Impact Investing: Beyond ESG | Episode 5
PUBLISHED ON June 7, 2023
Purpose Champions is an official Goodsted podcast. Each month, I host guests who follow their purpose and strive to create social and environmental impact for their stakeholders and communities 🏆
These stories are full of inspiration and insights for our community to learn from and take action to progress on their own purpose journey. You also hear from leaders of impactful initiatives and have a chance to get involved in their mission by sharing your skills and time.
In this episode JP Dallmann, CEO at ILA & Partners joined us to share more how he got into impact investing, what is impact investing, how the social housing sector might attract investors and more.
Listen and watch the full episode here:
Selin: Hi everyone. Welcome to the Purpose Champions podcast where we shine a spotlight on those championing social and environmental impact for their stakeholders and communities. In this episode, we are welcoming JP Dallmann, who is the CEO at ILA & Partners, who are on a mission to accelerate the transition of capital into sustainable and impact investing at scale. He's also the host of the Impact Leaders Podcast, Founder of the Impact Leaders Programme, the Impact Founders community, as well as a board member at Fast Forward 2030. Thank you, JP, for joining us on the Purpose Champions podcast today. We'll be talking about impact investing and I'm really excited to deep dive into this subject with you.
JP: The pleasure is mine, Selin. Thank you so much for inviting me.
Selin: So I know you've been in this space for many years and you're doing a lot of great thought leadership work about it as well.
How did you get into this space?
JP: So if we're talking kind of impact investing and beyond ESG, as I like to talk about sustainable and impact investing, and we'll see a bit of the difference in a second.So my background, my professional career has been in investment banking, so I come from the investment side of the banking sector and then obviously, hence the investment part.
Then as I developed, during my career, obviously you start looking at ESG within the organisations and the organisations you look to fund and you start as well, at the same time, your values, I think they change and you start realising what is really important. As we can see now, everyone is finally starting to realise the importance of certain things in the past we didn't used to look at. Starting with some of the exclusions and provisions and so on.
Then just to make the story short, so I invested in a tech company that was a platform that was matching people or talent to impact companies and that was kind of, again, kind of a version of other things that we have been doing before, I have been doing before. And through that, obviously, I started getting more understanding on the SDGs, the Sustainable Development Goals, global goals from the United Nations, which made me join Fast Forward 2030, which is an organisation where we both sit at the board which raises awareness about the SDGs.
All of that together, when I started realising how much we needed to transition capital to sustainable impact investing, that is kind of how it all started to develop and come together and I got more and more involved as the year went by.
Selin: Amazing. It's great to hear your story and how you got into this very topical and exciting area, which is super important because we are 62 years behind achieving SDGs, so I think we need every help that we can get. So for those who are not so familiar with the subject,
How would you define impact investing?
JP: So basically not through ILA & Partners, which is my company, we serve investment managers and investors that are looking to transition into sustainable impact investing. Obviously we talk to them for that reason. We need to understand how people perceive it, how people see and then also help them understand what it is.
So just a bit of background and also so that people know in case they didn't. I have a podcast called Impact Leaders where I interview some of the best sustainable impact investors globally and obviously because of that I managed to coin my own definition, which I call The IAMIA framework.
To do impact investing you need 'intentionality' in terms of where you invest in. 'Additionality', so what extra outcome you're going to create by doing this? 'Measurability', which is a way to measure that you are having this impact. And in my case, I like adding the last two, which is 'integrity', so really aligning your thoughts to your actions as well. So what you're doing when people are not looking. And actually taking urgent 'action,' which is key. So that's how I define impact investing.
But also for people if they have never heard about it. If you look at the Global Sustainable Investing Alliance, they have a definition and they have about 7 different ways in which they look at the different types of investing sustainably. So some of them are exclusion I mentioned before, I mentioned just a few so that people understand. Some of them are ESG integration which is kind of known a lot more maybe by many. And then people just think about that everything is ESG investing which is no.
You have thematic investing, which is when you invest in a certain area, like let's say solar, and then impact investing. Sorry, one more that is worth mentioning is like when people do engagement and shareholder action. Which is a way that investors try to influence companies and boards to change the way that they do things. And then impact investing is one of those where it's a bit more looking at having real impact in the environment or society.
