Daniel Madhavan - Impact Investing Group - Passionately hopeful and appropriately skeptical

Elephants in the room, the most exciting thing Madhavan has worked on for a very long time and why he is “passionately hopeful but appropriately skeptical” about impact investing.

Dan is the CEO of IIG / https://www.impact-group.com.au and a longtime leader in Australia’s impact investing movement.  He was the first CEO of https://impactinvestingaustralia.com.

In this interview he discusses the progress, challenges and opportunities in creating systemic change, the paradox of the impact finance industry, something new IIG has coming up and quite a bit more.

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Transcript

- Philip Bateman, Bravo Charlie here, presenting the Smarter Impact Show. I'm here with Dan Madhavan from the Impact Investment Group, and also bringing this to you today on behalf of Pro Bono Australia, so thanks for watching. Dan, pleasure to have you with us.

- Philip, pleasure to be here.

- For those who don't know, Impact Investment Group work across real estate, impact investing and venture capital. I believe you have one of the first wooden buildings in Australia in Cross-Laminated Timber, the 25 King in Brisbane. I'm a huge fan of CLT. Moving on to that you're in solar fields in Karratha, Mount Marjura and Williamsdale. You've got 14.3 megawatts out there. Because renewables, impact, it's the same thing. And Giant Leap, your venture capital fund dedicated 100% to impact startups. I think that's the first one in Australia doing that. And I note the mandate for 10X returns in four to seven years. I was wondering, where does that 10X figure come from?

- The 10X figure is similar to what other venture capital funds are aiming to return over a similar timeframe. So it represents an IRR, a return of about 20% per year as the target. One of the things that we're really proud of in regard to Giant Leap is not only are we aiming to back impact startups - and yes it is Australia's first impact focused venture capital fund - but we're also aiming to compete with non-impact venture capital funds. So in no way are we looking to compromise the returns that we think are achievable. Our thesis is that the fact that a lot of these startups and entrepreneurs are focused on creating social and environmental value as well as economic value actually is a competitive advantage for them. So we think it's more than appropriate to target returns that non-impact venture capital funds would target.

- And how's it going?

- It's going very well so far. It's early days; I think three years the fund's been operating. Venture capital funds tend to think about themselves in a particular vintage. So each fund in each year thinks about itself as a vintage of that year. We are almost top quartile, actually top quartile for our vintage.

- And you said on the front of your website, "We want to prove that finance can be a force for good." Do you believe you've done that?

- I think we've contributed towards that. I don't think we want to claim that we've single-handedly proven what is a big, that we've single-handedly proven what is a big, in my view, a really big question to try and answer in my view, a really big question to try and answer and a really big belief that we hold. I'd like to think that we have played a role in contributing to the answer being, yes, you can do good and make financial returns at the same time.

- And it's been a pretty hard three months for the world. How have you found it?

- I've personally found it quite challenging. I think when you watch the news and you see how different people, both here in Australia and globally, are impacted by this pandemic, it's actually really difficult to process and to feel like you can make a contribution, a positive contribution to that. I think all of us that work in this space are very much predisposed to wanting to understand what we can do to help or what contribution we can make. I can say whilst I think I can bring lots of financial experience and skills to a problem, when it comes to health issues I don't feel equipped at all to make a positive contribution. So I find that, personally, quite difficult. As a business I think we've done really well to understand what risks have come up to understand what risks have come up or surfaced in our portfolio because of COVID-19. And we're just, I'm sure as every other fund manager is doing, looking to manage those risks as appropriately and as diligently as we can.

- There was another thing as well stated on the website where you "believe that aiming for systemic change is our path to meaningful environmental and social impact." This is a massive time of systemic change. Taking a two to five and 10 year horizon, can you point to the systemic change you're working on or that you would encourage other people to hone in on?

- Sure, I think that system change occurs at a number of different levels. We all operate in numerous systems at any given point in time. For us in the financial system that we operate in, For us in the financial system that we operate in, we would like to contribute towards a recognition that people matter and the planet matters and that we can seek financial returns and invest in a way that doesn't need to compromise outcomes for people and the planet. In fact, we can invest in ways that support outcomes for people and the planet. That's the first thing that we would like to contribute towards; a shift in mindset or shift in thinking that has, I think, to date, or maybe has been the predominant thinking in the finance world, that often it's a zero sum game. You're there to provide returns to either your investor or your shareholder, and considering any other stakeholder would compromise those returns. Our view is the exact opposite, and what we're trying to set out to, with many others in the field, to try and prove, is that actually by taking into account many stakeholders, not only can we deliver better outcomes and more sustainable outcomes for people and the planet, but there's a way to make and support more sustainable business models and less risky business models. I think that would be a huge shift for the financial world to move towards that type of thinking.

- It's almost in a sense that when I think of social licence to operate, it seems to me impact finance, the impact economy, is really simply capital for good, acknowledging that social licence to operate exists.

- I think that's right. I think that's a huge part of it. The social licence to operate comes into it. I also think though that there's a huge opportunity to demonstrate that business can operate as more than just a tool for financial gain. And that's not a new idea. There's many people that have recognised that business and its role in the economy is much broader than what it represents to shareholders alone. But I think being more conscious about that, being more deliberate about that and supporting that with more evidence over time is what's really important. I guess that's our system change goal I guess that's our system change goal in a financial system context. I think we would like to play a role as allocators of capital in a whole range of other systems as well. So our energy system in Australia is nowhere near as renewably charged is nowhere near as renewably charged as we believe it could be. So we see a huge opportunity to contribute to the composition of renewables in our grid. We'd like to think that we've already made a bit of a contribution there, but that's another system that we think there's a huge opportunity to reshape over time into a much more sustainable way. Our agricultural systems are areas that we've become really interested in what role capital can play, impact investment can play in regenerative agricultural practises. All the way to one of the conversations we're having at the moment through the Small Giants Academy and a series of conversations that we're hosting on the new economy or The Next Economy. And this idea of The Next Economy is one that takes people and the planet into consideration deliberately and consciously and we'd like to contribute to that.

- Okay, fantastic. For those, if this is the first time you've been seeing Smarter Impact as it's coming to you through Pro Bono, if you jump back to the interview before this one, you'll have Tim Washington from JET Charge, he's the head of the EV Council for Australia, and before that Andy McCarthy who's running RACV Solar. So really fantastic to have a deeper conversation about the energy grid. January 2018, you were saying there's $2.4, but now $2.7 trillion dollars in superannuation in relation to the Banking Royal Commission and you called it a great opportunity to bring the investment mandate to bring the investment mandate into alignment with the values of its contributors. How did that go?

- I think we've made some small, but really important steps as a system here in Australia. I acknowledge the foresight and in some ways the courage of some of the early movers in the space. We've been very fortunate to work with WA Super who we worked with to set up the first place-based impact fund in Australia, the WA Impact Fund. So that was a year in the making and went through clearly a lot of.. there was a lot of work put into ensuring that not only does the fund meet the objectives of any superannuation fund in terms of the tests that it needs to meet around providing for the benefit of its members and the retirement of its members, but also would aim to do even more than that and contribute to stronger communities and also healthier ecosystems that those members live in. and also healthier ecosystems that those members live in. So I think that's a really neat and important step So I think that's a really neat and important step that the superannuation industry can take. It follows other pioneering moves by groups like Christian Super and HESTA who have who have also been early movers into deploying funds for impact. The other group for us that we work very closely with and have admired for a very long time is Future Super who have been pioneering the thinking around how super funds can play a role, which is not only responsible in its approach to carbon emissions, but aims to invest in some of the solutions that will help us either reduce carbon emissions or maintain a more sustainable approach to the way that we produce energy. There's some groups there that I think have really stepped up to the plate and we'd love to see others. Whether we get the opportunity to work with them or whether they are building portfolios on their own, it's all good in my book. I think the key thing is that we see more of it.

- Yeah, wonderful. I've spent my last four months with my head absolutely down in regenerative agriculture and water management, and there's a company out there called Kilter Rural, well worth having a look at. You'll probably hear me knocking on your door saying, "Hey, let's get together and give them all money." Cliff Prior, CEO of the Global Steering Group for Impact Investing - as I was eating breakfast on the way out the door researching this, he was calling for impact measurement on the government industry bailouts. Stating; "Well, if we're going to give all this money out, why don't we use impact measurement frameworks to measure what the cash is doing?" What do you think about that?

- I think it's a great idea. I hadn't noticed that Cliff had called for that, but fantastic idea. I think the more and more..

- It was only five hours ago to be fair.

- OK, OK. So I'm not across all news in the last six hours. I think it's a really interesting idea. I think whenever we're using, whether it be public funds or whether it be funds that have been allocated with an intention for impact, we're really strong believers that part of the responsibilities and obligation is then to measure the effectiveness of how those funds have been applied. That doesn't mean that they will always be effective, but even under those circumstances, at least if you know that, you can take lessons from that. And there are learnings in that. I think there's obvious political reasons why that maybe difficult for governments, but I think that's unfortunate if that's the reason why things don't get measured. I think there's a huge opportunity to learn from even what doesn't work.

- Yeah, and when the outcomes are unknown, but you want to keep going, there are three areas to focus on: "Certainty, confidence, and courage," to quote you. How do you think that shapes up in the current environment?

