Impact Investing: Flavor of the Month or Here to Stay?

Pablo E. Verra
May 2020
Driving Impact in
Defining Moments
Impact Investing: Flavor of
the Month or Here to Stay?

Driving Impact in Defining Moments Impact Investing: Flavor of the Month or Here to Stay?© 2020. Deloitte & Co. S.A.
Who Am I?
Introduction
• Partner at Deloitte S-Latam’s Financial Advisory Practice – regional champion for
impact investing;
• 20 years of full-time investment and advisory experience, 16 years fully dedicated
to impact investing:
• 13 years at IFC, the private arm of the World Bank Group;
• 3 years at IDB Invest, the private arm of the Inter-American Development
Bank Group;
• Directly invested or lent to companies based in 22 countries globally;
• Globally trained 500+ officers and students in private equity and impact investing;
• Former board member with operational knowledge of a regional fintech (Afluenta,
with operations in Argentina, Peru & Mexico);
• A believer in the power of bold teams leading constructive disruption;
• Proud to be from Cordoba, Argentina;
• Husband of Valeria and father of Catalina (13), Victoria (11) & Martina (8). Brother
of twin sisters. I do not get to speak much at home so this is my moment!;
• Enthusiastic writer, former professional DJ and always a music lover.
“Life begins at the end of your comfort
zone” – Neale Donald Walsch
Driving Impact in Defining Moments Impact Investing: Flavor of the Month or Here to Stay?© 2020. Deloitte & Co. S.A. 2

The New Paradigm
Introduction (cont’d)
“Society is demanding that companies,
both public and private, serve a social
purpose. To prosper over time, every
company must not only deliver financial
performance, but also show how it
makes a positive contribution
to society.”
Larry Fink
CEO & Chairman, BlackRock
More consumers start to
value which company is
behind the products and
services produced: up to a
recent time, they chose
only based on price,
quality and convenience.
More investors are
allocating resources
into companies that
look beyond
financial results.
135
502
2015 2019
Market Size
Impact Investing Total Market Size
(USD Billions)
Source: Global Impact Investing Network, “Sizing the Impact Investing Market” / www.marketsandmarkets.com.
3

Generation Changes: The Impact of the Millennials
Introduction (cont’d)
Driving the new
investing trends
93%
of millennials believe
social impact is key
to their investing
decisions.
75% of millennials are willing to pay more
for sustainable products.
82% of high-net-worth millennials express an
interest in socially responsible investment
approaches.
Sources: Morgan Stanley Institute for Sustainable Investing, “Millennials drive growth in sustainable investing”, August 2017. / Nielsen Global Study: “The Sustainable Imperative”, October 2015. / U.S. Trust Study.
4

ESG & Impact Investing
What is the Difference?
Environmental, Social and Governance (ESG)
ESG practices are sustainable investment strategies that take a
company’s environmental, social and governance factors into
consideration regarding asset allocations.
While there is an overlay of social consciousness, the main objective
of ESG valuation remains financial performance.
Total Market Size
ESG
USD 30.7T
S&P500
USD 25.7T
Impact Investment
Impact Inv.
USD 0.5T
Impact investing is an exciting and rapidly growing industry
powered by investors who are determined to generate social and
environmental impact as well as financial returns.
The strategy actively seeks to make a positive impact by investing,
for example in a non profit that benefits the community or in a
clean-technology enterprise that benefits the environment.
Sources: Global Sustainable Investment Alliance. / Global Impact Investing Network, “Sizing the Impact Investing Market”, 2019.
5

What are Impact Investments?
FINANCIAL IMPACT
SOCIAL
IMPACT
ENVIRONMENTAL
IMPACT
Agriculture: Primary production, primary
and secondary processing, access to
markets, value chain investing.
Education: Primary, secondary and
graduate education. Education technology
and workforce development.
Healthcare: Primary and secondary
hospitals, chain clinics, health technology,
health equipment suppliers (e.g.,
ventilators) and pharmaceutical.
Infrastructure: Water and sanitation,
information technology, telecom, clean energy,
transportation; and affordable housing.
Environment: Green financing,
renewable energies, waste
management facilities, sustainable
urbanization, marine and forest
conversion.
Diversity and Inclusion: Access to
finance for SMEs, gender gap reduction,
excluded population, trade access and
affordable housing.
Impact investments are investments made with the intention to generate positive, measurable, social
and environmental impact, alongside a financial return.
6

