff members up to five days a year for volunteering. That is a little over 2% in fact, but most people don’t take it. The idea is that those who are most passionate will make up for some of the people who are not.

One reason why more companies don’t pledge is just lack of awareness. People think Pledge 1% is too hard to implement. I spend my 1% of time on the initiative so that if a firm shows interest we can follow up. Our goal is for the pledge to be part of a company’s articles of association—almost a tick box at the end of the constitution, where you can donate 1% of equity to charity. It really should be something companies incorporate from day one. I would advise other entrepreneurs to put a stake in the ground—that philanthropy is important to them. Then go and run a successful business, because without a successful business you don’t have the means to give back. Pledge 1% has a real opportunity to make a difference.

We have yet to hit that 1% goal; I don’t know a single company that has. We try out different methods to encourage people, such as getting them into a volunteering programme within the first three months of joining Atlassian.

© The Economist Intelligence Unit Limited 2016

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The socially-conscious investor

In the hunt for profits with purpose, impact investing is starting to gain traction globally. We meet the organisations helping investors put their money where their mouth is and reap social—as well as financial—returns

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n 2014 American investor Marc Andreessen said he would “run screaming from a B corp” [companies wishing to benefit society as well as their shareholders]. However, not long afterwards his firm, Andreessen Horowitz, took part in a US$33m funding round for just such a company, AltSchool, a network of micro schools that offers highly tailored education to boost learning. Institutional investors such as BlackRock and Goldman Sachs are starting to latch on to impact investing—even the Pope is a fan. Such hybrid models—where investors seek out organisations that promise financial returns and positive social or environmental change— are growing in popularity. Investors injected US$15.2bn into impact investments globally in 2015, according to a survey by the Global Impact Investing Network (GIIN). Nearly half the capital came from fund managers. In all, the survey’s 156 respondents were managing US$77.4bn in impact-investing assets by the end of 2015. Impact investing has its roots in the divestment movement, where investors got rid of morally dubious funds in the likes of the arms or tobacco industries. Coined as a term in 2007, actively choosing investments with a social purpose got a push in 2008, says David Hutchison, chief executive of Social Finance, a UK-based non-profit that structures such deals. “There is an element to which people woke up after the financial crisis and realised how they invested their money was an important consideration.” Younger investors are particularly exercised, he adds, thanks to a greater awareness of market failures and that “the hunt for short-term profits doesn’t lead to the right answer in terms of social outcomes”.

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A range of for-profit vehicles exists for the socially-conscious investor, although they are still not as widely available as, say, green energy products. One of these is the social impact bond (SIB), pioneered by Mr Hutchison’s firm in 2010. An SIB combines the public, private and third sectors by getting investors to pay upfront for a project. The donor pays the investor back if certain social outcomes are met. Project implementers are typically non-governmental organisations (NGOs) or charities. “A lot of people drawn to us have already been engaged in philanthropy, but have been frustrated by the lack of systemic change that flows from the projects and the lack of evidence,” explains Mr Hutchison. Social Finance has mobilised around £100m (US$132m at current exchange rates) since 2007, with one-quarter of that going to SIBs. It targets returns in the “mid-to-high single digits”, according to Mr Hutchison. “We’ve been oversubscribed in each of the fundraisings we’ve had for SIBs,” he adds. Another organisation in this space is Prodigy Finance. Split between the UK and South Africa, the company offers loans to postgraduate students who struggle to get funding for pricey MBAs in the world’s top business schools. Students pay the loan back at 7%, plus a 2% fee; three-quarters of the students are from developing countries. Investors get financial returns of around 5.5% that compensate for the risk, as well as the satisfaction of knowing that they helped fund the next generation of leaders, says Prodigy’s 38-year-old CEO, Cameron Stevens. Prodigy has helped more than 4,000 students since 2008; Mr Stevens hopes this will ramp up to

Motivated by impact: A new generation seek to make their mark

an entry-level qualification. But drawing a line between investment and outcome to investors’ satisfaction is tricky, notes Mr Hutchison. “Investors don’t want to pay for what would have occurred anyway,” he says. “They [also] don’t want some macroeconomic event to make it look like the project failed, when holding a particular outcome steady was a huge result.” There have been failures, too, of course. A Goldman Sachs and Bloomberg Philanthropies-backed US$7.2m SIB aimed at reducing reoffending rates for inmates at Rikers Island prison in New York was not a success.