- Yeah, I was thinking that rang a bell. How does that shape up in the current environment? I think we have less certainty at this point in time I think we have less certainty at this point in time than possibly we've...I won't say ever had, because the world's been through some pretty difficult times, but at least in my generation's time, I would argue we have less certainty today than ever before. So certainty is off the agenda. Confidence has been challenging. Not just with the pandemic, but also with just the geopolitics and a whole range of other things that'll be follow-on effects from the pandemic in terms of the way business thinks and the confidence it has about the future and what it can invest in, the way people think and the confidence that they can have whether it be because of a lack of job security or asset prices and their own investments. So confidence is also really difficult at the moment.

- And physical mobility, the ability to get where you intended to go.

- Absolutely.

- How do you make things happen if you're not able to be there.

- Absolutely. So I think confidence is even a very difficult proposition for most at the moment. So we come to courage. And I think if there is a time where impact investment, but not just impact investment, where anything that goes to consciously trying to support outcomes - and that could be through philanthropy, it could be through social enterprise, it could be through corporates and their social responsibility programmes, it could be through impact investment. Whatever the mechanism is, the idea that we could deliberately and consciously try to support outcomes for local communities or our country or outcomes globally, for local communities or our country or outcomes globally, now is the time. And now is not the time that we have certainty and it's very difficult to build confidence. So you're left with asking people to step in to the moment So you're left with asking people to step in to the moment and do that with courage. and do that with courage.

- Speaking of that courage, as we're heading into a recession inequality often widens during these times, and I'm quoting Wendy Williams here, "there are also often opportunities for investors, those with capital, to get great deals as prices fall on property, for example." What is the role of Impact Investing in this time against this backdrop? Can deals be made that prioritise social impact? And can we mitigate some of the issues of inequality? And to what extent is investing inadvertently widening inequality in the course of making money?

- I think one of the biggest challenges for impact investment, starting with your last question, philosophically, is if all it is, is chasing great returns plus impact, is if all it is, is chasing great returns plus impact, are we actually contributing to some of the increases in inequality at a system level? I think that's a really big and challenging question for the whole field to address over time.

- Because traditionally as investors you buy low, sell high.

- Absolutely, and part of what we're trying to do is wrestle with that complexity and not hide from that complexity. For me personally, one of the biggest challenges in this space is to remain passionately hopeful, but appropriately sceptical. So I'm passionately hopeful that if we can rethink the way investment works that if we can rethink the way investment works and we can be more deliberate about outcomes and we can be more deliberate about focusing capital in areas not only where it is needed, but where it can support change, that that will prove to be a sensible way to invest. But I also don't want to shy away from the fact that people with capital are often in a very different and often privileged position relative to the people that we are trying to support outcomes for. And how do we resolve that? How do we work through A, the complexity of that, and sometimes the paradoxes that are involved in that. So I don't have an answer to it. I hope in five or 10 years, we'll have been able to work through some of that complexity. And I do think that if part of the conversation in impact investing needs to be in my view, yes there will be opportunities where you are not compromising, where you're not trading off something, where you can get a great financial return and a great outcome, and then there will be a whole range of areas where that is just not possible. We do need to entertain a question of, are we willing to take less or are we willing to support outcomes for less? The question underneath that is how much do we care about those outcomes?

- Is there a lack of mechanism to create this national level transparency around what everybody's doing that's creating impact that people can see? Because I imagine that, when I think about venture capital firms looking for that good deal, and then people with ideas going to a representative who's going to get them capital, who exclusively takes them on so they can't shop around per se, and then people exist in these little silos of their own dealmaking, is there a lack of mechanism for us to actually say, "Look, we're all using capital for good. We're going to use money, we're going to change the world. Money's great, we've all got it, let's uplift everybody." How do we get everybody on the same page?

- It's probably a question that every religion has struggled with for thousands of years. Trying to get everybody reading from the same book and operating to the same set of rules. I don't subscribe to that personally. I think the best we can hope for is a gradual shift of mindset in the good times and sharp shifts of mindset in the times where that opportunity exists. I would argue right now is one of those opportunities where there could be a step change in mindset, and that mindset shift ideally leads to a shift in action. and that mindset shift ideally leads to a shift in action. And I personally don't.. I'm not that interested in policing those actions or judging other people's actions. I think we want to be in a spot where you can see the difference and you can see that people have a different mindset and that's happened in many change movements over the years. Many change movements. We've shifted our attitudes on many issues that are far more complex, in my mind, than, should you invest for good outcomes. To my mind, that's actually not the most controversial topic that you could come up with. I think over the last.. even in my lifetime, definitely in my parents' lifetime, society has shifted its thinking on many much more important issues, and you can see the difference of that. So I don't think, "Should my super help contribute to my retirement and benefit my communities," is an overly controversial topic for us to shift our mindset on. Nor if you went bigger than that, "Should I think more deliberately about how I spend my money as a consumer or how I invest my money as an investor." I don't think it should be that controversial.

