GINA: Welcome back Stuart! Yesterday, we left off where you were speaking to impact investing sector trends in Africa and Europe. Today, I’d like to explore your experience with the availability of ‘patient capital’ and get your views on what’s needed to create sustainable change and the role of business and government.
Let’s start with your views on the availability of capital for impact-driven ventures.
STUART: I can only speak to what is happening in Europe. If you look at family offices versus high net worth individuals versus angel investors, their understanding of patient capital or impact investing is very different across the three groups.
For family offices, recently my partner and I were invited to speak at a family office event. We explained what impact investing is and how we operate. A lot of the attendees were either representing a family office or the investment manager to family offices and invariably were age 50+ white males with a background in finance who typically do safe investments in real estate or pension funds but are being confronted with younger generation demands for ‘smart capital’.
The younger generations want to do ‘good’ with the money and are asking the family office investment managers to implement this. Without us having to do anything, this is prompting traditional investment managers to want to learn more about impact investing. Traditionally, these are the types of individuals who would do ‘traditional investing’ and then donate to a cause but we are making the case that you can do good without compromising impact or financial returns in a way that is more sustainable.
GINA: In my experience with philanthropic foundations, many still have investment portfolios that are not aligned with their philanthropic mission.
STUART: It’s an education thing and I understand that it is difficult to understand what is impact investing because there are so many different definitions, asset classes but ultimately, it is common sense. You should always invest for good and profit. Maybe it’s a generational thing but we discovered that once we educate the traditional investors and they realise that it is possible to do good and make money generating market returns or above, this is very interesting to family offices because there is a pride behind what they do.
GINA: I think that the meta-analyses evidencing that socially responsible investing returns matches or outperform traditional investing in the mid to long term is very helpful in convincing investors. Is that your experience?
STUART: I think it is about shifting the conversation to move from pure profit investments to opportunities to invest in a responsible manner that won’t adversely impact your return potential.
GINA: One of the impediments to responsible corporate conduct is this so-called doctrine of shareholder primacy. Putting aside social impact, if you focus exclusively on the short-term to satisfy the demands of the shareholder at the expense of other stakeholders, how can you build a strong company in the long run? If a company is under pressure by its shareholders to produce short-term returns, how can we begrudge the corporate leaders from taking shortcuts?
STUART: This is one of the main reasons why we want to deal with startups when they are still malleable. If you can put the right structure in place as a small company, when you reach a mid-sized company or go public then it is part of your DNA and the shift doesn’t need to happen.
Case in point is Patagonia, which has been built up in a manner that at its core doing good and being responsible while making a lot of money. It is not about social impact, but rather about being a good business and making good business decisions for your supply chains. For instance, Patagonia has their own corporate VC called Tin Shed Ventures. Instead of donating the 1 or 2 per cent of profit every year, they put it into the corporate VC and the VC searches for companies that are doing a better job than what they are doing in their supply chain lines. Then the VC acquires that company. For example, they might find and buy a company that is using less water to treat fabrics - they will procure it and integrate their products and services into their supply chain.
Often there is a perception that the word ‘social’ comes at the expense of something else such as profit. But if you use the Patagonia model, you are simply changing the focus to making a decision to simply be more responsible.
GINA: Are you suggesting that we should shift our focus away from ‘social impact’ to developing business models that operate on the basis of what is in the best interest of all stakeholders, not only the shareholder?
STUART: Exactly. Without compromising financial return. That is key for any business. I believe that you can still make good money but have ethical supply chains, not pollute, or repurpose your waste. Put systems into place where the sum total of your business is positive, not just a financial sum total. I think the Patagonia model is the standard.
GINA: Impact investing supports companies that are targeting an existing problem, be it environmental or social and there is a need to drive more capital to help these companies grow. On the other hand, there is business that is not purpose driven but has developed systems that considers all stakeholders, including employees, the environment, consumers, suppliers, etc. in decision making. To my mind, this model, even if it is not explicitly tackling a social problem will lend itself to creating greater sustainability.
STUART: Of course. In Europe one of the big industries that illustrates this example is shared transportation. Shared electric scooters for example in the past five years went from one company to ten companies that are offering this model. For me, that model is indicative of how to make it work. While the output is the same, namely the scooter, the outcome is different because you are using electric scooters and not adding Co2 emissions into the environment. The profit is similar, the service is the same, but what is different is thinking through all of the consequences when making decisions, specifically, the unintended consequences of the action of your business.
GINA: One of the challenges in philanthropy and impact investing is measuring impact. What are your thoughts on impact assessment with regard to an ordinary non-purpose driven business?
