Monetising the Impact of an Investment

What’s your multiple on the dollar you spend on impact

The Global Impact Investing Network defined Impact Investments as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return[1]. With the turn of the decade, the Coronavirus pandemic elucidated systemic shortcomings of the standard operating model of governments and financial systems, while at the same time the increasing trend of ESG regulations are further highlighting that the investing world will be required to not only measure the return on the dollar invested against the risk taken to achieve it but will also need to move a significant step further, in actually quantifying the measurable impact that dollar has had on society and the environment.

Fortunately, the field of impact investing has never been better positioned to address this challenge and capitalise on the opportunities this presents.

What we and the market as a whole is looking to address is the ‘Impact Monetisation’, which refers to the monetary valuation process of the positive impact created by an investment[2]. Monetising impact is a potential tool that investors can use to evaluate the impact an investment generates over the lifetime of the investment or the current impact value. This consequently will enable the ranking between impact investments that produce greater social or environmental impact versus another investment.

The need for Impact Monetisation can be considered as part of the natural progression of the assessment process for Impact Investors. It fits in the investment due diligence process where Impact Investors will compare the impact an investment creates in the same manner of the risk and return of a traditional investment.

The research surrounding impact monetisation is growing and at Wealth of Nation Advisors (WoNA), we are aiming to lead the way in Australia by expanding upon our research into measuring and monetising impact by the transferrable economic value an investment creates. We apply this monetisation technique to impact fund managers we represent and look at the impact monetisation at the fund level and/or company level. This tool allows WoNA to compare different funds and individual companies in terms of the holistic impact they provide. WoNA is working on an impact multiple, which considers the capital deployed by a fund or investment divided by our calculation of the social and/or environmental impact that an investment generates.

Let us consider an example:

At a company level let us imagine a company called Project Smallholder. Project Smallholder is a company based in South Asia whose operations are in the export and sale of fresh dairy products. The ‘Impact Monetisation’ that was used, to value the impact created, were based on the income uplift smallholder farmers gained who were part of the projects supply chain. Smallholder farmers have small scale productions (>1 hectare land under cultivation), and usually sell their goods in open markets to inconsistent and non-market rate incomes. However, farmers in Project Smallholder were able to intervene, enabling smallholder farmers to gain access to consistent income by enabling supply chain linkages through sale contracts[3].

The impact monetisation for this impact investment was the income uplift the smallholder farmers obtained prior to the sale contract and after.

For illustrative purposes, let’s visualise Project Smallholder to have completed raising $25mn US. The calculation below is how the positive impact was derived.

 

Project Smallholder Impact Multiple

Annual Income (w/out Project Smallholder)                           $500 USD

Annual Income uplift (from Project Smallholder)                   100%

Annual Income (from Project Smallholder)                            $1,000 USD

 

Income Uplift (from Project Smallholder)                               $500 USD

# Of smallholder farmers under contract                                250,000

Total Annual Income Uplift (from Project Smallholder)          $125,000,000 USD

 

Divided by: Total Equity Investments                                     $25,000,000 USD

Project Smallholder Impact Multiple                                       5.0x

 

As another example let us look at an infrastructure fund that focuses on energy and sustainability.

For illustrative purposes, let’s call the Fund, Renewable Energy Fund I (REFI). The underlying assets in the fund are primarily solar and wind energy infrastructure assets which over its lifetime generates power from photovoltaic modules (solar) that convert light directly to electricity and turbines that spin from wind that converts the spinning of a magnetic inside a coil into electrical energy[4]. In contrast to the common coal fire energy stations which produce carbon dioxide emissions from a combustion reaction, the solar and wind farm project produces no carbon dioxide emissions. The impact monetisation created from the project can be deduced to be from the aversion of the social costs of carbon dioxide. The social cost of carbon is a measure of the economic harm from those impacts, expressed as the dollar value of the total damages from emitting one ton of carbon dioxide into the atmosphere[5].

Renewable Energy Fund Impact Multiple

CO₂ Emissions Avoided (Metric Tons/Year)                         2,000,000

(x) Social Cost of Carbon (per ton)                                        $125 USD

Total Social Cost of Carbon dioxide (Avoided 2021)             $250,000,000 USD

 

Divided by: Capital Deployed                                                 $100,000,000 USD

Renewable Energy Fund Impact Multiple                              2.5x

 

Whilst there has been increased research and improvement in the monetisation of impact, it is still a work in progress. Select impact investments may create various impacts from the operations of a business. In certain cases, this should be considered when configuring the impact monetisation of an entity. Additionally, studies comparable to the listed case studies have been conducted in context where data sources are validated and readily available. Addressing impact multiple of money calculations in companies, funds and bonds in markets and companies where data is limited (e.g., emerging & frontier markets, new technologies, lack of research) will limit the accuracy of the monetisation of impact. We believe the impact multiple realistically should be used as a guide to show the measurable impact an investment has across asset classes, risk/return profiles and impact thematic and WONA like many, will continue to work on improving the calculation of impact monetisation which we are sure, will continue to be assisted with the advances in data collection through technology, especially in emerging markets.

It’s clear that impact monetisation is a journey.

In a world still heavily weighted on ‘trading impact’ or ‘impact by proxy’, investors and regulators for that matter – like Europe with Article 9 funds – are starting to realise that there is a difference between leveraging the concept of ‘trading impact’ versus delivering impact.

We work with the best-in-class global as well as local impact managers, along with progressive institutional investors across Australia and New Zealand, who invest with the intention of delivering positive measurable and quantifiable social and/or environmental impact, while at the same time delivering market-equivalent risk-adjusted returns.

Impact Monetisation is about a journey in following the money. As an investor ask yourself the question, what true impact is my dollar having – am I trading impact or creating it? Check out the impact managers we represent via the website or the IIP APP, it’s how you start to follow the money.

 

 

1. https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing
2. https://yanalytics.org/research-insights/monetizing-impact
3. https://digitalnative.substack.com/p/will-impact-investing-come-to-venture
4. https://www.edf.org/sites/default/files/expertconsensusreport.pdf
5. https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator