Impact investing: Not hype, but trend – Mikhail Paley

Impact investing, that is, investment that ultimately generates social or environmental benefits, is a relatively new concept for Russia, but it is likely to become extremely important soon: the status of an impact investor can be prestigious, especially for businesses entering the international arena. Chairman of the Board of the Impact Investors Association Mikhail Paley explains the concept in the interview below. Member of the Civic Chamber of the Moscow Region, Managing Partner of Cybersport Association, Founder of Charity Blockchain Association and charity marketplace 1+1, Mikhail has worked for more than 11 years in senior executive positions at major financial institutions in Russia such as Gazprombank, Rosbank, and BKS.

Impact Investing: Lost in definition

— So what is impact investing anyway?

Impact investing is investing that makes an impact. What does this mean? Imagine a commercial company engaged in its commercial activities, which at the same time benefit society. And more than that. There are the so-called UN Sustainable Development Goals, 17 of them: no poverty, decent work, innovation and infrastructure, international partnerships, etc. If a company through its activities contributes to the achievement of these goals (not through charity, but specifically through its commercial activity), this makes it an impact company and an impact investor. If a fund or a private investor finances such a company, they are actually making an impact investment: it promotes the development of a business that works for the global good.

So someone did draw up a definition based on the UN goals, UN documents?

In fact, there is no single definition. But there is no better coordinate system for it than the SDGs, because it is an axiom recognized throughout the world: all countries should strive to achieve these goals in all areas. Large corporations are working to achieve the UN SDGs because it gives them a global partnership. Charitable organizations also look to the SDGs understanding them to be a kind of vector drawn by the UN as the main organization in the world. It is already a common practice for the international community to correlate SDGs and impact investing. Although, of course, there are different opinions; there are companies that do not recognize these benchmarks, and others that do not like the UN. But this is still the easiest way to measure and digitize the impact that a company makes on the world around it.

Russia’s Impact Investors Association

— How was your association established?

There are three main partners in the association. I actually met them before I joined the impact investment drive. They are Olga Diachenko, Anton Zur, and Eva Andriyash. Before that, I worked in the charity sphere. I also had friends who promoted foreign companies in the impact segment, and partners in Russia who were more socially oriented than anything else. When we met and I heard about this concept, at first I had the idea to set up a club. So I said:

 “Look, guys, I have many interesting ideas about how clubs are created.”

We discussed the idea and decided to first bring together everyone involved in impact investing in Russia to one room and try to start a club. But when they came, it was a Dutch concert. No one even had a definition of impact investing. Some had only academic interest in it, or considered it as a financial instrument. Others were interested in some vague projects. Still others talked about charity. So it was a complete chaos. We decided to regulate this chaos and establish an association that would point our development in the right direction while relying on international experience. Our foreign colleagues already know what to do. They already know how to digitize the impact thanks to the Global Impact Investing Network (GIIN).

— Is this also an association?

— More like a global network. We just reviewed their experience and realized there is a $500 bln market that grows by 30% a year. In England, for example, it is already bad taste to invest in something other than impact projects while here in Russia nobody knows about them at all. Those who know are isolated people who do a lot of useful things but have no common vector. Initially, we received help from Dmitry Garin from the Rybakov Foundation who introduced us to the methodology that we began to use. This is how the association came about. We started organizing various events, telling people about impact investment thus immediately steering the whole thing in the right direction. To avoid any misconception, we said, from the start:

“Friends, the global community prefers to be associated with sustainable development. Let’s drop the debate. If a company promotes a sustainable development goal with its commercial activity, it makes an impact and we will digitize this impact.”

— What does it mean to digitize impact?

— It means that we can evaluate your social impact in numbers. Venture capital funds and private investors are becoming our partners and association members. In order to create the first pool of our partners we held another club meeting and invited only those venture capital funds that could potentially be interested. A number of funds showed interest and we started working with them on several areas. First of all, we reviewed the projects that they already had in their portfolio and determined their impact component. For example, we determined how a specific project is useful to the world in terms of the UN’s sustainable development goals. We created an analytical team that is raking up various foreign methods used for digitizing impact and applying them to Russian reality.

By the way, Russia’s Federal Statistics Service already presents digitized indicators for sustainable development goals on its website. This statistics is also included in our research – to show, for example, that a specific company operating in a specific region has a goal to reduce unemployment by 0.01%. We need to figure out this company’s impact based on the number of jobs it created, the number of people with disabilities that it hired, as well as the impact planned by this company and its general contribution to the global efforts. So we reviewed portfolios of venture funds and selected those projects that actually produce the impact in question. For example, when we analyze jobs, we need to understand: are there more men or women holding management positions?

— Is gender equality also important?

— Of course, it is one of the sustainable development goals. Another question is about wages and whether they correspond with subsistence level? All these indicators must be provided by companies, in the context of their entire activity. Then we analyze this data, meet with company representatives and discuss other goals, if there are any. Finally, we arrive at a conclusion:

“Guys, we think you are an impact company or, for example, an impact project.”

