Financial and Monetary Systems

How can investment banks boost impact investing?

Lutfey Siddiqi
Visiting Professor-in-Practice, London School of Economics and Political Science
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Financial and Monetary Systems

It is not sufficient to pursue economic growth in absolute terms, it’s important to be mindful of its consequences. The challenge is to amplify the kind of growth that is both inclusive and sustainable – two terms that encapsulated the organizing framework of the Annual Meeting 2014 in Davos.

In thinking about this challenge – at a macro and micro level – I’m influenced by four propositions:

  1. Much can be achieved by “impact enterprise” – ventures that intentionally and explicitly target social or environmental outcomes in the form of cash-generative enterprises. In many cases, these social businesses are self-sustaining alternatives to pure charity.
  2. Much can be achieved by big business. I come from the school of thought that says, “If you want truly impactful change, try intrapreneurship first before striking out on your own.” Small changes inside large organizations can lead to outsized results.
  3. At an individual level, when it comes to doing good, I believe in a comparative advantage approach. For maximum impact, it’s better to utilize our volunteering hours doing something that we actually have expertise in. We can either do it pro bono or earn commercial wages that can be handed over to those that specialize in delivering social outcomes.
  4. Looking ahead, we must expect a growing part of finance to come from non-bank sources. Increasingly, sources of funds will be direct investors – private, institutional, sovereign – with banks as arrangers, not principals.

How, then, do we amplify the reach of impact ventures?

Given that all good intentions require funding, the question may well be rephrased as: How do we turbo-charge the allocation of funds to impact causes?

I believe one of the answers is to co-opt investment bankers. Not just a niche desk within banks that sits alongside the philanthropy offering, I mean mainstream investment bankers.

Investment bankers specialize in originating, underwriting, structuring and match-making sources of funds with their uses. When it comes to underwriting, they commit part of the firm’s capital – typically a fraction of the total amount raised – to catalyse the build-up of a book of outside investors.

I acknowledge that mainstreaming impact investment is a non-trivial undertaking. As highlighted by the Forum’s recent study, several parts of the ecosystem need to be aligned. However, rather than wait for everyone else to act first, how about we get the fly-wheel moving by asking the CEOs of the world’s top 10 investment banks to simultaneously commit to the following:

First, for their employee-volunteering programme, actively encourage deployment of their origination and distribution expertise for social enterprise or investment.

Second, commit some amount of capital for the purpose of underwriting a finite number of these transactions. A symbolic commitment to back-stop US$ 10 million each should provide the thrust for lift-off.

We know that Investment bankers like league tables. Let’s tap into that competitive streak. Let’s construct annual league tables of social financing in the same way that league tables of traditional issuances are published and fought over by investment banks.

The top-down messaging from these investment banks and the commitment to allocate capital (no matter how small) would send a strong signal. Externally, this will help attract first-time investors while, internally, staff across organizational divisions will pick up the message.

The bandwagon effect of launching this as a coordinated yet competitive campaign among banks may well prove to be the thrust that enables a much-needed step-change in the financing of social enterprise.

So what are we waiting for?

Author: Lutfey Siddiqi is Adjunct Professor at the Risk Management Institute, National University of Singapore and a Managing Director at UBS Investment bank. He is also a World Economic Forum Young Global Leader and participated at the World Economic Forum’s Annual Meeting in Davos 2014.

Image: Vehicles move on a bridge in Beijing REUTERS/Jason Lee

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Financial and Monetary SystemsEconomic GrowthEducation and Skills
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