Impact investing today - interview with Rochus Mommartz - Part 2

In this conversation, Rochus Mommartz, CEO of responsAbility Investments, shares the lessons he has learned, how sustainable investing has expanded and how investors are currently involved in bringing impact investing to scale. 

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Welcome to the responsAbility Investments podcast. Let's get the legal disclaimer out of the way first. The information provided in this podcast is given for informational purposes only and should be considered neither as investment advice nor as investment recommendation. No liability shall be accepted for the accuracy and completeness of the information. The views presented in this podcast are those of the individual participants and are not necessarily endorsed by responsAbility. Past performance is neither an indicator nor a guarantee for future results. Now find out how microfinance planted the seeds for the entire impact investing industry, which according to the IFC, is a $2.3 trillion industry with nothing but growth on the horizon. In this three-part series, Rochus Mommartz, CEO of Impact investment House responsAbility, sits down for a personal discussion with David Diaz 1 of Responsibilities leaders in Climate Finance, where Rokus reveals what it was like in the beginning, how a niche market was formed, how it expanded, and what the future looks like from his perspective as one of the original players on the journey since the beginning. This is Part 2 of their conversation. So in the previous episode, Rokus, we spoke about your personal journey, your entrance into into the space, what was once called microcredit. Now a broader definition, financial inclusion, the semantics around impact, the the semantics around how we define the space. And I think this is a good place to start this second series, Rojos, as simply as possible. How would you define impact investing today? For me really this means investments which have direct impact on the real sector. At the end when you want that you money contributes to positive change. The question which you can ask yourself is I do an investment, did something change if you think it through and did some something positively change? Of course kind of there might have all type of changes, but to me at least there is a fundamental difference between you invest or you act on the capital markets, which most of the investment takes place in capital markets. But it means you buy from somebody and somebody sells a share or or or a bond and you buy has something changed? Nothing has at that point in time changed, understood. So when you do private markets, that's slightly for me, it's ultimately what is the change you contribute to with your investment? A question I think that's at the heart of the industry. Is there a trade off in your mind, Rojos, between impact, between this positive change and financial returns? When you look at private equity offerings, you know we do and others do private equity offerings in emerging markets with very specific impactful thematic approaches, For example, sustainable food or digital inclusion or healthcare. These are topics then there is no trade off because when you compare this to private equity offerings, which if you allow me to say not intentionally impactful, just ordinary private equity transactions in whatever type of company, I say you are investing growth capital when need is abundant. So there's huge need out there. So why should there be a trade off that there is no trade off? The trade off comes or the trade off or the difference between a return expectation in a highly developed market and return expectation, let's say in an emerging economy, when the private equity fund manager operates, there is the leverage which might be used. Of course, in developed markets, you might very often see private equity offerings where a certain part of the return comes out of a leverage. And here, of course, very often in emerging markets, no leverage is used. So that's the difference. But that doesn't mean when you compare apple with apples that there's no trade off. Now when you go into topics on the private debt side, for example, climate, finding energy efficiency, access to energy or also financial inclusion, one has to really look the market dynamics out there. So these are still topics where also a lot of public sector players are active and you might find then risk return profiles when you compare them let's say to a private debt portfolio in the UK just to say something or or in the US and say, wow, is this risk turn wise equivalent if you want so. So you might have situations where you see it's probably not fully equivalent, but as a stand alone, because comparison is also difficult, there is an attractive return. So impact investments on the real investment side and not on the philanthropic side always targets an attractive market return. And if you accept that the market dynamics are what they are with the players around, it always also allows to deliver those returns, which not necessarily means that you are always maximizing the return. On the topic of, let's say, the environmental, the social return, the, the, the change that you were describing, some call it additionality, right? What is the role of measurement in this space? What do you think investors want to see when it comes to measuring that change that you described? Impact measurement, David, is not something like many people or some people believe. It's new. It's a thing which has been around for a very long time. And and for a very long time it has been with the public sector. I mentioned in our first talk, I mentioned that of course 30-40 years ago what we call today impact investment was to very large extent run undone by public sector or in institutions and they developed already a system how to monitor the impact. It has three categories. Output measurement is most symbols then out come and I apologize for the terminology. I didn't invent it, but that's what it is. Outcome measurement, which means what