STUART: In the impact investment context, we looked at all the reports I mentioned earlier. There is no one size fits all model. Measuring your KPI’s (key performance indicators) which is typically a financial measure such as “What’s your burn rate?” “What’s your customer acquisition cost over lifetime value?” These phrases were drilled into us in business school because that is what investors want to see. There is a missed opportunity to include factors that are not financial into that analysis. There should be a measurement around impact to society or impact on the environment.
We use the Theory of Change to make this assessment. We ask social enterprise founders, what is it you want to do? Then we look at the business model and see if the mission is integrated into the whole process all the way to the output. If the output is not aligned with the original intention, then there is a problem somewhere. We take that approach with each startup with a framework that we built by pulling from all of the different sources tailored specifically for startups.
GINA: What about the B Corp model?
STUART: The B Corp evaluation process is designed for corporates, it is not meant for startups. Some of the questions are valid and valuable but 50-60 per cent is not applicable. We built metrics that are suitable to measure a startup. It is the small incremental things that add up and make it a responsible business. As a business owner, I should be held accountable for the consequences of the impacts of my business.
GINA: Frank Dixon, a former Managing Director at Innovest Strategic Value Advisors, an ESG rating firm, argues that the ESG model is incomplete and that we need to add another “S” at the end, for “Systems”. His argues that companies alone are not going to make an impact unless better systems are put into place that make them accountable for their impact and that the current systems are flawed and compel companies to degrade the environment and society. I would like to hear your thoughts on that.
STUART: I agree. A good example in France is this new regulation that targets restaurant food waste. Restaurants were throwing away 60 per cent of their food. It was just under a year and a half ago, the government introduced a law that fines restaurants who throw away food. Because of this law, the food wastage from restaurants dropped to zero. Also, what it created were little social enterprises that would buy the food from restaurants and repurpose it through soup kitchens or shelters. This is a great example of how accountability has a trickle-down effect. That’s a top-down approach.
On the other hand, you can reward consumers for making responsible decisions. There is a store in Italy that encourages customers to return used plastic bottles by paying for their return. The customer is incentivised through the payment and the business is incentivised through government, by way of tax relief.
These are examples of the consequences of small regulatory changes with a big impact.
GINA: Do you have any opinions on what the regulatory environment could do to support impact investing?
STUART: Wow. It might be a bit contentious but there could be a selection of funds where if you are an LP (limited partner) investor to one of those funds there is a tax relief offered to you in the same way that you donors to charities receive a tax relief. The tax relief encourages massive donations, but this model is unsustainable because you create dependency. Maybe it is not about making more money, maybe it is about recovering capital, but if there is tax relief available for impact investing, that in and of itself is an incentive. That is why many high net worth individuals invest in art because of the tax relief they receive, not because the art is that valuable, but because it is a part of their tax planning.
There is a special structure that the European Union has created for impact investment funds. It is the structure we are set-up under. There are some advantages offered by this vehicle including lower set up costs, lower legal fees, and if I am not mistaken the LPs get some type of tax relief if they invest over a certain threshold. In addition to that, there are some laws around auditing requirements and protections for the directors from aggressive shareholder influence.
GINA: What are your views on the opportunities for individual investors who want to get into this space?
STUART: A good place to start is education around what is impact investing and how you can get involved. In Europe there are a number of networks that you can get involved with, for instance, there’s one called Go Beyond Investment that is meant for angel investors who want to get involved in impact investing. They are really well structured and invested in by the European Union. They have good resources to offer newcomers into the space for guidance. They recommend starting with ten per cent of your investable income and recommend that you collaborate with two or three other Angels. It is also good to find areas that you are passionate about and look for businesses that solve that solution. It is about contributing to something you actually care about!
GINA: Do you think that there is a profile of an ideal impact investor?
STUART: People who are 45 or 50 upwards who made money through working hard and want to do good with their earnings. A majority of the time, like 70 per cent of the time it is a white male, but I think that the more women who get involved as angel investors bring more heart into it. Just having that voice in the conversation makes such a big difference. For instance, if you are having a shareholders’ meeting or a board of advisors meeting, having a voice of divergence that encourages people to see things differently with a bit more emotion attached to it is extremely valuable for discussions around making money. What I saw in business school was that the one voice that was lacking was the female voice because we live in a male-centric world, something like 90 per cent of CEOs are male, the conversations are all the same – and we don’t know what we don’t know. The more the female voice comes into the discussion, the less there is a need to educate or explain impact investment because for females, impact investing just makes sense.
There is urgency. I read somewhere that if everyone in the world lived like the average middle-class American we would need three earths to sustain us.
GINA: How do we convey the urgency, Stuart?
STUART: Wow. I feel like the writing is on the wall and that the evidence of change that is needed now is more prevalent than ever before and if you are not seeing it, it is because you are choosing not to see it.
GINA: I think there is so much ‘whitewashing’ or ‘greenwashing’ from the private sector and the public sector that it can be confusing and difficult for the average person to discern what’s real and what’s not.
