In which sectors can impact investing be worthwhile?

At Golding, impact inves­t­ing is about support­ing commer­cial solu­ti­ons that acce­le­rate the path to a sustainable and more inclu­sive future. This is done by inves­t­ing in compa­nies that bring new trans­for­ma­tive tech­no­lo­gies and busi­ness models to market at scale.

In our view, four key factors are essen­tial for successful impact inves­t­ing. First, a thema­tic stra­tegy is needed that focu­ses on those sectors and regi­ons where there is high demand for more sustainable products. Second, sector-speci­fic exper­tise provi­des inves­tors with the ability to select from the best oppor­tu­ni­ties within a given stra­tegy and help these compa­nies realize their full poten­tial. Such a sector expert is often a prefer­red part­ner of manage­ment teams, which can have the advan­tage of lowe­ring entry valua­tions. Third, inte­gra­ting impact into the invest­ment process ensu­res that each invest­ment is attrac­tive from both a finan­cial and impact perspec­tive. Fourth, detailed impact measu­re­ment is needed to moni­tor the actual perfor­mance of indi­vi­dual invest­ments and enable conti­nuous learning.

Further­more, in addi­tion to these more tech­ni­cal skills, it certainly helps to be very curious in type and to have a perso­nal desire to use capi­tal for the bene­fit of society.

Our invest­ment stra­tegy is based on the belief that compa­nies that provide solu­ti­ons to major social and envi­ron­men­tal problems and take into account the inte­rests of all stake­hol­ders invol­ved will perform better over the long term. We have iden­ti­fied three sectors with proven impact and finan­cial return poten­tial that focus on trans­for­ma­tive tech­no­lo­gies and busi­ness models. These are Green Solu­ti­ons, Food and Agri­cul­tu­ral Tech­no­lo­gies, and Finan­cial Services.

With regard to Green Solu­ti­ons, the jour­ney toward a fossil fuel-free society has alre­ady begun. World­wide, tremen­dous oppor­tu­ni­ties are emer­ging from the commer­cial appli­ca­tion of envi­ron­men­tal science and tech­no­logy to conserve ecosys­tems and reduce the nega­tive impacts of human acti­vi­ties. On the one hand, deve­lo­ped markets are expe­ri­en­cing chan­ges in their produc­tion proces­ses and consu­mer beha­vior that require new solu­ti­ons and tech­no­lo­gies. There are promi­sing solu­ti­ons to improve energy effi­ci­ency that support the tran­si­tion to a_low-carbon economy while impro­ving health and other sectors, such as buil­ding opti­miza­tion and retro­fits, grid and energy storage tech­no­lo­gies, trans­por­ta­tion, and effi­ci­ent mobi­lity solu­ti­ons. On the other hand, emer­ging econo­mies in Asia, Africa and Latin America are stri­ving for grea­ter prospe­rity for their popu­la­ti­ons, and it is important that they achieve this growth inde­pendently of green­house gas emis­si­ons and inten­sive resource consump­tion. Successful compa­nies in these markets must tailor their products to speci­fic local needs, with parti­cu­lar atten­tion to ensu­ring that they are also afforda­ble and acces­si­ble to the markets. There is great poten­tial here for invest­ment in solu­ti­ons that expand access to clean energy to improve socioe­co­no­mic outco­mes and miti­gate climate impacts through tech­no­logy and/or busi­ness model inno­va­tion, such as solar home systems, solar-powered appli­ances, and mini-grids.

With respect to the food and agri­cul­ture sector, it has recently become known that the current reli­ance on unsus­tainable agri­cul­ture is degra­ding and deple­ting our planet’s water, soil, air, and forests. These impacts have nega­tive conse­quen­ces for long-term envi­ron­men­tal sustaina­bi­lity and under­mine socioe­co­no­mic well-being. Golding focu­ses on the commer­cial appli­ca­tion of agri­cul­tu­ral science, tech­no­logy and inno­va­tive prac­ti­ces to improve the resi­li­ence and sustaina­bi­lity of agri­cul­ture. We expect signi­fi­cant invest­ment in compa­nies focu­sed on advan­ced inputs and proces­ses that protect the envi­ron­ment, such as impro­ved seeds, more sustainable inputs and inno­va­tive farming practices.

