The definition of impact investing is today still controversial and has in some quarters evolved. The classic notion of impact investing has often meant investing at the base of the pyramid. It's also taken on the notion of investing in the private issuances or securities of private firms, essentially, venture capital or private equity and its related affiliates. I think the best way to think about impact investing however, as you might expect from the lectures in this module, are to think broadly. Now, by classical then what we must mean is something historical, historical as an antecedent or historical and ongoing. The classic treatment that we'll do today is first to focus on base of the pyramid activities, which as you'll hear in a second go back decades and decades and then we'll talk a bit about private market investing, investing in either venture funds or private equity funds, or investing in private businesses. We'll also cover those in future lectures in several different aspects. Focusing on the base of the pyramid, classically raises the notion of microfinance up as an example of impact investing but also, as a methodology for expanding the notion of the investment opportunity set. Importantly, potentially addressing the possibility for investors to find low levels of correlation among other investments than they already are investing in, or ultimately, generating better ratios of Reward to Risk known as the Sharpe ratio in their portfolios. It's an exciting area both of research and actual investment. Microfinance models typically target a customer base of poor people with the purpose of helping them out of poverty while at the same time generating investment returns and presumably profits. It's distinguished from charity in a number of ways, including the notion of residual profits on a risk adjusted basis and also with the notion of the potential for regeneration of the impact, through the generation of those profits. In other words, it's different from both government repatriation of extra analogies, government support of the poor for example, although it can be interacted via public private partnerships and through specific charity, in which again, classically defined, charity involves giving away of funds. How the new model developed is that in the 60s and 70s, microcredit programs backed by governments and philanthropy targeted agrarian activities, typically small farmers. As an outpost of pre-World War Two elements of the green revolution, new plant hybrids, chemicals, fertilizers and techniques dramatically boosted crop output around the world. One of the major players in today's impact environment, the Rockefeller Foundation, pioneered early development programs and the notion of microcredit to increase small farm productivity. Lenders then were government and development agencies and farmers co-ops making small subsidized loans. In some sense, programs faltered however due to low repayment rates and political challenges ultimately, getting money to the smallest farmers. In 1961 ACCION International was founded as a community development organization in Caracas, Venezuela. Today ACCION is a nonprofit with a global reach in two for-profit subsidiaries which are among the largest MFIs or microfinance institutions. In 1976, in what is now recognized as a global watershed event, Dr. Muhammed Yunus and students, together built a microcredit program for small farmers in Bangladesh. Starting initially as his class project and ultimately evolving into the Grameen Bank which opened in 1983 with donor support to institutionalize the loan program. As some of you know, Muhammed Yunus won the Nobel Peace Prize a number of years ago. The Grameen Bank has been held aloft as a dramatic success, lending out billions of dollars in very small increments, essentially to those at the base of the pyramid. The definition of the base of pyramid is as with many concept in economics fundamentally controversial. The notion of the bottom of the pyramid was a term first used by Franklin Roosevelt in 1932 when he, and I quote, said, "The unorganized but the indispensable units of economic power. The forgotten man, which we'd today call the forgotten person, at the bottom of the economic pyramid." Highlighting both the role, the in fact indispensable role of the base of the pyramid in global and local economies as well as in some sense a recognition of the challenges, the forgotten person at the bottom of the pyramid. C.K. Prahalad and Stuart Hart, in a series of books and articles starting in the late 1990s, popularized the notion of the base of the pyramid and in fact, themselves defined the notion of the base in different ways, either globally or on a national scale. It's not hard I suppose for you to conceptualize of the idea of a pyramid in different countries and of course aggregating to one global pyramid. The initial Prahalad and Hart 2002 definition of the base of the pyramid, were the four billion people with annual per capita income less than 1,500 dollars. I suspect many watching this video would have challenges not spending 1,500 dollars a year on coffee. 