10,000 students just this year, targeting US$400m worth of funding in 2016 alone. The key to piquing more interest in impact investments is to offer comparable yields to a traditional investment, otherwise “you end up in the 0.6% of income that’s donated every year, not the 25% that is invested”, says Mr Stevens. The average internal rate of return for impact funds was 6.9%, compared with 8.1% for their non-impact counterparts, according to the GIIN study.

For all the talk, impact investing remains the prerogative of a substantial minority, not the majority, observes Mr Hutchison. Still, its mainstream appeal may yet grow. “I’ve noticed that some investors, who invest across a wide range of instruments, talk about their impact investments the most. It’s the one they are proudest of. That process of talking about it will do a huge amount to expand the market.”

Younger investors have been at the vanguard of the trend, driven by technology entrepreneurs who want to give back in different ways, he notes. Still, the “sweet spot” for Prodigy’s investors is those in their 40s, because the amount needed to invest to date has been quite large. Tracking impact is as important in building confidence in the sector as it is to the individual programme, says Social Finance’s Mr Hutchison. Both Social Finance and Prodigy Finance employ data analysts to crunch the numbers; Prodigy swallows the cost and Social Finance charges a 5-10% fee. In response to investor demand, Prodigy added economic status to its dataset: 58% of students are the first in their family to pursue postgraduate studies, and Prodigy recipients have started 12 businesses. One of Social Finance’s programmes paired up toddlers with troubled teenagers to help the latter stay in school. It measured behaviour, school attendance and qualifications attained. At the end, 73% of the 14-16-year-olds achieved

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Motivated by impact: A new generation seek to make their mark

Sense and investability

English financier and environmentalist Ben Goldsmith talks about why impact investing, beyond the ethical benefits, is just good business sense Generating a measurable, positive social and environmental impact is a key consideration for young investors, who are increasingly pursuing impact investing as a core component of their investment strategy. Ben Goldsmith, the youngest son of Sir James Goldsmith and nephew of Green Party UK founder Terry Goldsmith, is one such millennial investor. He helped establish WHEB Asset Management, its spin-off Alpina Partners and, most recently, Menhaden Capital – all geared towards investing in environmentally responsible companies. In our conversation with him, he explains what’s driving this generation of investors towards investments with a purpose beyond profit.

Key motivations I grew up in a family in which the environment was considered a core concern of humanity. My uncle was one of the founders of the Green Party UK. So I grew up a passionate environmentalist.

Achieving those goals through three funds he helped establish: Alpina Partners, WHEB Asset Management, Menhaden Capital So the thematic interest is the same across all three businesses I helped create. We are interested in the green industry broadly defined – not just energy but businesses which help industrial sectors use resources more efficiently. The difference between the vehicles is that Alpina Partners only invests in private companies of a certain size, WHEB Asset Management only invests in large publicly-listed companies, whereas the newest vehicle, Menhaden Capital, has a completely unconstrained mandate - it can provide loans to people building wind farms in Bavaria or invest in a hydroelectric company in Vietnam.

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I was always drawn to finance and wanted to be commercial as well. That was the motivating force in me. I suppose I’m lucky to live in an era in which those two aims can be achieved simultaneously.

Taking a long-term view... All three are long-term vehicles, but in different ways. The private equity funds managed by Alpina Partners have a fixed ten-year life. So you have to invest, grow and sell the business within a ten-year period, which is typical of private equity. At WHEB Asset Management, the time horizon is open-ended, which means they can take a long-term view. But investors can take their money out at any time, so they cannot invest in something illiquid as they may have to return funds to investors on short notice. At Menhaden Capital, we have permanent capital which allows us to be really patient in our approach without the risk of an investor drawing out funds.

Motivated by impact: A new generation seek to make their mark

Is there a generational shift in how these investments are perceived? I think there is, yes. What I think is happening with younger investors, who are more switched on about the [environmental] changes taking place, is that they are looking to weed out the negative impact from their portfolios. So investors are looking at all their investments and thinking: Are we investing in businesses engaged in harmful practices - ripping out rainforests, digging coal, employing child labour, polluting rivers? I think there is an increasing recognition, particularly among younger investors, that doing so is no longer sustainable— it is not only the wrong thing to do morally, but also financially, because these businesses are no longer going to be able to survive in a world where there is tremendous transparency and visibility. Social media makes it very difficult. Therefore, it is making increasingly good sense to try and avoid investing in the “bad” guys.