A problem asso­cia­ted with food and agri­cul­ture is the large inef­fi­ci­en­cies and losses in emer­ging market value chains — both at the farm level and at the over­all supply chain level. These inef­fi­ci­en­cies and losses contri­bute to envi­ron­men­tal degra­da­tion, thre­ats to farmers’ liveli­hoods, and food inse­cu­rity. Here, digi­tal solu­ti­ons can reduce inef­fi­ci­en­cies, mini­mize waste, and help improve farmers’ inco­mes and resi­li­ence. Examp­les include digi­tally-enab­led farm manage­ment and consul­ting, supply chain manage­ment solu­ti­ons, and shared farm equipment.

Our third sector focus area is finan­cial services. Limi­ted access to finan­cial and banking services for indi­vi­du­als and busi­nesses in emer­ging markets under­mi­nes deve­lo­p­ment and social sustaina­bi­lity in these regi­ons. Many of the world’s poorest popu­la­ti­ons have no or very limi­ted access to the services offe­red by credit insti­tu­ti­ons, as they either cannot afford them or they are simply not acces­si­ble to them. This, in turn, nega­tively impacts the resi­li­ence of their income situa­tion and makes it more diffi­cult for them to access important products and services. Fintech solu­ti­ons such as digi­tal payments, digi­tal lending plat­forms, and digi­tal insu­rance provi­ders have greatly impro­ved access to finan­cial services for indi­vi­du­als and micro, small, and medium-sized enter­pri­ses (MSMEs). These digi­tal solu­ti­ons reduce tran­sac­tion costs for both indi­vi­dual consu­mers and MSMEs and increase access to finan­cial services. The bene­fits go far beyond the direct impact to indi­vi­dual consu­mers, as finan­cial services serve as a “meta” sector and form a core compo­nent of new busi­ness models within Green Solu­ti­ons and Food & Agri-Tech Solu­ti­ons. For exam­ple, most resi­den­tial solar systems are sold in combi­na­tion with a finan­cing package that can be amor­ti­zed over a period of time through mobile payments.

Yes, abso­lut­ely. The best exam­ple of this is Golding’s exis­ting Impact Team port­fo­lio. As of Decem­ber 31, 2021, the target funds in which we have inves­ted to date have gene­ra­ted an average annua­li­zed return (IRR) of 29% after expen­ses (in USD). — Of course, these invest­ments are not without any risk. As with all private equity invest­ments, the exit risk in parti­cu­lar is an issue that needs to be carefully conside­red before making an invest­ment. Added to this are the current rela­tively high company valua­tions in North America and Europe. Above all, a disci­pli­ned invest­ment process and deep indus­try and sector know­ledge are urgen­tly needed.

For invest­ments in emer­ging markets, macro factors are also rele­vant for inves­tors’ invest­ment decis­i­ons. Exch­ange rate fluc­tua­tions are constant compa­n­ions and are taken into account by us in the target returns. This is another reason why we focus our approach on the larger econo­mies that have estab­lished stable demo­cra­tic poli­ti­cal systems and deve­lo­ped deeper capi­tal markets. The best solu­tion for these risks is broad diver­si­fi­ca­tion, for exam­ple in the form of a fund of funds.

About Dr. Andreas Nilsson

Dr. Andreas Nils­son is Mana­ging Direc­tor and Head of Impact at Golding Capi­tal Part­ners, respon­si­ble for impact invest­ments. Prior to joining Golding, Dr. Nils­son was Mana­ging Part­ner of Sonanz, an impact private equity fund of funds he foun­ded in 2015. Prior to that, he was a private equity inves­tor at EQT and UBS. Dr. Nils­son recei­ved his PhD in finance from the Stock­holm School of Economics.

Nilsson@goldingcapital.com