The Circular Economy
Arriving at true circularity means rethinking and transforming full value chains to create a system in
which waste is designed out entirely and the goal is net positivity.
A linear economy refers to the traditional
industrial model that follows a “take, make,
waste” process.
Linear Economy
Circular Economy
In a circular economy, growth is decoupled
from the consumption of scarce resources.
Products and materials are kept within
productive use for as long as possible, and
when they reach their end of use, they are
effectively cycled (or looped) back into the
system.
Source: Ellen MacArthur Foundation, SUN, and McKinsey Center for Business and Environment.
7

A Critical State
The Circular Economy (cont’d)
• If global warming continues at the current rate, temperatures will likely
increase 1.5°C between 2030 and 2052. This environmental event is
estimated at a economic cost of USD 54 trillion.
• We are now using 75% more natural resources than we are regenerating
each year.
• According to the World Health Organization (WHO), by 2025, half of the
world’s population will be living in water-stressed areas.
• By 2050, there will be more plastics (by weight) in the oceans than fish.
• Since 1970, human activities have wiped out 60% of mammals, birds,
fish and reptiles, one-fifth of the world’s coral reefs, and 13 million
hectares of forest.
Sources: Ove Hoegh-Guldberg, Daniela Jacob, Michael Taylor, “Impacts of 1.5C Global Warming on Natural and Human Systems”. / World Health Organization, “Drinking-Water”, 2019. / Earth Overshoot Day, “Global Footprint Network”, 2019 / Ellen MacArthur
Foundation, “The New Plastics Economy: Rethinking the Future of Plastics”. / World Wildlife Fund, “A Warning sign from Our Planet: Nature needs life support, 2018. / European Commission: “Growing Consumerism”.
• By 2030, global demand is expected to increase 30% for food, 40% for
water, and 50% for energy.
Alarming Consequences
Transform the existing value chain to remove waste and increase
efficiency
Grow the core business organically by embedding circular offerings
Invest in and scale entirely new, disruptive circular businesses
Close resource loops in a continuous collaboration with cross-sector
stakeholders
8

The UN’s Sustainable Development Goals
The 2030 Agenda for Sustainable Development
The 2030 Agenda for Sustainable
Development, adopted by all United Nations
Member States in 2015, provides a shared
blueprint for peace and prosperity for people
and the planet, now and into the future.
Sustainable Development Goals
Example: 6.1. Target
By 2030, achieve universal and equitable
access to safe and affordable drinking water
for all.
Proportion of population using safely
managed drinking water services.
Example: 6.1. Indicator
Source: Sustainable Development Goals Platform.
Shared Blueprint
9

First and Second Order Effects
COVID-19 Effects on SDGs
Loss of income,
leading vulnerable
populations to fall
below the poverty
line.
Food production and
distribution could be
disrupted.
Devastating effects
on health outcome.
Schools closed for
many people and
less effective remote
learning.
Women’s economic gains at
risk and increased levels of
violence against women.
Supply disruptions and
inadequate access to clean
water.
Supply and personnel
shortages are leading to
disrupted access to
electricity.
Economic activities
suspended; lower income,
less work time and
unemployment.
Population living in slums
face higher risk of exposure
to COVID-19.
Reduced commitment to
climate action.
Conflicts prevent effective
measures for fighting COVID-
19.
Aggravate backlash
against globalization.
Source: UNDESA.
10