Commercial returns vs. environmental impact This is an area where we are seeing, and will continue to see, significant growth – evident in the examples of installed solar capacity, electric vehicles, LED lighting, to name a few. So I think that, in fact, you are likely to make money investing in this [sector] than in other areas if you are smart about it. There are two sides of the coin when it comes to impact investment. On the one hand, impact investment means reducing the amount of negative impact created by your portfolio - child labour, polluted rivers, deforestation. On the other hand, you invest in businesses that are actually making a positive impact – solar, wind, LED lighting, efficient lavatory systems. The evidence suggests that by reducing the negative impact you actually make more money, whereas the commonly held wisdom previously was that you would sacrifice your financial returns. In turns out the opposite is true.

Have you had to exit from investments? Yes, of course. But in anything you invest, if something changes in the macro environment or if the business model is flawed, as an investor you need to be open to changing your position. Investors have lost money in a lot of places. Look at the collapse of SunEdison during the first quarter of this year. So, the answer to that question is yes, but no more so than with any other area in which you might invest.

But why are these businesses outperforming financially when there is a significant investment cost attached to “going green”? First of all, the payback is enormous. It may cost to insulate your building and install LED lighting, but the savings on your energy bill allow you to recover your investment within 12 to 18 months. So they get an enormous rate of return just by reducing their power bill. But more important, companies which are not thoughtful about the negative impacts of their business tend to be less thoughtful about other aspects like strategy, human resources, and the general management of their business, and tend to underperform. The evidence is mounting that you tend to get better financial performance from companies that are thoughtful across the board. Do you really want invest in a company that is not looking at opportunities to make a 30-40% return on investment by investing in insulation or LED lighting for its buildings?



I don’t think there is a separate category of investing which is called impact investing. I’m not a huge believer in that. I just think it’s about investing in better [managed] companies and not investing in [badly managed] companies and, in some cases, investing in companies that are actually going out and delivering change.



© The Economist Intelligence Unit Limited 2016

15

Motivated by impact:

A new generation of investors and philanthropists A new generation are blurring the boundaries between investment and philanthropy. Millennials are pursuing investments that go beyond delivering a profit to having a measureable social impact as well.

UP CLOSE AND PERSONAL

56%

of millennials in the US are motivated to give by a personal connection or trust in the leadership of the organisation

Affluent millennials in the US are investing in:

30% Gender equality

39% Water Investments are a way to express social, political, or environmental values for:

39% Environment

34%

MATURE BABY BOOMERS

36%

58% Education

44%

GEN X MILLENNIALS

67%

63% of British millennials think values-based investing delivers the same or better financial returns

A GLOBAL PERSPECTIVE With increasing exposure to global issues, young investors and philanthropists are increasingly supporting causes in distant parts of the world Mark Zuckerberg (San Francisco) Founder of Facebook, 32, donated $25m to tackle Ebola in West Africa

Ruth Yeoh (Singapore), Executive director YTL, 32, has invested in habitat protection of rare birds in the UK

Joe Gebbia (San Francisco) co-founder Airbnb, 34, created a tool for hosts to offer free accommodation in response to the Nepal earthquake

Paul Blackburne (Australia), founder of Blackburne Property Group, 40, established the Child Protection Unit with the Cambodian Children’s Fund

MAKING AN IMPACT High-net-worth investors in the US who currently own or are interested in social impact investments:

MILLENNIALS 85%

16

GEN X 55%

48% of 18-24 year olds in London would give more if they had more information on the impact of their financial donation

BABY BOOMERS 28%

MATURE 24%

How are organisations measuring the impact of financial donations?

