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The Rise of Impact & Sustainable Investing

In recent years, and especially now in the wake of the Covid-19 pandemic, we are seeing more and more social and environmental startups growing in Israel and worldwide. But do they get the same treatment as “regular” startups when approaching investors? Not exactly. In this article, we will discuss the various aspects of the impact investing phenomenon, how to prepare, what to watch out for, and why it is here to stay.
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** This post was featured in Hebrew on Lastartup Magazine.

When a startup wants to make a social or environmental change, in addition to its bottom line, it is automatically categorized as “Impact” and fewer doors are opening up for it, at least that has been the case in Israel so far. Fortunately, like other phenomena, Israel is following in the footsteps of the US and Europe, in which the field of responsible investments is thriving and even became mainstream, and they are beginning to gain momentum here as well.

In September 2015, the UN set a series of Sustainable Development Goals (SDGs) for the coming decades – a total of 17 targets, 169 targets, and 230 metrics. The setting process included consultation with governments, international institutions, the World Bank, the OECD, the academy, the business sector, and civil organizations. The goals address a variety of issues, such as eradicating poverty and protecting the planet, along with socio-economic goals such as gender equality, employment fairness, and economic growth. Detailed measures and indicators were set for every goal in order to monitor the progress of each country in relation to itself, and at a global level. Impact investments are an expression of the implementation of these goals.

Impact investing – An investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains. Impact investments may take the form of numerous asset classes and may result in many specific outcomes. The point of impact investing is to use money and investment capital for positive social results.Investopedia

In recent years, the business world has been discovering the benefits of these investments, not only as a financial instrument that yields returns, but also as a tool to drive social and environmental change and as a policy that enables better relationships with customers, employees, suppliers, and shareholders alike.

 

 

The Rise of ESG Investments Worldwide

 

In the last decade, Impact and sustainable investments have become an international focus of interest to many. The official term for this type of investments is ESG Investments (Environmental, Social, Governance), based on the growing assumption that the financial performance of organizations is increasingly influenced by environmental and social factors. As a result, the volume of global investments that focus on ESG criteria has grown in recent years by an average of 20% per year, to the current levels of more than $35 trillion, with estimates for growth of up to $53 trillion in 2025.

Also, according to the annual report of the Global Impact Investing Network (GIIN), investors who completed the survey in both 2016 and 2020 (reported their activity in 2015 and 2019), grew their volume of capital invested by 12% per annum, from USD 14 billion invested in 2015 to USD 22.5 billion invested in 2019. In addition, the number of impact investments made by this group grew by 9% per year, from 4,885 investments made in 2015 to 7,014 in 2019. The average deal size grew by 2% per year, from USD 2.9 million in 2015 to USD 3.2 million in 2019.

In addition, according to a survey conducted by Barclays Investment Bank at the end of 2019 for over 450 clients worldwide, more than 72% stated that they want their money to be invested in goals that will positively impact the world. In an interview in May 2020, the bank’s CEO, Karen Frank, shared that they believe this number will only increase following the Coronavirus and that ESG investments are the future.

“We have real confidence that sustainability is not about a topic, or a fad, or a new trend, or how people should allocate their money. It really is about a different way of investing.” – Karen Frank, Barclays CEO

And if we go ahead and look on Google Trends anyway, it’s evident that impact and sustainable investments have become more popular than ever, with Ireland leading the search for the phrase Impact/ESG Investing, followed by Canada, Hong Kong, UK, US, Thailand, Singapore, United Arab Emirates, and New Zealand. Israel in this context, is lagging behind them in the 31st place, just a bit ahead of Kenya, Ghana and Pakistan.

The rise in Google searches for the phrase Impact/ESG Investing from 2004 to present worldwide
The rise in Google searches for the phrase Impact/ESG Investing from 2004 to present worldwide

Impact and Sustainable Investments in Israel

 

Although this field is still in its infancy in our region, the responsible investments sector has started to develop recently, and various players have begun to adopt investment methodologies to leverage the Israeli entrepreneurship and innovation spirit in favor of creating social and environmental change. As a result, the impact investment market in Israel is growing rapidly, and according to a report published by Ourcrowd fund in collaboration with Social Finance Israel in 2019, this market is estimated at about $260 million per year (twice as much as in 2018). Moreover, in the past two years, impact investments were made in over 2,500 Israeli startups.

