Profits for a better world: the call for Impact Investment Banks.
Updated: Mar 16, 2021
One of my all-time favourite singer-songwriters is undoubtedly Bruce Springsteen. The way he manages to shine a light on the lives of unseen people always moves me to these days. More specifically, while writing this article, I was listening to Springsteen's album 'Darkness at the edge of town', and a song struck me with a particular emotion. That song is titled 'Prove it all night', from which the lyrics chant "Well if dreams came true, oh, wouldn't that be nice, […] you want it, you take it, you pay the price […]". Those words couldn't but reminding me that to mould the raw clay of a dream into the final craft of reality you need not only a vision but also the right tools – or to paraphrase in simple business terms that means a need for financing.
As we look back throughout history, banks were the standard financiers of the real economy. Today, however, getting a line of credit from any bank is almost a heroic mission. Commercial banks, due also to the current low interest rates environment and to the increasing capital requirements imposed, prefer to strategically diversify away from being pure lenders, branching into secondary activities such as mergers and acquisitions, issuance of securities, capital markets trading and related services comprising the broad offering of what is also known as investment banking.
Anyhow, unlike what the appellation suggests, investment banks do not invest their capital into target companies, they just support the interaction between investors and investees. But before the crash of 2008, and the introduction of the Volker Rule, banks were very much active at investing in private and public companies, and investment banking was at its apex. Through it, banks also managed to finance the expansion of small companies that were willing to grow by contracting debt, acquiring other companies, or raising capital in any fashion. Unfortunately, today, investment banking turned into a high-end luxury service suitable for prosperous borrowers, as only well-established corporations posting sufficient revenues and returns on capital will be able to access such financing. Thereby, companies aiming to launch an innovative business, or even about to tackle a social issue, will struggle to finance themselves via traditional commercial and investment banks.
Hence, I feel like voicing from a crowded parade when I say that the capital needs of companies working to solve social issues should receive more attention nowadays. Luckily, always more neo-capitalists are joining forces to make a positive change and improve our economies through a more socially impactful form of capital allocation and investment management, like for instance in the case of Impact Investing and Social Finance. Sadly, banks are still late to the party, and the main challenge faced by impact capitalists is yet getting access to any guise of finance.
So, is it that the big banks are the bad guys? Well, it is much more complicated than that. As I write this article, banks, regulators, socially impactful companies and investors, regularly sit at big round tables discussing possible action plans, which are far from being defined. However, and provided the creation of a better regulatory framework and the implementation of the appropriate legal and tax reforms, I believe that the world would dramatically benefit from a growing number of what can be label as Impact Investment Banks (IIB).
Impact Investment Banks are nothing but investment banks with a unique mission: helping socially useful companies to better access financing, both from private and institutional investors alike, through the existing business model that all major international investment banks already have. For instance, an IIB based in New York may allow, through its energy capital markets team, a small watering company in Mexico to issue green bonds aimed to finance the purchase of a new water-purifying machine. Similarly, an Egyptian company providing freelance ambulance services, and in need of credit to expand its fleet, may be helped by the leveraged finance team of a London based IIB. In addition, we can also imagine a sales team of an IIB placing the equity shares of an SPV (special purpose vehicle) created by a US constructor for a housing project aimed to home immigrant workers in the suburbs of an industrial city - so, wouldn't it all be nice? But who is going to pay the price? Is it just expensive social care with no investment returns? Well, not at all. For these projects are structured to make money for their final investors, and sometimes even a lot of money.
The essential difference between a national subsidy scheme, a typical banking institution and a pure Impact Investment Bank would be that any project financed will have not only an accretive social value but also a return for their ultimate backers – a feature that impact investors call Blended Value. Then, from the Blended Value generated for investors and society, the impact investment bank will charge a fee that will be the remuneration for facilitating the financing – and who should pay the bill? Well, I believe that a shared contribution could be appropriate. On the one side of the transaction, companies will remunerate the banks with a small percentage of the capital raised. On the other, the relevant state, or regulator, may grant a tax-break on those fees earned by the IIB, so to incentivise the creation of Impact Investment Banks and for the latter to back socially useful projects.
From here, many positive business synergies may also arise for the IIB. For instance, the Impact Investment Bank might have booked inside its wealth management division many private individuals that may be interested and qualified to invest in the socially impactful projects. At the same time, the bank might have private equity or ESG funds (Environmental, Social, Governance), within its asset management department, that may also qualify to invest into project such as the one sponsored. But would private individuals and fund managers be actually interested and well incentivised to invest ultimately? Well, once again, it will also be on the shoulders of regulators and governments to answer this question, and concurrently whether they will grant incentives and tax breaks to impact investors, neo-capitalists and banking services alike.
I hope that ultimately our ruling institutions, public and private, will all understand that we are entering in a new chapter within the history of capitalism; a phase where social impact and profits will finally meet at the crossroad for the good of our societies. The question is whether our politicians and regulators will want it, will take it, and ultimately, will pay the price.
This article has been written by Tancredi Cordero, Founder & CEO of Kuros Associates.
For further information related to this article please visit:https://www.ft.com/content/741090f3-5023-3a78-a9d3-0d7b394f2616