STUART: I feel like there’s a bit of ego around business. If someone like Warren Buffet were to say that he was allocating half of his investable assets and putting them towards impact investments, that one statement would shift so much. If impact investing had a public relations agency they would need three or four stars in business all they would need to say they are investing half of their money in impact investing and stopping their philanthropy. Then you will see a shift with the lower tier investors with smaller amounts of money move away from traditional investments going towards impact investing or they will put their money in companies that screen for positivity instead of negative screening. It takes a champion like Buffet or Bill Gates to say I’m done with my philanthropy and putting that money into impact investing to shift the needle.
I don’t know if you follow cryptocurrency trends but there was a sentence that Warren Buffet used around Bitcoin that had an effect on the market the next morning. It is that kind of conversation that I am calling for.
GINA: So what you are saying is that we need to find a champion.
STUART: Exactly. It should be an older male that is wealthy like Richard Branson. Not Zuckerberg because he is from a younger generation. You want the Buffet’s, the Gates’, or someone like Amancio Ortega of Inditex. Anyone of them who say they invest half of their wealth in impact investments will shift the needle.
GINA: That reminds me of a story I heard about the inspiration for the creation of an annual top ten philanthropists in the world list, similar to the top ten wealthiest people. I believe that the media mogul Ted Turner noted that his peers vied to get on the annual top ten list of the world’s wealthiest people and speculated that if a similar list was created for philanthropists that they would be comparably competitive. And he was right. I also believe that further inspired the Giving Pledge. Maybe we need to use a similar model for impact investing.
STUART: Aah! Yes, an annual list of top ten impact investors by dollar amount (of personal money).
GINA: That would be awesome!
Stepping back more broadly, can you share how you define social enterprise?
STUART: For me, a social enterprise is an organisation that the output of its business model is to generate revenue and solve a social or environmental challenge. The two cannot be separated, they are mutually inclusive and they exist because of each other.
Some might argue that Toms Shoes was a social enterprise for a while through the “buy a pair of shoes, donate a pair of shoes” model. But that model only works because the one is dependent on the other and if I don’t buy, the child is not going to get a pair of shoes. You are not empowering the child to develop the means to buy his or her own shoes, you are actually creating a dependency model where the child thinks: “I’m getting a pair of shoes for free”. For me, that model is not a social enterprise because you have a beneficiary that is dependent on a ‘giveaway’ model.
I would argue that Tesla, who produces cars, might be a social enterprise. How? Well ask yourself, is it solving a social issue? Yes. Is it generating profit? Yes. Is it generating profit because it is solving an issue? Yes, because the cars are electric. Is it a social enterprise? Well, by that definition, sure. But you wouldn’t necessarily call it a social enterprise because it is a big production company.
GINA: But should it be considered a social enterprise?
STUART: I would love for it to be called a social enterprise! That would shift perceptions of what people think about the term.
GINA: I know there is a common perception that social enterprises need to reinvest part of profits back into the mission rather than pay out dividends to shareholders. What do you think?
STUART: There was a water company that had a similar model and we had a big debate around this. It uses 100 per cent biodegradable bottles for natural spring water and sells it for slightly higher than market price and takes 20 per cent of the dividends and donates it to companies where his company builds water wells in Benin. Based on your description, is that a social enterprise? I don’t know.
If you pick up the company and move it, what is left in Benin? The locals' lives haven’t changed; they may have a water pump that no one uses. Is that good? If the water was from Benin and they used locals to bottle and sell the water and you created employment, if you pick up and leave at least you have left people who have learned a skill, they understand more about business, is that better? In my opinion, yes! This notion of donating to Africa has put Africa into the situation it has been in for centuries. I know it makes you feel good because we are helping people who are needy but are you really helping? Not if you’re not changing their lives for the better so that when you leave you know you left something good behind.
GINA: And that what’s left behind is sustainable.
What do you think we need to shift in order to move the needle towards sustainability? Where do we need to push?
STUART: Something that hits home for me on an emotional level is the way society treats animals. I always look at animals as an indicator of the health of humans. I believe it was Mahatma Gandhi who said, “The greatness of a nation and its moral progress can be judged by the way in which its animals are treated.” Animals are the beings to which we can be however we want to be. So, because humans feel that they are superior to animals (and I am not a vegetarian and I struggle with that) they often treat animals as inferior beings, despite the fact that they were here before us, that’s not important to us.
What pulls at my gut is ocean plastic because that is not our territory. We are land mammals and we have impacted way past our environment for no reason. We are really messing up badly because we only care about ourselves to such an extent that we are messing up another being’s environment. I think it was a few weeks ago, they autopsied a dead whale in Indonesia and found eight kilogrammes of plastic inside of it. It died because it couldn’t process food because of the plastic.