did this change achieve? What changed actually happened with that? It's you receive a loan or you receive a solar home system. That's the output. What are you doing with this and how does it change your life? It's another one. It's the outcome. And the third level, which is the most complicated one, is the so-called impact measurement. That question is, but please tell me what would have happened to these people if they would not have had access to this type of offering. Now that gets a bit complicated. Yeah. And the first university at least I remember has been Ohio State University in the 70s and 80s. They did already impact measurements with trial groups has been much developed in the on the scientific level since ever you know, and there are many people doing this type of controlled experiments to find out because what you have to do is one group who has access to the service. The other group doesn't have set to extract actually what the difference is. So it gets a very complicated story there that most investors do not expect. I think all in that because they just know it's just too costly. And in your ideal universe, Rojos, is it helpful, this pressure on impact measurement, does it add value or does it maybe distract your teams? Does it add cost? What is the ideal if you could choose, wave a magic wand and change everyone's perception on how they should think about this topic? I would do very, very little measurement personally. But I'm a practitioner. I have one big advantage, which many investors do not have. I have been working in more than 40 countries on the ground with people and seeing what it means. Many people don't have that, so an investor's very far away from this. So I say, but how on earth do I know what happens with my money? That I understand. I am a strong believer in scientific approaches, but that means not measuring and analysing across everything. You take a certain approach, like for example, access to clean power, let's say decentralized solar home systems to provide and have the business model. And then you do pilots and you analyse deeply what it means for the community in a certain region. And you use the insights of those much deeper, looking analytics towards reshaping the offering to improving the offering. That makes sense. Honestly, I think that's something it's an ideal field where the public sector could play a role and saying we run these studies systematically, we provide the insights and therefore we improve the offerings in the longer term. That's super beneficial. On this .22 questions. I mean, the first is the cost, the time spent, maybe not much gained, but can impact measurement protect an an institution from claims against greenwashing? We've seen a lot on this topic in in the median recent weeks, months, years. Is this something that worries you or you would say, in spite of these claims, I still would be more comfortable in a world without this much measurement in? I would say in nearly all cases or most of the cases where we talk about greenwashing, it's about people, asset management houses, others investing in the public markets. So listed instruments and saying, yeah, but I either applied ESG criteria or we as a company applied impact criteria, SDG, social development goals. What, what whatever the the framework is to signal to investors, Yeah, but I put in an additional element and you are investing, let's call it for simplicity sustainably because I have a filter and I make sure this happened when now in the papers and in cases which got very prominent over the last couple of months on on greenwashing. Then we are talking about that type of situation where somebody having a deeper look at this says, yeah, but you claim you are applying a framework but you are not real or your framework is not good enough. Now it's a very different thing when we talk about private markets, thematic approach, for example, when we like say responsibility, we offer a product. Now I mentioned it two or three times, access to clean power. So the investor who invest in that product, here's what are we going to invest to. We invest in business models, in companies who do exactly one thing they create, for example, access to clean power. We as a manager are of the opinion if you pick the right companies, they adhere to certain standards when it comes to environment, social and governance, for example, ESG or in their business orientation, then each of the investments and each of the companies in such a portfolio does exactly that. Of course, it can happen that we as a manager can get it wrong. We thought the company has on a governance aspect adequate procedures in place and it didn't have that can happen, but that's different thing from greenwashing. We have to be transparent with investors all the time. I think it's not anything which is now new. When we talk about greenwashing, it's something we have been doing and we are doing since 20 years. And we tell investors clearly what we do with the funding provided in a certain investment solution, in a certain fund. And that you can have situations where in an investment process really something fails. Yeah, that should not happen, but it can happen. And of course we have seen also over the years we have seen failures for example, where we assessed I, I remember right now case just on the governance side where we assessed together with others governance standards and found out later they haven't been at the level where we thought. And I guess this is one of the fundamental challenges in emerging markets, developing markets is getting the right information to validate those conclusions, right? Absolutely. And it seems the industry, Rojos has evolved a lot on, on, on this space. As you mentioned, output outcomes, impact measurement, ESG, you mentioned ESG. Tell us a little bit about this term. How can you put it in the same category as impact measurement? Does it stand apart? How do you see ESGESG? So environmental, social and governance aspects, that's where the ESG stands for is fundamentally a different concept from and