The Israeli state also joined the celebration, and in September 2020 the Ministry of Strategic Affairs announced the ‘Impact Nation’ initiative, according to which the state will fund ethical financial reports for public companies in Israel that will allow them to join the investment portfolios of international entities in sustainable fields. Out of an initial budget of NIS 3 million, the state will fund the preparation of impact reports and ESG scores, which will examine the business activity of 30 companies in accordance with the SDGs set by the UN. The main guideline is improvement in all targets – even for the most unprivileged populations.

"Impact Nation" from EQUAL's Investor Pitch Presentation

Pitching an Impact Startup to Investors

 

As stated above, Impact investors strive to produce a financial return alongside a measurable social or environmental change. This group includes private investors and investment management entities, including private funds, philanthropic funds, institutional and public organizations. Here are the key points to keep in mind when approaching investors with a sustainable startup:

 

1. Solid Business Model and Economic Feasibility

 

Like any “regular” startup, the first thing to focus on when approaching investors with a social and/or green startup, is your potential to succeed in the market and how your business is going to make them money. Don’t get confused, impact investors are still investors and they expect returns, only that in impact, the bottom line is double – both making money and doing good, not one over the other. Remember that you are building a business, not a non-profit.

Therefore, when you present your startup with a twinkle in your eye about how you are going to change the world for the better and help thousands of people, while closing the ozone hole and stopping global warming – remember to first show real data that supports that your idea and business model will build a sustainable company that will yield significant returns for your investors in the future.

2. Social and Environmental Impact Measurement

 

In contrast to traditional investment analysis that is based on parameters of return and financial risk only, the Impact Investments examination focuses on a double profit line – social and financial. Therefore, in order for an investment to be defined as an impact investment, it must exist with the intention of solving some social and/or environmental problem, be embodied in the business model that works to yield a financial return and, accompanied by careful measurement of the social impact. 

Impact investors use impact management frameworks, tools and systems for a number of purposes: setting goals, measuring performance, and reporting impact results. Meaning, you should use less talk and more data to prove your point here as well. You can find various impact measurement methods here and here, and I suggest you make a neat table that maps, for both you and your investors, the areas in which you are going to generate sustainable value, how much and how.

 

3. Beware of Fakes

 

As in any field, Impact also has its charlatans, from both sides – investors and entrepreneurs. In fact, according to the GIIN’s annual report, out of 294 investors asked to choose which are the biggest challenges that the impact investment market will face in the next five years, the highest rate (66%) chose ‘Impact Washing’ as a top threat.

Impact Washing – the practice of overstating or falsely claiming benefits of a product/service to sell more of it. Source

People who tend to do this ‘washing’ usually have narcissistic personalities and like to wear a philanthropic mask to seem as if they are doing good in the world, when in fact, they just want to take advantage of empathetic people with good intentions and make money at their expense. Therefore, don’t be tempted to believe that every investor, fund, or service for startups that call themselves “For Good” is indeed such. The same goes for entrepreneurs, who are gradually realizing that appearing social or green may help them gain more investments and customers.

So when you are looking for quality investors who will harness your vision, or inspiring entrepreneurs with the ability to execute, just pay attention to the treatment they give you from the very first encounter and their actual actions. Statements are nice and marketing can be dazzling, but try to delve deeper to understand who is standing in front of you. There is no shortage of stories in the high-tech industry about entrepreneurs who spoke loudly about how they are doing good in a world, who fell hard and even committed criminal offenses, and alternatively, investors who seemed kind initially, and then made their entrepreneurs’ lives miserable. As one psychopath once said: “I love do-gooders because they do me such good.” 

In fact, some of the best conversations I had were with investors who did not declare themselves as Impact at all, and merely liked EQUAL’s idea and saw its business potential. Hence, skip the labels, do in-depth due diligence, and try to locate those who truly dedicate themselves to making this world a better place. We will all benefit from it.

Here are a few links for impact & sustainability startups and investors in Israel where you can start your search:

1. Equal’s Israel Wimpact Community

2. Startup Nation Central (using the tags Circular-economy, Cleantech, Clean Environment, Sustainability, Impact, and SDG):

3. Circular Economy Forum

4. The Impact Nation

5. PlaneTech

6.  Hackaveret Impact Hub and its Facebook group

7. SDG Israel Community

8. 100 Good Initiatives

9. Impact Tech Israel

 

 

Let’s Build a More Beautiful (and Profitable) Future

 

In conclusion, Israel can become a global leader in the impact and sustainability market, a source of innovative solutions to the great challenges facing humanity, with a dynamic ecosystem of ventures and investors. And if Jeff Bezos, the richest man in the world, makes his own investments based on the consideration “Is the venture going to change people’s lives”, then Impact ventures are definitely a great investment route, because their main purpose is improving our quality of life.

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