Social return on investment (SROI)

Logic model

Mission alignment methods

Experimental methods

Sources: Oppenheimer Funds; Achieve (Millennial Impact Report 2015); US Trust; City Philanthropy; Harvard Business School Social Enterprise Initiative; Standard Life Investments / YouGov. © The Economist Intelligence Unit 2016

Motivated by impact: A new generation seek to make their mark

Global vision

Technology has made the world smaller for a millennial generation who view the world through a global lens. We meet the young investors looking to do good with the dollars under their control, and to do so on a grand scale

“I

was working in fashion, selling US$200,000 one-page magazine adverts. And then I met some of my peers, who were raising the same amount but supporting incredible organisations that work in Africa or girls’ education [in developing countries],” says Stephanie Cordes, vice chair of US-based Cordes Foundation. “It put my current job into perspective.” Not long after, the 26-year-old quit her job and joined the family foundation set up by her father, which focuses its US$10m portfolio on impact investments in Africa and Latin America and on improving life for women and girls. For Ms Cordes, the opportunity to use your money to move the needle on some of the world’s biggest challenges “just makes sense”. “You could be investing in something that at the same time goes against what your philanthropic dollars are trying to solve… Sometimes I don’t think older generations see that circle,” she observes. “By investing in things that are aligned with your values you can create much more impact.” While studies ricochet between labelling millennials as the most civic-minded and the most selfish of generations, what is clear is they are constantly plugged into world events. A global perspective is the norm. Easy access to information and travel helps: almost half of 18-24-year-olds check their smartphone within five minutes of waking up, according to a 2015 Deloitte study, while a survey by Boston Consulting Group found that 70% of millennials wish to visit every continent on earth, compared with 48% of other age groups. They are also a generation whose early careers were shaped by the 2008 financial crisis, but in

which youth and optimism combine in a desire to fix the problems they see. One of those tools, increasingly, is cash: 93% of millennials believe social impact is key to their investing decisions, according to an annual study by US Trust. The younger generation of investors is more globally minded than ever, and technology is one of the key drivers, agrees Ms Cordes. The foundation’s portfolio reaches more than 70 countries by investing in various funds and directly into organisations such as Bridge International Academies, which provides low-cost private schools in Africa. “We are able to connect with people in developing countries much more easily, for example via Skype or social media, and we’re so much more aware of what is going on,” she notes. “Having more access to information definitely gives you bigger ambitions.” Size matters to millennials. Impact investing in emerging markets is appealing as it allows you to invest in businesses with the potential to reach millions, says Stewart Langdon, 37, a partner at LeapFrog Investments, a private equity firm that manages assets of US$1bn in financial services for the poor in Africa and Asia.

Size matters to millennials. Impact investing in emerging markets is appealing as it allows you to invest in businesses with the potential to reach millions, says Stewart Langdon, 37, partner at LeapFrog Investments. © The Economist Intelligence Unit Limited 2016

17

Motivated by impact: A new generation seek to make their mark

An investment banker, Mr Langdon joined LeapFrog in 2010. “When you work for a corporation, people will do projects such as paint a school, which is noble,” he says. “[But] I loved the idea of being able to use my skills every day to have a major impact on the fight against poverty... We didn’t want to do projects that reached just a few thousand, but which changed the lives of millions and millions of people.” The number of companies LeapFrog invests in has reached

almost 85m since 2007, according to the firm, by offering services such as micro insurance and savings that many in developing countries are using for the first time. The firm uses a traditional private-equity structure, charging a 2% fee and offering a 20% return above a certain hurdle. One of the companies in LeapFrog’s portfolio is Swedenbased Bima. The firm teams up with mobile operators in 15 countries to reach poorer customers with low-cost life and health insurance for under US$1 a month. Bima has 20m subscribers, more than 90% of whom live on less than US$10 a day. “Bima is run by people in their early 30s,” explains Mr Langdon. “There is no way we would have been able to attract young, dynamic talent into the organisation if they weren’t motivated by the idea of building something big that had real purpose.” The coming years will see more funds popping up concentrated on climate change and on women’s empowerment for the same reason, argues Mr Langdon. “That’s a big coming trend in impact investing because women’s lives are so challenging in the developing world.” For Ms Cordes, marrying your career with doing good— whether through a job, start-up or investment—and doing it on a global scale is a no-brainer. “Philanthropy can’t solve some of the world’s toughest problems on its own,” she says. “The capital market is a way to create more business opportunity with a social component that allows us to align our investments with what we are interested in, which is how to make a positive change in the world.”

70% 93% 18

of millennials wish to visit every continent on earth

of millennials believe social impact is key to their investing decisions

© The Economist Intelligence Unit Limited 2016

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