Impact & ESG, purpose & returns...  
Which foundations for Impact Investing?

We started Altalurra with opinionated ideas and objectives. Capital and technology can foster a better world.

We deep-dived into impact investing by:

• participating in community conferences
• staying up to date with existing and future regulations
• listening to passionate academics and practitioners
• discussing with public investors/institutions, private investors/philanthropists, and impact-driven founders.

Our main takeaway is that we need to come together to generate fast and long-lasting impact at scale. Strength in numbers! Too many isolated directions. We know that our collective contributions will matter.

Altalurra’s perspective is unique. It comes from (1) our long exposure to the broad financial markets and Fintech ecosystem and (2) our respective life stories.  We hope that sharing our insights will spark constructive reactions. We aspire to listen to the standpoints of all stakeholders and learn from them.

Let’s start with a few foundational statements around impact:

1. Establishing a common language is key.
2. Understanding that the world is evolving is necessary.
3. Fostering impact requires applicable and simple approaches.
4. Impact investing should focus on supporting founders rather than on reporting.

In what follows we identify some blockers and contention points, and set forth how taking different perspectives could unlock the power of widespread impact investing.

1. About impact and ESG

• There is confusion between impact and ESG for both investors and founders. The confusion is created by some large players who randomly tag impact concepts onto ESG-branded financial products and by the lack of universally agreed-upon definitions. Add to that the infamous alphabet soup of acronyms, and you can understand how lost one can feel! 
  
  
• Impact and ESG share common concerns about environmental and social issues. However, there are clear differences:
  • These issues are core to the business model and products/services in the case of impact, while incremental, secondary, or risk-related in the case of ESG. This implies strong distinctions both in objectives and governance.
  • Impact takes an outward-focused stance primarily, while ESG is primarily inward-focused.
    
    
• Impact and ESG can be pursued together or not. If you walk the talk as an impact-driven firm, good ESG practice should be natural. There is little chance that you will generate a significant impact if you focus on ESG unless you are already a large corporate correcting its own wrong-doings.

2. About impact and returns

• Impact investing based on a single set of impact measures – say carbon emissions – is unlikely to succeed unless the investment strategy is very well and narrowly defined. Selected impact drivers have to be the first-order revenue drivers of a company, not the second or third-order ones. One must align the drivers/factors considered, the strategy, the operating framework, and the performance analysis. This is no different from any other factor-based investing strategy.
  
  
• Impact investing started mainly as a philanthropist exercise more than a decade ago. It is often associated by many investors with either investing in underdeveloped countries or with deep-tech/long-term wishful thinking. This is where the belief that impact implies sacrificing returns is primarily grounded. Of course, nobody has enough historical data to prove the opposite yet, but this is not sound thinking.
  
  
• Impact drivers are a megatrend in the same way digital technology became one about 25 years ago. By conviction, competitive advantage, necessity, or by regulation, more and more stakeholders favor companies that do good. This will only accelerate. Investors who recognize this turn towards impact investing as an opportunity area. Benefit? They do good for everyone and will be proud of it. Arguing differently? Maybe one would prefer to talk politics.
  
  
• A founder or an investor can decide to have a limited but very concrete local impact. But one cannot shy away from talking returns if one wants to be impactful at scale while creating a sustainable business. No shame, and some realism.

3. About measurement and frameworks

• Let us be honest, this is a jungle and the various committees and regulatory frameworks will need years to come together. We are still debating today banking regulation and reporting, after multiple crises. There is a single climate crisis, already underway, and no second chance. We witness societies fracturing more than coming together.
  
  
• The UN Sustainable Goals have been widely adopted among the impact community because they are relatively simple. But they are only goals to pursue and associated measures are not business or investment drivers, they first and foremost allow for categorization and for measuring global progress.
  
  
• The vast majority of startups and large corporates want help. Many startups feel that they follow an important mission, but do not know how to measure their impact or factor their mission into their operating model. Some large corporates feel that there is long-term survival involved, but do not know where to start.
  

4. About decision-making and reporting

• Most of the impact drivers and frameworks out there are
  • created starting from an investor standpoint,
  • focused on reporting,
  • not adapted to early-stage startups and investments as they require historical data points.
  
  The frameworks should start upstream not downstream.
  
  
• Founders need to be supported such that they can make impact-driven ROI decisions. Frameworks should align with what is needed to run a company. It implies defining impact drivers specific to each company’s first-order positive and negative effect on environmental and social issues, and meaningful for their revenues, not just costs.
  
  
• If we limit impact investing to reporting or non-financial drivers, we will always expose ourselves to misalignments between goals and outcomes. Bread and butter for the colorful-washing fans.
  
  
• Aggregation of outcomes is sound, or aggregation of exposure to the same driver, but not the drivers themselves. Sounds familiar?