- We are of the earth, we're from the earth, we live in the earth. It's a biosphere, we're not separate from it. And I think as well, when I remember speaking with Rosemary Addis where she was talking about the time horizons and how this is all relatively new. We're only just getting healthy first world, everybody connected, start of the '70s, capital moving around last 10 years. It's been like, "Let's use our capital for better things," because we can communicate about the disadvantages, certain unchecked investing per se has had. And this is all new. So it's an exciting time from my perspective. What are the elephants in the room in the impact industry that people aren't talking about?

- I don't know that there's that many elephants that people aren't talking about. There's a few elephants, you've named one them, which is investment comes from a place of capital. Capital belongs to owners of capital. Are they the best people to solve some of the more complex issues, particularly around inequality, where one could argue that they're part of the problem, not part of the solution, right? So I think that's an elephant in the room. But I don't think it's not being talked about. I think one of the things that I feel quite pleasantly surprised by that I feel quite pleasantly surprised by is the fact that that is an active and ongoing conversation within the field. So I don't think it's one we're going to resolve today, but I am passionately hopeful that we will work through that over time.

- And what are you excited about?

- I've a very self serving answer to that, I think. The thing I'm working on at the moment is launching an alternatives fund. So a fund of funds at IIG and it's the most exciting thing I've worked on for a very long time. So that's the thing that's getting me really excited.

- When you say alternatives...?

- So alternatives is a word in the finance space, investment language, to say those things which don't behave like normal things. So your normal things or traditional assets would be things like property, shares, bonds, cash. So they're your more traditional asset classes. And then you have this bucket for things that would be described as alternative i.e. that they behave differently to all of those more traditional things. So one of the challenges we set ourselves at IIG a couple of years back was, how could we really try and mainstream impact investing? how could we really try and mainstream impact investing? Because a lot of the opportunities are there for people who understand those outcomes more deeply, or are more passionate about those outcomes and often the financial structures to invest in are quite esoteric or quite complex. And we said, can we come up with a really simple fund that could be a way to unlock mainstream investors that could be a way to unlock mainstream investors and mainstream capital into impact investing? And this is the idea we've been working on for nearly two years now. So we're at the edge of launching it, which is very exciting.

- Wonderful. And if there's one thing you wanted people in the world to know about the Impact Investment Group, what would you tell them?

- I would tell them that the opportunity is to really rethink the way finance can work is to really rethink the way finance can work to support outcomes. And that comes at not just doing the same things And that comes at not just doing the same things and adding impact to them. It comes from actually rethinking the way financial instruments are structured, the way a transaction gets done, the way you engage with the people who you are trying to support, the way that their voices are heard in that process, the way that we recognise the value of people, all people, the way that we recognise the value of people, all people, not just the people that have got the finance degrees. That's something I've been really proud of our team for doing, is the space that they create to really try and understand is the space that they create to really try and understand both the issues that people are experiencing, but also the people who are experiencing those issues. That's very different for me and it's one of the things that makes me very proud to lead our team because I think they do that with great dignity because I think they do that with great dignity and also with great consideration.

- Wonderful. And for most of the people watching are probably traditionally in this space where you work, and for people who have heard the call you just put out there, what would be the first step for them to engage with this as a process? Because I imagine the people who are watching are similar to yourself; they want to make that call out to other people. So what would you advise them as the first step to having somebody engage with this?

- There are so many wonderful resources, both ones that are literally sitting on the shelf and also great opportunities to meet and talk with people in the field and learn from their experiences and leverage their knowledge and wisdom. So it really comes down to, some people like to sit in a room and do their own research. There's some amazing resources. You mentioned the Global Steering Group for Impact Investment, Impact Investing Australia has some great resources on its website.

- We first met at the Summit, The Impact Investment Summit--

- Yeah, The Impact Investment Summit, Asia Pacific Impact Investment Summit.

- It blew my mind; hundreds of people all sitting there super hyper focused on "How do we have the hard conversations? How do we bring everything we've got to bear? How do we bring our networks along?"

- That was the second group of things I would suggest. There's many events that you can go to, including the Summit and often some satellite events that they run, as well as we run events. There's many.. maybe not right now. But most of them are virtual events at the moment, but there's so many different forums for people to learn about this space. As someone who also came into this from a more traditional finance background and did not know anything about impact investing when I left my more traditional finance background, one of the things that was so clear to me about this field is it is full of people who share that experience and are therefore incredibly generous with their time and their knowledge because they've also been in a position where they were trying to understand this and work it out and learn about it, and others have given to them, and this is a form of them passing that on.

- Is there anything we haven't covered that you'd like to share?

- No.

- Great. Thanks so much for being here. Thanks so much for watching, folks.

- My pleasure. I hope you enjoyed it.