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HUMANITARIAN FINANCE: GOOD CONSCIENCE OR REAL IMPACT?

In the field of responsible investments, impact investing is gaining in popularity. But is it possible to invest for the greater good while at the same time achieving profitability targets? This was one of the questions addressed at the discussion panel organised by Mirabaud in Geneva on 27 April 2018 in collaboration with broadsheet Le Temps, featuring Yves Daccord, Director-General of the ICRC, Scott Weber, Director-General of Interpeace, and Catherine Reichlin, Head of Financial Research at Mirabaud & Cie SA.

Growth is making a comeback. The financial markets are on the uptick. Does this mean that the world is in better shape? It isn’t quite as straightforward as that, not least in light of the current resurgence in conflicts and growing tensions not only among states, but also within their own borders. Not to mention all of the consequences this brings with it: displacement of populations, migration, and destruction of economic structures, healthcare systems and infrastructure. Confronted with growing needs, humanitarian organisations are taking action. But the way in which they are taking this action is changing. “This is also the case for the ICRC, which going forward will have to take a sustainable approach to its emergency aid and give greater thought to how it can invest over the long term in particularly unstable environments. Restoring security is one thing; rebuilding hospitals is quite another,” says Yves Daccord. And then, of course, there is the risk factor which inevitably enters the equation.

The challenge of funding for the humanitarian sector

While 91% of the annual budget of the ICRC (CHF 2 billion) is still provided by the member states of the European Commission, today the organisation is compelled to find other sources of funding, especially for situations where raising money proves more difficult. For example, “today it’s easy to get money for Syria, but nobody wants to give for the Ukraine,” remarks Yves Daccord, who states that “the method adopted by the ICRC is increasingly modelled after that of the member states, which represents a real challenge in terms of impartiality.” Is it time, therefore, to turn to finance in search of solutions? In Scott Weber's opinion, it is not a matter of choice: “Today it is no longer a question of asking whether or not we should work with the financial sector, but rather exploring ways we can do this intelligently.”

Growing demands on the part of investors in terms of ethics

Cognisant of the fact that extra-financial factors have a decisive impact on company performance, for several decades now the financial sector has been integrating environmental, social and governance (ESG) criteria into its investment strategies. This development has been driven in no small part by growing demands on the part of investors in terms of ethics. These parameters – which were enshrined by the United Nations in 2006 in the UN Principles for Responsible Investment (UNPRI), to which Mirabaud is a signatory – have given rise to different approaches to responsible investing (see opposite). “For example, we can proceed by exclusion by systematically disqualifying companies which have a negative impact on society or the environment. Alternatively, we can give preference to best in class companies which set themselves apart through their excellent ESG practices,” says Catherine Reichlin. Among the most recent solutions proposed, impact investing has picked up the greatest tailwind. Specifically, this option – which has been around for a decade now – advocates investing in projects, organisations or companies whose primary objective is to have a positive and measurable impact on a social or environmental level in addition to generating a financial return. This solution first manifested itself in the form of microfinance, before evolving into bonds known as “impact bonds”. And so “green” bonds were born, followed by “social” bonds and finally “humanitarian” bonds. There is no need to explain the goal of these bonds – their qualifiers speak for themselves. And if it transpires that these instruments generate a return that is slightly lower than the return of a traditional bond from the same issuer, “investors such as states are willing to put in more money if there are results,” explains Scott Weber.

“Social investors take risks for a good cause”

As one of the first issuers in the world of humanitarian bonds, in 2017 the ICRC launched a financial product to support a rehabilitation programme in war zones for a period of five years (Mali, Congo and Nigeria). “It would not have been possible to launch such an initiative within the context of traditional humanitarian action financing,” confirms Yves Daccord. For the ICRC, this is an important paradigm shift: the institution no longer works here in an emergency capacity, but rather with a view to the impact it can have over the long term, namely by reintegrating into the economic and social system people who have been disenfranchised. In addition to the traditional donors and states involved in this project, this initiative also aims to encourage the private sector to switch to social investments. To those who might criticise the ICRC of speculating on the misfortune of the most vulnerable, Yves Daccord has the following to say: “The sole purpose of money is not just to make profit; it should also enable us to deliver an intelligent response to situations that arise. Social investors are remunerated commensurate with how effective the programme is. Therefore, they take risks, like us, but they do it for a good cause, like us.”

“The ICRC is happy to talk to the Taliban. Why can’t it do the same with bankers?”

A humanitarian bond thus enables investors to generate a return on critical issues – issues which could prove considerably more costly for the community than one might think. “Let’s take the case of Ebola, for example. Putting in place today a healthcare system capable of absorbing the shock of a new epidemic would be much more effective than having to intervene tomorrow with emergency measures on the ground,” maintains Yves Daccord. He continues: “Impact investing makes sense for humanitarian action; so does working with finance. The ICRC is happy to talk to the Taliban to find solutions. I don’t see why we can’t do the same with bankers. The important thing is never to lose sight of the real impact our actions have and how pertinent they are.” Catherine Reichlin adds: “Profit is what keeps the economy ticking. Offering additional solutions to socially responsible investors for generating profit while at the same time supporting a good cause, that creates growth for society, which is crucial in the world we live in today.”