Selin: Perfect, thank you so much for those definitions. And I'm sure every day you're coming across some exciting opportunities or innovations you feel that will make a real difference in the world while also providing financial returns.
What type of investment opportunities are you currently excited about or interested in?
JP: Well, it's very interesting because as you go through your own personal process and then you see other investors going through what they're doing, right. Obviously investors are always looking for the opportunities where they see the sectors moving and developing.
If I start first from a personal perspective, obviously I care immensely about financial inclusion and with our education, or particularly financial education, and there is a lot of work to be done there, in the word that is used a lot is kind of the democratising of impact or democratising of finance.And there are a lot of third world countries where, like in Latin America for example, we're working with one company which is called eCLUB and they are based, the first company out of Paraguay. And in Latin America, in totality, there are hundreds of millions of people that have no access to any banking product whatsoever. It's all run in cash.
So there is a real need there and obviously they have never been explained how to operate, how to manage. Imagine if we have a struggle sometimes in first world countries, there's an understanding of how to manage your finances. Imagine other countries. And entrepreneurs, in inverted commas, are the base of the economy. So one or two people, companies in a way that need to create a credit history and they have no way to do it because then obviously they cannot get any loans and they live on a month-to-month basis almost, and the costs are huge, right? So it's estimated that they spend up to like 15% of their income just on the cost of managing everything with cash.
That's one part I think it's interesting and definitely we need to do, especially if you believe that if you help people do better financially, that will help them have a better quality of life. There are different concepts that are used in this area, and obviously each individual may think that first is education as in the school or some people may think that is actually nutrition. I think there's room for everyone and there's room for argument as well of what comes first. But in my case, I think that one is very much needed. That's from an impact perspective let's say, and from a returns perspective in the case of LATAM, LATAM is the second highest return after Africa in the financial sector. So definitely a place to go and make a difference if you want to take your capital there and then the other just to kind of keep it short that I believe, and it's not actually myself that I just believe, but it's actually Larry Fink from BlackRock talked about that the upcoming 'unicorns' are going to be in carbon management or carbon technology management.
And I think that there is a huge potential there. I think it's the biggest opportunity with the biggest impact. So we are working on that as well with the investment fund that is focusing on specific growth capital for companies that are developing these solutions. And carbon management, for those that don't know, these are companies basically that are helping either capture emissions as they are produced. So if you're talking about stock and then obviously store it and then at the same time there's others which are for example, using the stock. So what we have already in the environment and looking to capture that. So that's some of the areas, there are some different sectors obviously that need more help than others, like transport or constructions and things that potentially we cannot really change totally. So we need technologies to help us just make them less polluting.
Selin: Yeah talking about construction retrofitting and kind of the housing industry, as Goodsted, we're talking to quite a lot of social housing associations and professionals working in the space. So actually I'd love to hear your thoughts.
How can the social and affordable housing sector attract impact investors?
JP: Yes, I'm not an expert as such, but I have spoken to a couple of really good investors specifically as well on social housing or you mentioned affordable housing and I think that in general, a lot of people don't realise what this housing crisis is about. Again, it tends to be more complex than what we all think about. Some people may just think that it's just about council houses as such, but it's not just that, you know, you have access to housing, you have assisted living, for example, as people get older, you even have homelessness, which is an ongoing crisis that we see even in the UK.
So what I have seen is that what I appreciate is that there are some very clever investors that are understanding again the opportunity within the sector. And I've seen some very high net worth individuals that have set up their own investment funds to try to effectively take away from councils, for example, the management of the properties to effectively make it more privately managed.. With all sorts of different benefits that brings, including economies of scale. But you as an entrepreneur, you know that you are a believer like me that the private sector can do a lot of really good innovation.
I've seen the work. I think obviously they struggled a little bit with the scaling. Because some of the very big players, which I'll talk about as well, and there's some of the kind of ones that are becoming really impact driven only, which sometimes don't have the same capacity. But what is attractive to investors is a little bit of, again the same in terms of the recurring kind of long term income even though, as we know, in real estate and social, especially in social housing, the returns are a little bit lower.
But these individuals I think on another question are happy to have that investment, that risk profile within that portfolio so that kind of diversifies in a way and it's on the lower side of the returns. And then I've seen some of the big, big investors doing actually whole cities, which again most people don't know about, they are doing huge projects with councils where they are working on the high street, assisted living, housing for the key workers. So that's actually something that's happening as well and I'm happy to see that. But obviously that one is again talking at this level, not the individuals that actually need the house. And a quick shout out to SBI Capital and Pi Capital. I think those are the two that I think they're doing quite interesting work. And then obviously Schroders and others you know.
