The world's challenges are clear. As Secretary-General Ban Ki-moon referred to already one year ago, governments and businesses have never before had such a concrete "to-do list for people and planet." For little over a year now, we have 17 Sustainable Development Goals (SDGs) that apply not only to all 200 members of the UN, but are also broad and ambitious in scope and focus on all three dimensions of sustainable development: social, economic and ecological. The UN is also urging the financial industry to take a larger role in impact investing with the goal of aiding the SDGs.
One of the critical success factors for achieving the SDGs is capital. In fact, it is probably the primary success factor in solving the problems of the world, as capital is a main driver. In recent years, this realization has increasingly influenced the financial markets. Exclusion criteria is becoming more ambitious and pervasive, and there is an unmistakable trend to divest from fossil fuels simply because the risk is now too big and thus no longer in line with the Environmental, Social and Governance (ESG) strategy. Investors, banks and pension funds are consequently closing the 'back door'. But now, with the first anniversary of Global Goals in the pocket, which was extensively celebrated recently during the Global Goals Week in New York, we should definitely move forward in putting our capital where are goals are, and use it as a force for good. In other words: open the front door.
Capital for Good: the front door
On September 14, 2016, the Global Impact Investing Network (GIIN) launched a campaign calling on asset owners and managers around the world to channel their capital into impact investments. Additionally, the GIIN is publishing a series of investor profiles to highlight the successes of the impact investing industry in order to get all capital hands on deck.
Simply put, we refer to this front door as 'capital for good'. This is the explicit investment in businesses, funds and bonds that have a direct, positive impact on the SDGs. It is currently demonstrated by the growth in investors buying green bonds and the attention it is getting from investors as well as from stock exchanges. These positive investments are predicted to triple by 2018 to a total of 300 billion dollars.
Private equity firms are also innovating for good, such as New Crop Capital, who invests in disrupters of animal agriculture. New Crop Capital argues that the meat, egg, and dairy sectors, representing a $700 billion global market, is ripe for innovation and large-scale disruption for sustainability purposes.
Another, very impactful trend is evolving. The front door is being opened by business itself. They are putting their Corporate Venture Capital on the table. In the comprehensive 2014 report "Investing in Breakthrough: Corporate Venture Capital", John Elkington describes Corporate Venture Capital (CVC) as "a discrete investment activity into an independent company or a portfolio of companies with the objective of achieving both financial and strategic return to the parent company." The strategic return is particularly essential. The companies receiving CVC investment are often innovative start-ups or scale-ups, and the investment also serves to give them access to new knowledge and core competencies.
The strength of the CVC model is twofold. Firstly, innovative ideas are effectively linked to economies of scale and financial power. This creates enormous potential leverage, especially if the multinational start-up or scale-up also provides access to their own global network and knowledge network or acts as a launching customer. Furthermore, this model helps large companies to realize their long-term strategic objectives.
CVC for Good
The growth in CVC is fueled by numerous disruptive, transformative trends which are greatly increasing the pace of innovation and business endeavours. Large companies are therefore looking for faster 'shortcuts' to enter new markets and accelerate growth. They are not only looking to innovate with a manageable risk and an assurance of a financial return, they are increasingly using Corporate Venture Capital to realize their long-term goals for 2020 and beyond based on the SDG agenda. 'Business for good' is gaining ground, and capital.
As one reviewer noted in response to my book New Economy Business "Business as a force for good is a trillion-dollar business case." Capital invested in positive impact business cases can therefore provide the sought after financial returns while contributing to the strategic objectives and to the betterment of the world - all at the same time. This phenomenon is sometimes called 'Corporate Impact Venture Capital', or 'Corporate Shared Value Venture Capital'. I call it more concisely: 'CVC for Good'. This form of CVC is intended to not only realize the long-term strategic objectives of the investing company, but also to help solve the world's problems more quickly.
The list of examples of CVC for Good is getting longer every day, and moreover, the size and the funding is increasing as well. For example, Unilever Ventures is investing $200 million in promising young companies ('tomorrow's world-beaters'). These start-ups not only receive capital investment but also access to Unilever's global ecosystem as well as their assets and expertise. And IKEA has added a new focus on climate change with a commitment of €400 million through 2020 to support communities most affected. IKEA has also committed to investing €600 million in renewable energy, aiming for 100% renewable energy by 2020. Their goal is to produce the total energy they consume by 2020 by investing in wind farms, solar panels and biomass generators. Hydra Ventures, the corporate venturing division of Adidas, invested nearly two million dollars in CRAiLAR Technologies Inc. last year. CRAiLAR Technologies Inc. is a company that makes sustainable, environmentally friendly fibers and fabrics for textile, paper and composite use. And the listed publishing company Pearson poured $15 million into the Pearson Affordable Learning Fund (PALF) for the development of low-cost private education systems in the developing world. The Body Shop International not only directly invested in Divine Chocolate Limited (a Fairtrade chocolate company owned by a cooperative of Ghanaian cocoa farmers), but also supported this cooperative through the purchase of raw cocoa products. Morgan Stanley made a 5 million-dollar equity investment into Eleni LLC, a Nairobi-based company that designs, builds, and supports the commodity exchange eco-systems in frontier markets.
In a recent report by CB Insights, the impact of strategic investing is shown in the many activities and investments by CVC firms. These firms played a significant role by participating in 20% of the 3,113 venture-backed financing rounds in the first half of 2016. Since Q4'14, there have been at least 160+ corporate VCs completing deals, with Q3'15 hitting an all-time high of 191 corporate VCs making an investment. Additionally, 53 new global corporate VCs made their first investment in the first half of 2016, including firms like General Mills Ventures and NBC Sports Ventures, and the number is expected to double by the end of this year. Although the average deal size with CVC participation has fallen to a 5-quarter low of $19M in Q2'16, CVC deal size has consistently been larger than VC deal sizes over the last 14 quarters.
Global Goals and Capital for Good
The SDGs are a great instrument to match the parent company's ambitions to the delivery of added value from the investee. My vision is that this match is a great accelerator. In this way multinationals can use their capital for the SDGs, thus accelerating the realization of our goals. These companies have the advantage that they are often used to thinking far outside their own four walls, collaborating with diverse stakeholders and partnering with NGOs and governments. CVC funds reflect this way of working as well, as the examples above clearly illustrate.
With my new company called Business for Good set to launch on October 4, it is the intention to accelerate the scaling up of business innovations by linking them to investors and multinationals with CVC funds in order to maximize the impact. This is absolutely necessary as the world cannot wait long for Ban Ki-moon's 'to-do list' to be accomplished and businesses are not waiting either. Business for Good is already creating international connections and access to innovations, markets and investors. It is our mission to accelerate and maximize the impact of innovative solutions and put capital where our goals are.
Marga Hoek
CEO-Founder Business for Good
Chairman Sustainable Science Association, Board member Dutch Sustainable Business Association,
Author of the award winning book New Economy Business.