Are these products really of interest to investors?

“While it was not easy to find social investors at the start of the project, we think that these types of products have a bright future ahead of them. This will take time, however, because here we are predominantly targeting professional investors,” emphasises Yves Daccord. Indeed, this type of undertaking goes far beyond the realms of philanthropy, and states have a defining role to play in this regard as a catalyst by stimulating investment and attracting new investors.

Are we seeing a shift in attitude?

“Many people today are asking themselves where their money is going,” comments Catherine Reichlin. “Impact investing gives them a concrete answer to this question with a quantitative objective and profitability calculated on the basis of results achieved on the ground.” It’s not just small-scale investors who are expressing interest. At the beginning of the year, the symbolic boss of BlackRock, the largest asset manager in the world, urged the companies in which his firm is a shareholder to put themselves at the service of the common good. According to him, “all companies should not only produce financial results, but also demonstrate how they make a positive contribution to society”. Even the World Bank has changed its attitude and has begun deliberating new methods of achieving its primary mission: to eradicate poverty. A few months ago, this institution issued a USD 320 million bond to combat epidemics so that it had funds it could call on quickly to fight illnesses before they spread out of control. Its yield is commensurate with the risks involved. Accordingly, an investor could lose a major portion of the money they have invested if an epidemic devolves into a pandemic. But they could also win big if nothing of the sort transpires. Within this context, the objective of containment should allow risk to be limited. A product of this type for famine is likewise being explored. Considering that money does not arrive on the ground until three to four months after the crisis escalates into a disaster, the available funds would enable actors to intervene much earlier among the affected populations and thus to limit not only victims, but also the cost of operations. In practice, the most effective way of reducing a situation’s downside risk is to strengthen a society’s immune system.

Liquidity: leverage for humanitarian action?

Understandably, responses to humanitarian problems are usually implemented upstream. Finance can provide a source of leverage here. That’s why it’s important to have liquidity at your disposal, so you can be proactive. “That's precisely the purpose of an organisation like Interpeace,” says Scott Weber. “When we identify a problem on the world map, we strive to do as much as possible to prevent it by involving all relevant stakeholders in the discussion. We do this in the conviction that it is by establishing more inclusive governance systems that we can build societies which are better equipped to manage their own conflicts, which more often than not are borne out of exclusion. The partnership we have with Mirabaud serves as a great example in this regard, since a portion of the management fees and the performance generated by one of its funds labelled “responsible investment” allows us to access a certain liquidity. For us, one dollar invested corresponds to 10 dollars. We are therefore able to deploy ourselves more easily and more rapidly on the ground.” “Let us not forget the Marshall Plan,” recalls Catherine Reichlin, “which was not a gift but rather a loan to help Europe get back on its feet after years of fratricidal war.” Are we not faced with a similar situation? We are a far cry from the Rockefeller era where the overriding goal was to gain a lot of money at no matter what price and to reinvest it without any real regard to where the funds were going. Today, investors are on the lookout for congruence and consistency between the values a company espouses and the way a company conducts itself.

“Today, a certain weariness has become evident in public opinion in the face of humanitarian action. The landscape is more and more complicated and the involvement of actors more and more complex to decipher. If the narrative employed by humanitarians is now still only enticing a small number of philanthropists, it is clearly no longer working. We need to find other solutions, other funding methods, other investors. The major challenge for us going forward will be to work in project mode, which for the ICRC implies a real shift in culture. And impact investing solutions perfectly serve this goal,” underlines Yves Daccord.

To close the discussion panel and the Q&A session which followed, Nicolas Mirabaud, limited partner, also highlighted the importance of Geneva both as a global centre of financial expertise as well as a cradle of humanitarian action. “Our city is home to financial and humanitarian capabilities which are held in high esteem by the entire international community,” he explains. “Geneva and the surrounding region is also a prime centre of innovation, and I am convinced that in future, finance will continue to create synergies and support the work of the various actors working on the ground, whether by getting direct involved directly or by putting in place innovative solutions that enable these actors to complete their mission.”

 

 

APPROACHES TO RESPONSIBLE INVESTING

Definition

Integration
Application of ESG criteria in the selection of stocks in order to measure the potential values, opportunities and risks for investors.

Exclusion
Disqualification of companies whose activities have a negative impact on society or the environment or that breach international standards are disqualified.

Thematic
Selection of companies that operate in sectors of activity linked with sustainable development – such as water, renewable energy or sustainable agriculture – are selected.

Involvement
Exercise of voting rights in a company according to specific convictions and direct dialogue with the company in order to improve its social responsibility.

Impact investing
Targeted investment in organisations, companies or funds whose mission has an environmental or social impact, while at the same time striving to achieve solid financial performance.

Best in class
Positive approach aimed at giving preference to companies with the best ESG practices.