Selin: Amazing. That's very useful. I'm sure anyone who's listening who is from the social housing sector will check them out.
What would you advise in general to those who are pitching to impact investors? How can they pitch most effectively and what should they think about when pitching?
JP: Yes, so on this point, what I just mentioned before, there's two points. Just again, there's a lot of things, but to be able to attract investors, as you well know, you need to talk to their needs and what they're looking for.
Again, if we think about it from, let's say, a profit and impact or a return and impact, which I like to simplify. So the first thing you need to do is understand what is called the spectrum of capital. So where your investor is sitting on the spectrum. Is there somebody on one side that is just caring about returns and therefore if we go and talk to them about impact, they may not care at all. But if you have something that provides really good returns, such as the carbon management technology companies that we're talking about, as a consequence they create impact. You may want to talk to them about just the returns.
And on the other side of the spectrum you have all the way down to philanthropy where people basically don't expect any return whatsoever and it's just giving the money away. And then just before that, perhaps you have venture philanthropy and then you have impact investing before that.
So you have to understand, and many investors don't even know that they are one of these, by the way. So sometimes you have to do the work to understand based on their portfolio and what they're doing, who they are and what they're interested in. That's one.
Then some people are willing to give up some returns, some people are not. Some people are very interested in some specific impact. Which brings me to the second point, which is ideally to have a theory of change. So what is it that you are looking to achieve as an outcome and how are you going to do that? In the case of financial inclusion, it is through this tech product which people can access through an app to actually help them change that behaviour and gain them access to financial services. So that's kind of how I simplify it, again, just to make it easy for people.
And then if you don't know about the spectrum of capital, you can go to our website, ILA & partners, we have one there from the Institute of Impact Investing and then on the theory of change as well, you can find information about them.
Selin: Amazing, thank you so much.
What would you advise those who are interested in getting into impact investing as investors?
Well, I'll separate this in two as well. So if you are an investor or investment manager launching a fund specifically looking to do sustainable or impact investing, come and talk to us, to me, ILA & Partners. So that in case you understand exactly, potentially you want to develop your strategy, some people have been doing it internally, some people struggle to actually understand how to go about it. And then we work with partners. If people want to understand how they can actually either if they haven't already integrated ESG, or they haven't defined what strategy they're going to use and then it gets more technical.
In the EU you have SFDR, which are regulatory requirements and have something called Article 8, Article 9, where you classify your fund fully impactful or not. Again, just to summarise, and then obviously all the way to launching a product. So when people decide to launch, let's say, an impact investing fund, they need some of this information and then obviously understand the requirements and then obviously meet the right investors.
And as the previous questions were talking about, understanding how to talk to them and who to talk to is key. Then, from an individual's perspective, I would invite people to join because of these questions that you're asking and because we have seen the struggle on the leaders, some of the investment managers, portfolio managers, some of the CEOs, and any individual that is trying to either do more impact with their specific roles, not only in investment but in corporates or through what they're doing. We launch the Impact Leaders Programme, which is a bit of an extra initiative, like we have the podcast to raise awareness. This one is to help leaders and basically we focus on 3 main areas, which is helping them get clarity. So people need to be very clear about, again, all of these things that we very briefly touched on. Where they stand, what's important to them, who is doing what. Then, what is your proposition? And the same as a company needs to understand their proposition, their strategy, and what they're doing, whether bringing the value they're creating, and then to have one that is actually clear and targeted to the right audience and then finally does this access to the network.
So, as you know, it's a big world, but it's a small world, right? So sometimes knowing the right people can accelerate your success, which all of this makes you become an impact diamond, which you need to keep. We're all diamonds in the making. I say we need to keep polishing it, which then makes you very attractive to people coming to work with you, investors coming to invest in you, other than all the time being out looking for things.
Selin: I mean, both for those who are looking to get investments from impact investors and those who are looking to become impact investors, I think this has been quite an insightful episode. Thank you so much for sharing all your thoughts with us and all your experiences, and yeah, I look forward to continuing our conversations about this.
JP: Thank you, Selin.