if you allow me to say positive impact, positive, I mean because impact can be ever anything but negative. So positive impact ESG is also not that old. I think we are talking a bit more than 20 years right now where people have been coming up with that concept and saying, OK, when you want to do an investment under a sustainability aspect, it's important that the investee company, so the portfolio, the company which you invest in complies with certain environmental, social or governance aspects because otherwise the risk from a sustainable perspective is too high. So it's fundamentally a risk concept. Anybody who start thinking about it will find out immediately. But environmental aspects and social aspects and government aspects are very different things. So it's not like it's, it's not one homogeneous category. It fits together as an acronym, but it's not, it's not clear. You see David and there now when, when, when these days now and I think we will see over the next 5 to 10 years or even sooner a very interesting discussion on that because today, as you know, the regulators push a lot for you know transparency there and the concept of ESG is is a is a key concept there. The problem in the application of this is that if you assess a company across ES and G and then you try to give a score and say is this company under ESG performing well or not so well. You have to add very different things together. Because how is a poor performance on E compared to a strong performance on S and the mediocre performance on G? How do you sum it up? And the way you measure it might be different from someone else measures. And that's the reason why when you look at the professionals who provide ESG scores for the investors and the asset managers, why the ranges are so wide. That's a question I have exactly as a as a someone that logs onto these websites, can I trust those ratings Rojos? I mean, I'm not saying you cannot trust that, that's not what I'm saying, but I'm just saying you have to understand that each provider of that services has to make up her his it's mind on how do I add this up and what does it mean? I think we will see at least if I may predict this, we will see a bit of discussion going forward and the trend of a decomposition of things, OK, We, we look at only E that's a bit easier. And so if you look at E and say, OK, environmentally, how is the company scoring? And then investors will say, OK, please select companies which are strong on environment. And yes, look at S&G, but probably not that deeply because because I really want to make sure that the E part is, is very strong. So these type of discussions might come up interesting. They'll become deeper and more focused. And I think there's been an important evolution within responsAbility itself. I mean, when I joined, there wasn't a deep ESG team, carbon impact team. And now this has really, really grown and tell us a little bit about that transformation and why you think it's important. From a company perspective, it's all about creating opportunity for people. And each fund which we manage, we start from how can the financing of very specific business models in emerging markets, how can that financing contribute to creating more opportunities or a better environment for people living in those countries. So where we come from is if you want so deep impact. So we look before we design a product, we really try to understand what do we want to achieve, what do we want to change. That's the starting point. Now therefore historically we had, if you want. So in today's terminology, we had impact analyst from the very beginning of the company. Basically I was probably the first impact analyst of the company because I joined the company very early on, 1st as a consultant, then later, you know, full time and, and that's my background. So I looked and then later many other people looked into business model and said is this business model in line with our requirements. So we started from the impact side and for us aspects of E environment, social and governance very important since the beginning. But as we started in the financial sector, the environmental aspects were of a lesser important at the start. So I'm talking 20 years ago. Of course, naturally governance aspect always have been important. But 20 years ago it was a different discussion. 20 years ago it was about is there good governance practice. It was not so much about you, but how is the topic or also kind of of diversity, how, how do you deal with aspects which only came up later that that were not at the forefront 20 years ago, the social aspect. And again here you could also, of course, diversity under the social aspect of a company. You look into that. We always already looked into this, but for us it was, it had had a different angle for us when we looked at the social part. It was for us uttermost important that the business behaviour of that camp, of that business model is really up to our standards. It's interesting what you mentioned about the challenges on defining a term, which sounds so simple as ESG, but then has such broad and deep and characteristics within each particular segment. And now we're adding new ones, right? EUSF, the EUSFDR, for example, the EU taxonomy, the industry continues moving in this direction. There are new terms, there are new metrics that investors expect to see. What is your view on these and maybe tell the listeners a little bit about what these, what these additional requirements are? And in your opinion, are they a catalyst or a hindrance to affecting change? That's a useful thing we here, here transparency is created and it it gets easier for the investors really to identify, OK, what do I really contribute to here with my investment? That's very important. Of course, you do such a thing of regulation. It's always imperfect that that's just a reality. And I have been working myself on regulations in my past and I know how complicated it is. I give you just an example and but that example I'm only that people understand why it is more complex. Now