45 billion people living on less than two dollars a day. That's a slightly updated version, that's Prahalad 2002. Or a billion people living on less than one dollar a day. An estimate of the market size by purchasing power calculations, namely exchange rates, embodied say for example, the Big Mac index across countries equilibrating consumption baskets was thought to be a high of 13 trillion dollars and that's the number calculated by C.K. in 2005. Neil Kanani, at the University of Michigan, suggests it might be lower but it gives a baseline of 300 billion dollars worth. Again, coming down to the controversial notion of transferring consumption and consumption baskets across countries. Serving this population was the original target of what is ultimately come to be called today impact investing either through direct lending programs, through microfinance institutions or community development institutions, or through investing in organizations in private markets or in some cases public markets that serve or specifically address the financial empowerment in business entrepreneurship of those who lie at the base. Today of course there are many other goals for socially oriented investment. The Grameen Bank and others including the media network, have risen to service the base. Again, began as the Grameen Bank project in 1976 headed by Muhammad Yunus at Chittagong University in Bangladesh, it actually became an independent bank via government legislation in 1983. Today its ownership is 90 percent borrowers in a mutual style format, namely the rural poor and it's a joint venture with the Bangladeshi government which owns 10 percent. 97 percent of the borrowers are women which highlights a kind of element of the traditional microfinance model, lending to women who often operate in a collective environment with an agrarian enterprise or an agrarian approach to entrepreneurship. A number of potential benefits have been identified. It's not a sexist thing to say that in general, women are the center of family life and in fact of community life in the targeted communities for initial microfinance efforts. And then there are ancillary or corollary benefits. Benefits to health and education of children, betterment and financial empowerment of women in many societies where they naturally face challenges by legacy and by current hostile environments. The advantage of having the non-transient nature of women in some of those communities, allowing to evolve a kind of feedback loop or feedback mechanism of self-empowerment as well as obviously ownership of the means of production, which is not a Marxist footnote whatsoever, it's just a notion of entrepreneurship. The Grameen Bank reports over 20 billion dollars being dispersed since inception with 19.3 Billion dollars having been repaid. Currently, there are about $1.6 billion of loans outstanding, with about 16 million being classified as non-performing. Here, under the Bank's definition missing five to nine consecutive installments. Now of course, when you hear that number, if you're in the western world or if you're in the US, you might be thinking that between five and nine consecutive misses on paying your credit cards for example, would be deleterious to your financial life. There's no question. Typically, microfinance loans are distributed in arenas in which the notion of a fair Isaac or some other credit score, or a definite Phelps, or Dun & Bradstreet kind of credit score has almost no meaning. With credit histories not being verifiable otherwise, work lives being non-existent or again non verifiable, in some cases, addresses not even being verifiable. In addition, the model of microfinance typically involves again not only small loans, but also a kind of overarching structure in which entrepreneurs are couched or cradled in a system of education and outreach. Helping budding entrepreneurs to understand the basics of balance sheets and accounting, checking. Perhaps helping them become electronically financially empowered through the use of cell phone and other technology, and more frequent interaction, and more frequent payments, so that the notion of five to nine consecutive payments which would of course potentially destroy the credit rating of someone in the western world, is something that can both provide information that would then induce a feedback loop, but also may not be that unexpected since we're dealing at the base of the pyramid. The Grameen Bank has grown to just under 26,000 branches. Interestingly enough, interest rates on the main credit product versus the general loan, has revolved around 20 percent as an annual percentage rate. Some products are priced significantly lower, eight percent and below, depending upon the quality of collateral, and the type of loan, and the type of business activity, and borrower. Some would suggest, especially in a world with low interest rates, that a 20 percent analyzed percentage rate sounds high, but a couple of other characteristics of the model are important to talk about. One, small loans that are generally fairly expensive to administer, and low-levels of credit quality. Again, even with very low-levels of non-performance, these loans are very expensive to administer, so those percentage interest rates are viewed in some cases to be appropriate and workable. Again, both the bank and Muhammed Yunus were awarded the 2006 Nobel Peace Prize. Although, the government fired Yunus from his own creation in 2011 apparently, reporting dislike for his involvement in party politics. A number of other well-known actors like Rockefeller, ACCION , Grameen Bank, and the Omidyar Network have been established over the years, and serve as sources and resources for