For decades, the idea of ‘socially responsible investing’ meant little more than not including companies considered to have a negative social or environmental impact in an investment portfolio. Increasingly, investors are seeking to fund ventures or initiatives that actively achieve positive (and measurable) social or environmental results – while still generating financial returns. These “impact investments” can be made in both emerging and developed markets. And they can tolerate a range of returns, from below-market to above-market rates.
Getting capital from investors to projects
Impact investing capital can flow to projects in a variety of ways including:
- Equity financing in which a company sells stock or shares to investors
- Fixed income financing in which companies or governments borrow money from investors with an obligation to pay back the principal plus interest (also referred to as debt financing; this includes the sale of bonds)
- Lines of credit in which investors arrange for a line of credit to be extended to the borrower, and
- Loan guarantees in which investors assume all or a portion of the debt obligation of a borrower if the borrower were to default.
The potential for private capital entering the marine conservation and management field is considerable. A 2016 report by Credit Suisse and McKinsey Center for Business and Environment estimated a total conservation finance investment potential of US$200-400 billion between 2016 and 2020. To learn more about the potential and current state of impact investing for ocean ecosystems and users, MEAM spoke with two marine impact investing experts:
- Melissa Walsh is the principal of Marine Conservation Finance Consulting, a consulting firm that provides conservation financial strategy development, marine offsets, impact investing, and sustainable agriculture expertise. She can be contacted at melissa@marineconservationfinance.com.
- Ian Dutton is the principal of Nautilus Impact Investing, a firm which provides strategy, evaluation and training services to help social and environmental project investors and implementers secure a better return on their investments. He can be contacted at ian@nautilusii.com.
MEAM: Can you tell us about some impact investing projects dealing with the ocean environment or ocean users?
Walsh: The short answer is that ideas and capital are plentiful, but examples of successful marine impact investments are very rare. I've completed a global analysis of impact investment opportunities and challenges for marine conservation, and only found a handful of examples of projects that meet the Global Impact Investing Network (GIIN) definition of impact investing and deliver marine benefits (publication forthcoming). The examples fit in two categories: fisheries finance and marine eco-tourism, and they rely on combinations of debt and equity finance. The impetus or motivation for these projects is consistently to use money and business as a power for positive change, to deliver sustained and resilient human-reef systems that are not reliant on the grants treadmill.
Dutton: Below are three examples of how impact investing approaches are being developed in response to different types of challenges – each employs a different type of investing innovation to generate impact. They are indicative of the growing appetite for financiers to engage in new ways with ocean stewards, and of the increasing recognition by ocean stewards of the need to engage financiers in new and creative ways:
- Nature-Based Solutions – Restructuring Debt to Empower Marine Conservation in the Seychelles – With a “blue economy” based on fishing and tourism and a low-lying island geography, Seychelles is extremely vulnerable to climate change. In an innovative partnership serving as a global model, The Nature Conservancy is working with the Seychelles government to restructure nearly $30 million of debt. This will allow Seychelles to redirect debt payments to protect its oceans and coasts from the impacts of climate change and build an endowment that will fund future research. [Editor’s note: Read an interview with Robert Weary, director of conservation finance at The Nature Conservancy, about the debt-for-conservation-adaptation-and-spatial planning swap in Seychelles.]
- Vibrant Oceans Initiative: Investing for Sustainable Global Fisheries – The Vibrant Oceans Initiative’s goals are to restore fish stocks, reduce bycatch, and protect and restore ocean habitat, improve the lives and livelihoods of fisher communities, and contribute to food security. Individual or collective investors can fund a range of projects – from independent, small-scale ‘artisanal’ fishers in Chile to multimillion-dollar infrastructure investments supporting regional tuna fisheries in the Philippines.
- Fish 2.0: Bringing Investors and Entrepreneurs Together for Sustainable Seafood – Fish 2.0 is an biennial competition that connects seafood entrepreneurs, business and conservation leaders, and investors to each other. Through a competitive process, fisheries business owners learn how to improve their business models and approach investors, while investors gain early access to new opportunities and learn how to include sustainable seafood in their portfolios.
MEAM: Can you tell us more about the conditions (market, social, etc.) that are needed for impact investing projects dealing with ocean environments and ocean users to work?
Walsh: Marine impact investments require the same conditions as any effective marine conservation initiative – robust science, strong governance, engaged stakeholders, etc. However, they also require an extra level of business and financial planning. We have a systemic issue where marine scientists and conservation and management practitioners are not normally educated in business and finance and finance professionals are not normally educated in marine resource issues. This leads to a large gap in understanding. Intermediaries – I like to think of these as matchmakers – are almost always essential for marine impact investments to work. Intermediaries help investors source deals, assess risks and returns, assess impacts, and evaluate projects and generally provide technical assistance to both sides.