When you ask: what can we do about it? It is so blatantly obvious that our consumption is destructive. If I had the means to do more, it would go towards rethinking the way we use plastic.
The solutions are always business solutions. There are ways we can make materials biodegradable or dissolvable but the company that creates the packaging that goes around a six-pack of beer couldn’t be bothered to implement a different system.
GINA: One of the areas I think is worth exploring further is where are opportunities for change? You speak of the need for top-down change, I also think there is a lot of power to effect change from the bottom up as consumers, as individual investors, as employees and as voters. What do you think of the power of consumers for instance to effect change?
STUART: I’ll use the beer example again. You see so many examples of the beer can rings being swallowed by sea mammals or caught around the neck of a sea creature. There is no beer company that is making one of those rings that is dissolvable. As a consumer, yes you have power but you only have power based on what your options are. Governments (in Europe) are trying to curb the use of plastic by taxing it by 5 per cent but that hasn’t decreased use. I believe that plastic use has increased since that rule came into effect. Things won’t change because consumers who protest don’t have another option if they want to buy a six pack of beer. Either the consumer stops buying altogether or government starts to penalise these companies seriously, but leaving it to the companies alone won’t happen. I don’t know what the solution is, but what I have seen is in some instances when a startup has built something good and responsible and is making good money, a corporate would acquire it and use that service.
GINA: Like the Patagonia VC model you described earlier?
STUART: There we go. So maybe it is just if companies were more responsible and interested in cleaning up their supply chains we would stand a chance. The reality is that the ‘greenwashing’ and ‘whitewashing’ numbers published by corporates every year, we all know that much of it is made up numbers to generate their audit reports. We need more corporate leaders to stand up, like IKEA founder, Ingvar Kamprad, did before he died and say: “By date X, all of our stores will only use reusable plastic.” That was amazing and it wasn’t driven by government or consumer pressure – it was the founder of the company that took the initiative.
GINA: I have observed in recent years more and more of the large multi-nationals signing up to pledges such as ‘net-zero deforestation’ and I do believe that the catalyst for that was transparency through technology and the internet so that scandals cannot be swept under the rug so easily anymore. Reputation risk is a big motivator for corporations. Transparency is increasingly powerful because many people have phones that can record video, which can then be posted on YouTube. I have hope that transparency will continue to drive change in the right direction. I am seeing convening of big multi-nationals with civil society and in some cases government and putting their heads together to discuss how to achieve the commitments they are pressured into signing up for. It is a move in the right direction but it may not be enough.
STUART: I don’t think there is one singular stakeholder that will offer the solution: it is not the consumer, not the government, not the shareholder - no one alone that will drive the change. But I do think that the more corporate leaders that take the initiative that will drive other corporations to follow suit.
It is kind of like the female CEO hype that’s happening. You have a big company like Uber that brings on board a female CEO and suddenly you see other companies follow suit – like it’s a big thing and you have to announce it. But that’s exactly what happens with business. If one company does PR outreach stating that they have done ‘X’ for their supply chain, suddenly you will see another company come out with a similar PR announcement that they too have done the same thing. It’s a trickle-down effect.
The movement is starting. For example, British Petroleum just acquired the company that had the most electric charging stations for cars. That is a step in the right direction and I am pretty sure we will soon see the other oil and gas companies moving towards renewable energy and doing promotion around it. Momentum-wise, it is really good and eventually, it becomes the norm. Eventually, it will be normal to have a female CEO such that no one has to promote it anymore. It shouldn’t need to be promoted because it should be the norm.
GINA: I think this is a good note to end our discussion. Is there anything else you want to share?
STUART: Only that I want to say that I appreciate what you are doing, facilitating these conversations and pushing an agenda of creating change and doing good, and pushing impact investment. I think it is remarkable that you took on this kind of mission and I think the world needs more of it, as it should be the normal conversation.
GINA: I appreciate that, thank you. And thank you for the work that Fundie is doing and your engagement of students. I wish you the greatest success.
I want to say thank you for your time today, for joining me on No Ordinary Business and sharing your story and that of Fundie with us.
If readers want to learn more or get in touch with you, how can they?
STUART: People can learn more about me from my website www.stuartminaar.com, connect via LinkedIn or follow me on Twitter @mincestew and they can learn more about Fundie Ventures online at http://fundie.ventures
About Stuart Minnaar: Stuart is a tech entrepreneur and a World Economic Forum Global Shaper originally from South Africa and now living in Spain. He started and sold his first business at the age of 28. Stuart believes that business is the best way for a society to prosper. While doing his MBA at IE Business School (in 2016) he co-founded Fundie Ventures, one of Europe’s first impact funds run by students. Fundie Ventures helps social enterprises become investment ready and supports entrepreneurs solving real-world problems focused on the Sustainable Development Goals.