you go to Africa, Uganda or some country, say, yeah, but there are people in there, you know, for them it's important economic growth. They might currently only consume if you want to consume or emit 10 times less CO2 emission than anybody living in Switzerland or in the US, 20 * 30 times. So is it 20 times less? Now that means if you say, but no, that an investment qualifies, it always has to to achieve a certain thing like a reduction. But there can be investments which contribute to a sustainable growth, which should increase the emissions, for example, in days. In that context, it should not reduce it because these guys are so far apart. Now don't misunderstand me. I'm saying for the bigger picture, what happens here, that's fine, you know, regulation and you know, but the challenges are in the details sometimes. And I appreciate you bringing the, the, the local perspective because I think that that's often missed. Sometimes when we think about how these frameworks are designed, it's, it's missing that local context, right? Requiring 30% efficiency of, let's say, a Ugandan farmer might not be the best way to promote development in that particular place. That's the tension, yes. And also standards that might work, if I understood you correctly as well, standards that might work in, in our markets and let's say in Holland and Switzerland and France might not be neatly applicable in other markets where we work exactly. And that's look, it's a big challenge for it's a big challenge for regulators, of course, I understand. And that it has been honestly speaking, when I look at our past 20 years in this, there have been many situations where these type of situations occurred. And therefore I think we have to continue to explain to investors why certain certain elements or certain regulations cannot be 1 to one applied for example, in the local context, which is slightly different. I found very helpful your your your discussion on intentionality, let's say the lens of investing as a first step, ESG is a risk layer that then helps you understand the relevant risk within specific theme of investment. And then a new evolution, which is these additional regulations on what exactly is being done and how do we measure them. Talk a little bit about differences when it comes to public and private sector assets and the investors that invest in these assets, what are their perceptions? Is there a general difference today when we talk about investment that's primarily of course investment in the public markets that those have been have developed over the last 200 years before that and I mentioned that when we first talk this kind investments have been predominantly local and they always touched directly the real economy. You know people put money together or somebody say, OK, we invest into a new housing for people in the community. So therefore social housing that's an impact investment locally. Now what happens to me as we have capital markets, when you invest into capital markets, you, you just have to be aware about all the real economy investments already happened because this is secondary. The markets already exist. You invest the best what you can expect. And I think that's where the discussion today is, is 2 things. One is many people invest under a certain perspective that this gives a signal to the market. It might. I'm not a believer. It might also have an impact on capital cost for companies. And so I, I don't think, but let's say that's one line of thinking. So it could shift companies to become more environmentally and socially conscious by knowing that there's more capital out there, let's say could be in effect that deserves an own scientific discussion. I don't go into that direction right now I am, but anyway that I don't go there. Second is engagement. Now I'm a shareholder, I can engage, I'm bondholder, I can engage or my broker or my asset manager or my fund can engage through. So there is engagement. Let's also be realistic. I think it's most effective if you really pull large part of capital together. Because if my $10,000 if I invest all my, I don't know, I don't think on large companies the engagement is, is is so effective. But fairpoint there's engagement. If you are successful in engagement, there might be change in the real economy. Yeah. And if, of course, here, this would be an argument for pulling more, more and more capital together in, you know, like in in large pools so that the engagement gets more powerful when the Black Rock engages is a different thing. Like if I personally would engage, it's, it's, it's two different things. So yes, Fairpoint, it's there. If the investor, the moment the investor understands this correctly, fine. Now how we name it, I never would use for that. The word impact. I I wouldn't do that because that's misleading. Again, people think, yeah, but that's I'm really having an impact on the real economy. No, probably not that much, but you can build a portfolio according to your needs. You can say, wow, I have companies in My Portfolio. They are under this lens of, let's say environment performing or scoring very high and I give this signal to the market and there's some engagement, fine, there's nothing wrong with that. It's a different thing when you go to the private markets and the private markets. It's even more different when you go where capital is scarce. That's a super important factor. Now when somebody decides I invest, which I don't recommend, but directly, let's say they're in peer-to-peer lending platforms as I invest directly in this small water purification company in India or in Indonesia, then yeah. And to provide financing for that company, they probably can can broaden their services. Yeah. I mean you, you, you are your money directly influences the scope even and and the broadening of the service. You have in that sense an impact on the real economy. So if you do that either directly, which is always a or through a fund, Yeah. And the fund defines predefines, which business models are financed. Then you talk about something which