June 22, 2020

COVID-19: Time to Practice Social Investing

5 min

While the spread of COVID-19 continues to keep global economic activity at a standstill, fund managers in international development are considering how impact investing can help rebuild economies around the world. In a recent webinar, Venable partner Philip von Mehren moderated a panel of impact investors, including Bert van der Vaart, CEO and co-founder of SEAF (Small Enterprise Assistance Funds), and Chris Vroman and Laura Fenster Rothschild of Emmett Partners. The discussion focused on the sectors fund managers should target to maximize social impact, and how to advance social and environmental goals while producing financial returns. Here are some of the key takeaways.

1. Defining Impact Investing.

Investors sometimes confuse impact investing with philanthropy or make the assumption that achieving a positive social benefit requires making a concession on financial returns. In fact, it is an investment strategy that seeks to get market-rate returns by investing in companies that are mission driven in their intent. While on some level all investing has an impact, allocating capital to companies or entrepreneurs that have identified a problem and are offering a solution is both a smart way to invest and a smart way to get a strong return.

2. Developing Impact Investment Strategies.

As we live in an increasingly globalized world, international investment is no longer separate from domestic investment. In order to help investment funds to make an impact both globally and domestically, the United Nations has laid out a roadmap of Sustainable Development Goals (SDGs) that address 17 areas of needs, ranging from eliminating hunger and providing quality education to achieving gender equality and addressing climate change. The SDGs provide a useful framework for identifying underserved markets and are even more relevant since the global pandemic has highlighted the need for investors to consider other factors beyond financial returns, such as resilience and long-term sustainability.

3. The COVID Effect.

While the pandemic hasn’t necessarily changed the focus of impact investing, it has served the purpose of highlighting its importance as a thesis. By requiring us all to slow down, the pandemic has allowed us to take account of what really matters, namely access to basic necessities like food and quality education for our children. Furthermore, the pandemic has drawn attention to the excess in our lives, altered our spending habits, and given us the space to confront the racial and economic injustice bubbling under the surface of our societies. All of these factors taken together serve to amplify the need to invest capital wisely, ensuring funds are deployed to address the underlying social and economic problems that will otherwise undermine global stability and inhibit economic and social progress.

4. Has the COVID Pandemic Changed the Investment Priorities of Funds?

There has been a shift away from certain sectors involving mass gatherings, such as entertainment, the hospitality industry, and even hospitals. There is an increased focus on improving wellness, however, which has led to a shift toward investing in online health diagnostics and specialized clinics. Supermarkets are doing well, while other forms of retail are slipping, and there is a renewed focus on financial technology. There is also an increased interest in investing in more locally or regionally sourced production and companies that use local supply chains, as well as a general desire to invest in markets that are closer to home. Finally, with the government flooding markets with cheap debt and trying to keep interest rates down, there is some uneasiness about how robust equity markets are going to be over the longer term. Investors are therefore more focused on reducing risk and working with entrepreneurs to improve their resilience.

5. Assessing Portfolios: Are Current Investments Surviving the Pandemic?

As impact investors generally focus on companies that are responding to existing problems in the world and providing services that are now recognized as “essential,” impact-oriented portfolios are well positioned not only to survive but to thrive post-COVID. Furthermore, as many of the companies in our portfolios tend to be local in their focus, there haven’t been many supply chain issues. Impact investors often focus on companies that are working on technological solutions to solve environmental problems, improve health outcomes, or develop educational criteria. As the pandemic has led to increased reliance on digitized means of addressing such issues, such companies are more necessary than ever. One such example is a company that produces baby monitors that also monitor temperature and respiratory rates. Now, because of the pandemic, there is demand for this type of product in senior care and other health facilities, which speaks to the important role technology can and should play in moving our society forward. Similarly, around the world we’ve seen an uptick in the implementation of digital means of moving essential products and services. For instance, even in emerging markets and remote locations, grocery stores have added delivery services or curbside pick-up. So, provided that companies involved in developing such services are in a position to grow, the pandemic has proved to be fertile ground.

6. Why Allocate Capital to Impact Investing?

While in the past, investors might have been inclined to invest their money in industries with little social benefit, such as coal mines or cigarette companies, and then allocate 5% of their returns to charitable causes, that trend is over. Investors still want their money to yield strong returns, but in a way that improves the world. So, from a returns standpoint, impact investing is the smart choice, and most investing is heading in that direction. Furthermore, all of the strategies of traditional investing – public funds, late-stage buy-out funds, early-stage funds, debt-focused funds – can be found in impact investing as well. Asset allocators should consider what classes they are comfortable with and seek out impact strategies within those classes, rather than designating impact as a separate asset class. Finally, investors are realizing that as the world is heading in a direction where people, particularly younger generations, care about injustice, it’s risky to invest in companies that cause harm, because once the word gets out, the products won’t sell.

Want to learn more? View the full webinar or find additional resources here.