In terms of market conditions, there are examples of impact investments in both the developed and developing world. It is a misconception that impact investing is only for developed countries. There are certainly great examples of fisheries finance from the USA and Europe, but there are also examples of opportunities in developing economies where holes left by ineffective governments can be filled by private sector impact investments.
Capital for marine impact investments appears to be available, and the limitation is the paucity of investor-ready projects. To me this is analogous to the food scarcity dilemma; the world produces enough food to feed the entire population, but nearly one billion people are underfed due to distribution and waste issues. We have growing evidence of the availability of investment capital – including a recent survey of 21 impact investors (publication forthcoming) – but we need to focus on developing and scaling projects to accept the capital.
Dutton: The two key preconditions for a successful impact investment are (a) financial return and (b) measurable social and/or environmental outcomes. Both are equally important to impact investors who, unlike conventional financiers, give equal weight to both requirements.
Generating a financial return (ranging from concessional – accepted by the investor to be below-market – to competitive rates) is typically the major challenge for many proponents of impact investment projects. This is often due to the inherent challenges in determining the market value of an ocean good or service. It is also difficult to demonstrate positive impacts of many ocean management strategies because there are often inadequate baseline data so potential investors are unable to determine impact with the required level of precision.
As the examples above indicate, impact investors are developing a range of new approaches to determining the viability of impact investment methods for ocean conservation. They are also developing a new suite of strategies to impact markets. At the recent IUCN World Conservation Congress, a new coalition was launched to increase private investment in conservation. Impact investing will be a prominent component of that coalition’s work.
It should be kept in mind that the power of impact investing can be enhanced through ‘blended’ financing approaches, e.g., combining grants, loans, and other kinds of financing. Ultimately investors and other stakeholders need to collectively decide what financial instruments will work best in response to the specific issues they are seeking to address.
MEAM: What advice would you give to a marine conservation or management professional interested in exploring using impact investment for her/his own work?
Walsh: For a non-profit, my advice would be to partner with an intermediary – someone who can bridge the divide between marine conservation and finance. Together you will need to assess if an investible business model can be developed for your context.
A common pitfall that I see is that non-profit organizations try to retrofit new types of money into old fundraising pathways. Impact investments need to be designed with the intent to return some or all of the money back to the investor and therefore need to be underpinned by a solid business model.
Sometimes, non-profits are reticent to pursue activities that generate money because they seem inappropriate. Culture shifts and uncomfortable conversations with non-profit boards are often part of the process.
Also, access to funding to make the transition from a grants-funded organization to an entity that can accept impact investments (non-profit, social enterprise, or other model) is often very hard to come by. When organizations get critically low on funds, they often think that private investment can be a quick fix to save them. This is not the case. It can take months to years of full-time capacity to develop, test, and capitalize a new marine impact investment. Organizations will need to be very creative and persistent to devote the time and capacity it takes to develop a business model.
For an individual, my advice is to consider a social entrepreneurship fellowship. There are numerous programs to support individuals in developing impact investment business plans. The combination of your marine conservation knowledge and some business guidance could be powerful.
Dutton: Impact investing can be daunting for conservation professionals who have little experience in conservation finance or fundraising. The good news is that although it is a relatively new field, there is a rapidly growing network of conservation professionals with impact investing experience and the current market is substantial and expanding significantly.
For a basic but thorough introduction to the field, I recommend the seminal 2014 book by Judith Rodin and Margot Brandenburg, The Power of Impact Investing, which provides a great overview of the core concepts, genesis, and initial development of impact investing. That work connects directly to the burgeoning online resources related to impact investing, particularly those developed by the Global Impact Investing Network (GIIN). The GIIN website has a well-organized knowledge center that provides a menu of reference materials that meet the needs of novice to expert impact investors.
Most conservation professionals will also benefit from connecting with impact investing professionals directly. Many mid-size to large conservation organizations (e.g., RARE, African Wildlife Foundation, The Nature Conservancy, WWF) now employ impact investing staff. There is also an increasingly diverse array of impact investing expertise associated with financial institutions (e.g., JP Morgan, Goldman Sachs, etc.), with government (e.g., the UK Social Impact Investing Taskforce), and with independent organizations (e.g., Impact Investing Australia).
Linking your specific interests in marine conservation with some current impact investing initiatives may seem to be a stretch. But like all new fields of social endeavor, impact investing offers enormous opportunities to explore ideas, to learn, and improve the practice. We encourage you to make your contribution to the field – you might be surprised by the impact you can have!
Editor’s note: The editorial staff would like to thank Ian Dutton of Nautilus Impact Investing for his help in preparing the introduction to this article.