1. Sustainable Investing and consequently, Impact Investing is Not a Profitable Business
Debunking the 3 Myths
Selected Sample of Indicators
Investors Performance
Over 90%
of respondents reported performance in line
with or exceeding both their impact and their
financial expectations.
Impact Exits
Forty-eight investor exits from impact
investments in India (2010 –2015) produced
an USD-IRR of at least
and the top one third yielded a USD-IRR of
Net Returns (2005 – 2019)
Global 100 Index
FTSE 100
ESG Valuation Multiples
118.2%
3% to 19%
higher multiples than median
performers.
10%
34%
127.3%
Firms that ignore environmental and social problems risk being damaged in the future by large
divestments from socially responsible investors. They will also face a hard time raising new capital.
Sources: GIIN, “Annual Impact Investor Survey 2019”. / Mc Kinsey: “Impact Investing finds its place in India”. / Boston Consulting Group.
11

2. Impact Investing is the Flavor of the Month
Debunking the 3 Myths (cont’d)
Over the past decade, impact investment strategies have shown strong growth both in assets under
management (AUM) and number of projects.
Impact Investment Projects
47
4
7
3
6
3
6
15
8
11
17
16
8
18 18
16
20
11 11
13
8
0
50
100
150
200
250
300
0
10
20
30
40
50
N°ofrespondents
N° of organizations that made their first impact
investment that year
Cumulative N° of organizations making impact
investments
N=266
Growth in Instrument Allocations (USD millions)
-
5.000
10.000
15.000
20.000
25.000
30.000
35.000
40.000
45.000
2014 2018
Real Assets Public Equity Private Equity Private Debt
N=79
33%
Source: GIIN, “Annual Impact Survey 2019”.
12

3. Sustainable Investing only Works For Public Equities
Debunking the 3 Myths (cont’d)
Integration of global sustainable investments (ESG Practices) across asset classes.
51%
Public Equity
36%
Fixed Income
7%
Other
USD 580B in Green Bonds, which finance
projects with beneficial environmental
effects, were sold in 2018.
7%
Real
Estate
7%
Private
Equity
While the number of sustainable
equity investments remained
unchanged from 2017-2018, fixed-
income and alternative assets showed
remarkable growth over the same
period.
Sources: Global Sustainable Investment Alliance, “2018 Investment Review” / Bloomberg / UN Sponsored Principles for Responsible Investment, “Annual Report 2018”.
13

From Origination to Real Impact
The Impact Investing Ecosystem
Impact-seeking purchasers
Impact-driven
organizations
Channels of impact
capital
Sources of impact capitalForms of finance
Government’s
procurement of services
Government as
commissioners of
outcomes
Foundations as
commissioners of
outcomes
Socially minded consumers
of goods and services
Socially minded corporate
purchasers of goods and
services
Grant-reliant organizations
(e.g. charities)
Grant-funded
organizations with trading
activities
Social enterprises/profit-
constrained organizations
Profit with purpose
businesses
Business setting significant
outcomes objectives
Demand
Social banks
International & community
development finance
institutions (DFIs)
Impact investment fund
managers
Crowd-funding platforms
Impact investment
intermediaries
Government
Social investment
wholesalers
Charitable trusts and
foundations
Local funds
Institutional
investors & banks
Corporates
High net worth individuals
Mass retail
Secured loans
Unsecured loans
Charity bonds
Social impact bonds
Quasi equity
Equity
Grants
Supply
Source: Impact Investing, “The Invisible Side of Markets.”
14

Example: Connecting the Parts
What is a Social Impact Bond?
Government,
foundation or
corporation
Investors
Social sector service
provider
Beneficiaries
1. Puts together the arrangement
2. Structures the service provider
3. Supports with expertise
Set objectives, timelines, payment levels and pay only for
verified positives outcomes.
Government achieves net savings and increased
tax revenues.
Provide Capital
Receive capital back and returns only according to
positive outcomes achieved.
Positive outcomes, improved lives
and benefits for society
Source: Impact Investing, “The Invisible Side of Markets.”
15