These are two different things. There are projects for an impact and projects with an impact. Projects for an impact are projects in education, healthcare, environmental protection and clean energy. There are also companies whose impact is not immediately obvious but who also make a big difference.

— Does the association have a lot of members?

— We currently have six venture funds, and several more funds have filed applications. Foreign funds (mostly from CIS countries) also want to join us. Actually, there is certain hype around this issue.

Explaining impact investment

— What other functions does the association have?

— We have several functions. First of all, it is public awareness: we provide information about impact projects and impact investment. In particular, we held a major event together with the Headliners investment club and the StartTrack company with the participation of Ruben Vardanyan, who is, in fact, the main impact investor in our country, as well as Alexei Goryachev who introduced impact companies to the Russian market and is also a major impact investor. We also invited renowned foreign experts who can tell the audience about impact and how it works. We intentionally gather many investors during one event so that they would understand what impact investments are and saw their value. And they have a huge value. In Russia, it is not obvious for everyone because we live in our own little world, and honestly, we are lagging behind. The global market is amounted to $500 bln, it is growing, while we are just spinning our wheels.

—Maybe it is not because we do not do anything, but because we do not consider it?

— Right, we don’t know what it is. Therefore we want to tell people:

“Friends, we can digitize our current assets and show the world the positive effect they have.”

Ruben Vardanyan, for instance, does a lot of good things… so, in the end, we are supposed to take a place on the international stage, and for an investor it is an opportunity to join international community, which opens new horizons for investments, profit-making and for the future in general.

— So this is a way for our investors to improve their reputation?

— This is a ticket to the international investment market. This is not hype, this is a trend, which will continue to develop. Being engaged in impact investment will probably soon be mandatory for everyone who wants to gain some good position in the West and the in world, to make connections, to be invited to join interesting deals and good network partnerships. So we want to tell people about it. Also, it is very important that impact investments are not about charity. It does not mean that you should take your own money and give it to someone else. As for me, I am engaged in charity. Through the Civic Chamber of the Moscow Region, I develop non-profit organizations in the region. But this is a different story. We are talking now about impact as a tool to reach meaningful profit-making. You both make money and at the same time you invest in something meaningful that makes the world a better place. This is a totally different paradigm, a paradigm of meaningful investment. We strive to tell people that impact investments are about investments, money and also about improving the world.

Global reputation

— Will international community approve your evaluations?

— Our evaluations are international. We initially proceeded from the UN sustainable development goals and GIIN methodology. When digitizing impact indices, we use GIIN methodology and add something of our own, something more specific.

— Does this mean that investors and investment funds should set some filters when selecting projects, like Islamic banks? They invest in some businesses, but only in those that comply with their Islamic ideology.

— Certainly not. Obviously, people will be investing in oil as they have always done. Nothing is going to change here. But we should understand that the world is changing bit by bit. A company’s reputation is becoming more important for clients and investors – its image in the international market, the way it presents itself and the benefit it brings. For instance, speaking of Generation Z, I think 70-80% of young people who have money choose to make only impact investments. This is a totally new way of thinking. Young people think differently, and the world will definitely change. You just have to remember that if you want to be on a roll you have to catch the train.

— Are you planning to develop any documents similar to a code of ethics that companies could consider or even adopt?

— Large companies already have certain related items in their charters. As regards startups, we will make every effort to ensure that they consider the impact aspect for their activities from the very start. This is the only way for them to become members of our association. Only those that actually engage in impact and seek to promote and digitize it will be able to attract investments through our association.

Scaling the business

— This leads to another question: does your association act as an initiator of investment projects? Do you engage investors in them?

— Yes, we are involved in this as well. We have a scouting service that considers projects both in Russia and abroad. We consider funds’ framework – that is, what projects our partners look to implement – and we seek impact projects that could be interesting for them. Of course, our aim is to make the impact bigger and create conditions for funds, private investors and startups to find each other, and to further develop this impact.      

— Can you say what sustainable development goals are relatively easy to attain in Russia? Where can we see an impact aspect in a typical project? What aspects are weak?

— Obviously, it is easy to see accomplishment of such tasks as providing ‘decent jobs’ and ‘eradication of poverty.’ When a manufacturing plant establishes its branch in a remote area and creates jobs for people out of work, this makes an instant impact. A positive environmental impact is harder to find. Almost every company’s activities are related to providing jobs, the goals including gender equality, supported employment, and eradication of poverty. An important thing is that only a scalable business can become an impact company. If, say, there is a man in a village who is the only one to know old secrets of shoemaking and he makes excellent felt boots – this is good but this does not make it a impact project. You cannot replicate it and start making felt boots all over the globe. An impact project is a project that aims to scale up and achieve considerable results. More realistic goals include infrastructure development, economic growth, and international cooperation. These tasks are easier to work on but harder to digitize. This is sort of an ambivalent issue: a company may work to attain these goals, yet this will not be effective for promoting the business.            

— Does this mean that major investments are required for economic growth?

— An investment object should have scale-up potential and it should also seek to scale up – only then can we consider it an impact project worth investing in.

By Konstantin Frumkin 

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