I would say, yeah, that's which deserves a term if you want to use the term impact so that you, you have an impact. I'd like to hear your thoughts on public sector investors, specifically development finance institutions. We save the best for last. When I started working like a bit bit more than 30 years ago in that field, it was mostly on behalf of public sector institutions. So public sector institutions are, if you want, doing investments specifically in developing countries, emerging economies, frontier economies, however you define it in detail since many years. And I go so far to say a lot of what we see today in impact investments would not be feasible. If not, the public sector would have prepared the field earlier on. I'm talking specifically also about regulatory frameworks. We touched upon that when we first discussed David. With regard to the financial sector. It's also very true to the energy sector. Purchasing power agreements for small renewables would are only available due to support specifically from World Bank, also others in Africa and many other continents. So that there's a very positive contribution from the public sector to the development of those countries and also to what we know today as impact investment. It's very simple to criticize the public sector. It's, I think it's a, it's really not complicated. There's a lot of inefficiency at in my perception. There are also sometimes I would say not really good and helpful market influences. This type of thing exists, but I think it's wrong and it's not what I think. I think the public sector fulfills still today a very important role there. And sometimes just the problem which I perceive and I'm I, I'm sometimes critical with regard to the public sector participation in this is one should of course also recognize how far the private sector already can go. In an ideal world, once a private sector comes in, the public sector would then decide, OK, this specific part is not needed anymore from the public sector because the private sector now took over. Now we all know things are a bit more complicated. It's not a day that comes December 31st and now we say, ah, now the private sector is there another is of course not like that, but but the point really is, is there is this very important role from the public sector to prepare the field. And if I can add something also from my perspective, I think that's absolutely on point. And also when in helping innovate and create new products and, and maybe pushing the space in different directions as well. Some of our new product offerings also came from combined offerings, wouldn't you say? Absolutely, absolutely. We are. And, and here, look, I can, I can just say we have so many corporations with the public sector. I don't even know the exact number. Is it 15 or 20? I, I just don't know. I mean, 15 or 20 corporations with the public sector on innovative structures. That is, to my understanding, a key role the public sector plays and we as one of the participants in, let's call it, impact investments, can only be thankful for that. That's great. Where the problem sometimes start is, of course, that's not only what the public sector is doing. This is a part where I personally think if one would even go stronger towards that direction, the leverage effect could be even bigger than what we have today. So the discussion when it comes to the usefulness or the achievements which the public sector actually realises today is more discussion on the degree kind of we of course, where we come from as representing impact investment from the private sector. We need the cooperation with the public sector. What we don't need, I give you just one example of two, two for the listener to make this a bit more tangible. If we then invest in a company, specifically when it comes to let's say energy, official climate, renewables in a company or we want to invest and we hear, yeah, but now a public sector institution also wants to invest. We are competitors there, which is fine, but the rates offered in by the public sector cannot be matched by any private sector players because the rates are so artificial low. Then I think there's a problem. There's a problem where the public sector is doing something which in an ideal world should not do. Now that doesn't mean I'm of the opinion all what the public sector do is that, that that's what I'm not saying I'm saying. I'm saying the, the challenges of course, look, many public sector institutions are now look they are have been growing so much and they are there since many decades. And as at the same time, the private sector also grows into these topics. There is of course this. Where both players are in the same swimming pool are in the same pool. And then to to reflect upon, but which, which party has which role here. That's I think a discussion which is an ongoing thing. Absolutely. And I even think within the development finance institution landscape, there are differences, some that are more commercially minded, some that really, no, this is definitely key challenge, but we won't bore our listeners with, with more details on this. But the topic of, you know, having a deeper look at the role of the public sector institutions in that space is an interesting one. For example, as I'm so keen on cost, it's always an interesting one. I I don't think there's any really good overview on, on, on what the costs involved are, which I find from a public perspective, quite an interesting topic. If there's a listener out there, that's a thesis topic. Yeah, that's a thesis topic. Yeah. I'm happy to introduce whoever has an interest to into this. Yeah, wonderful. Well, thank you, Rojos. I think this was a fascinating overview of building on the first series, which was your personal journey into microcredit, microfinance, financial inclusion, and now discussing in a bit more detail how has this sectors become more sophisticated, expanded public sector investors, private sector investors. And thank you again for your voice. Thank you and and I'm sure our listeners are grateful.