Impact Measurement & Management
The Importance of IMM
Impact measurement
facilitates learning
Enables investment decisions to
be better tuned towards
achieving impact
Demonstrate a broad
impact business
model
Successfully attract investment capital
Increased transparency
and accountability
Additionality
Investor Level
Enterprise Level
Risk!
Rigor in impact
measurement
Impact measurement is central to legitimizing the practice of Impact Investing. Increasingly, investors
want to have more detailed social and environmental performance data so they can scrutinize it as they
do with financial data.
16

Market Size and Considerations
Recent Trends in Impact Investing
Geography 2014 2018 CAGR
MENA 702 2.972 43%
South Asia 2.838 6.663 24%
LAC 5.443 11.854 21%
ESE Asia 3.069 6.264 20%
USS & Canada 5.487 10.653 18%
SSA 8.118 13.514 14%
EECA 5.366 8.040 11%
WNS Europe 4.368 6.281 10%
Oceania 123 133 2%
Other 1.609 2.128 7%
Total 37.124 68.502 17%
Growth in geographic allocations amongst repeat respondents (M USD)
41% believe there is an inadequate
supply of professionals skilled in impact
deal making and structuring.
Emerging Market-focused investors had a much
greater allocation to financial services and
microfinance than did Developed Market-focused
Investors (45% combined vs. 3%).
Collectively, 1340 respondents of a GIIN survey manage USD 502 billion in impact investing assets, as of
the end of 2018.
Source: GIIN, “Annual Impact Survey 2019”.
17

Global Players
Recent Trends in Impact Investing (cont’d)
JP Morgan announced the creation of an in-
house development finance institution.
Goldman Sachs noted that it plans to spend
USD 750 billion over the next decade financing
and advising impact.
KKR announced that it closed its first USD 1.3 billion impact
fund (Deloitte is advising KKR on the definition of its impact
indicators).
BlackRock (with a significant financial support from UBS) and TPG (through a follow
on to its original 2016 Rise Fund) are currently in the market with new impact funds.
During the first three months of 2020, several relevant private global players indicated that they were
aggressively entering the global impact investment market.
Citi announced the launch of a USD 150 million Citi Impact Fund that will make
equity investments in "double bottom line" private sector companies that have a
positive impact on society.
18

How are Impact Investors addressing the potential impact of COVID-19?
In light of the recent developments and exceptional circumstances associated to the
expansion of COVID-19 in the world, the Inter-American Development Bank (IDB) is
making available more than US$7 million in non-reimbursable resources.
The World Bank Group is making available an initial package of up to $12 billion in
immediate support to assist countries coping with the health and economic impacts
of the global outbreak.
EBRD shareholders agreed to a comprehensive series of response and recovery
measures. The Bank now stands ready to provide support worth €21 billion over the
2020-21 period.
BlackRock is committing $50 million to relief efforts, helping meet immediate needs of
those most affected and addressing the financial hardship and social dislocation that
this pandemic is causing.
Impact Investors
19

Latin America
Increasingly, private equity and venture capital managers active in Latin America are raising dedicated
impact funds to manage alongside traditional PE/VC structures.
Source: LAVCA, “Impact + Tech/VC Investing”.
Microfinance
All other sectors
20

Latin America (cont’d)
Geographic Distribution
There are at least 38 impact investors with active operations in Latin America.
Selected LatAm Impact Investors
Source: LAVCA, “Impact + Tech/VC Investing”.
21

Strategy & Design
Deloitte identifies impact needs
and designs, structures,
originates and monitors impact
investment funds.
Development of Impact
Investment Thesis & Sources
Deloitte can develop a feasible
investment thesis for impact
investors and can source
investment opportunities in
Latin America.
Impact Measurement &
Management
Deloitte defines objectives, KPIs and
manages the project’s impact on
society.
Development of the Latin American
Impact Ecosystem
Through its network of regional and
global experts, Deloitte provides
access to its clients of the latest
trends in impact investing.
Impact Investing @ Deloitte
How Can We Help?
22

¡Muchas gracias
y cuídense!
Pablo E. Verra
Partner
Investment Banking & Impact Finance
+54 11 4320 2700
pverra@deloitte.com
Deloitte Spanish Latin America

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