entrepreneurs, for those who are considering investing and learning about impact investing. The Omidyar Network is fascinating to understand because it was started by eBay founder Pierre Omidyar in 2004. The model intriguingly combines a for-profit LLC with a grant making 501 c3 entity in the US, which is a non-profit entity, and ultimately committed nearly a billion dollars. At last, estimate about $917 million had been committed to the inception. Roughly, half and half between for-profit investments and direct grants. About 422 million in for-profit investments and 495 million in grants. The organization focuses on entrepreneurship, microfinance infrastructure, micro-insurance for example, the Base of the Pyramid, and now broader insurance organization known as LeapFrog, starting in Sub-Saharan Africa but, broadening its expanse over time. The Omidyar Network targets investing in technologies that enable financial inclusion including, a Sub Focus on mobile payments, e-commerce, and education especially, English language study. One of the early traditional investments for example, was PandaWhale, which in part was and is an information dissemination, a crowd-based on crowd-sourced information that would potentially expand the ability for those with the Base of the Pyramid to gather information about their environment. The size and the reach of the investment on microfinance industry is fairly impressive. One approach which is only one small subset is occupied by microfinance investment vehicles. Just under 100 at 93 MIV submitted data and were benchmarked in the Symbiotics 2016 survey. In that point, Symbiotics identified the total sector AUM estimated $11 billion. Geographically, in 2015, India moved to the first place worldwide in invested asset concentration at about 10.7 Percent. And yet the most asset growth was in place in Africa at about 20 percent annual growth. However, still 55 percent of MIV conduits that would channel money to those organizations then dispensing at the Base of the Pyramid, are managed from two Northern European countries, Switzerland and the Netherlands. In part, due to the important role of high net worth and ultra high net worth investors. Now, part of the notion today at least as received by the profession, is defining impact investing in my view fairly narrowly, as private investments in primary securities issued by startups, or entrepreneurial activities or enterprises. We study this arena at Wharton which the Social Investment Foundation Forum identified as having about $200 billion in it in the US. The notion of performance and characteristics is heretofore relatively unknown because of the paucity of data. The Global Impact Investing Network, Cambridge Associates, JPMorgan, and others have also pursued research of these kinds of investment activities. A couple of years ago, a research team organized by the Wharton Social Impact Initiative, and with Co-principal investigators myself and David Mustoe, along with Jacob Gray, our student Jeff Jeffers, our colleagues Nick Ashbourne, and Harry Douglass issued a report called Great Expectations: Mission Preservation and Financial Performance in Impact Investing. What we did was, took a close look at the kinds of investment activities that are occurring in private markets through venture capital and private equity funds, as contrasted perhaps with what's going on in mutual funds, what's going on with insurance companies investment, what's going on with exchange traded funds, sovereign wealth funds, defined benefit plans, and so on. In any case, those that are holding assets in public markets, publicly issued stocks or bonds and so on, and instead focusing on those generally primary securities issued by firms themselves. In part it relates to a philosophical notion of impact investing definition that has to do with directly influencing the cost of capital of economic enterprises targeting Social Impact, at the Base of the Pyramid, focus on the environment, and so on. This arena we have to recognize, is dwarfed by the social responsible investment assets SRI ESG. Again, I would consider those to be impact investing assets, as we said, which are in the US on the order of $9 trillion or more. This notion of investing in private investments however, does clearly connect to supporting the activities of organizations and enterprises that have potentially direct connection to impact. When we look at the holdings of larger organizations, we have to recognize that the footprint can be much larger, and even if they do have a focus or some kind of Social Impact activities, at the same time they may be generating externalities. At the end of the day, Social Impact has got to recognize that it's defined in the eyes of the beholder. And I would argue that, it's got to be construed as broadly as possible because the challenges, the externalities generated by humanity are indeed very large. Viewed even narrowly as a supply and demand idea, we still find that the span is huge, the size is huge, the economic notional value, or perhaps more exactly, the present value of the future stream of negative impact arising from those externalities which are not borne by those who create them potentially, is gargantuan. That having been said, innovation, entrepreneurship, in fact, in some case industry disruption, have been the hallmark of this new notion of impact. And so, this is what we studied at Wharton.
