Impact investment and M&A (IBA Annual Conference, 2019)
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Report on a session of the Corporate and M&A Law Committee at the IBA Annual Conference, Seoul
Monday 23 September 2019
Rapporteur
Sascha Hoedl
Schoenherr, Vienna
Session Co-Chairs
Nicola Charlston King & Wood Mallesons, Melbourne
Alejandro Payá Cuatrecasas, Barcelona
Speakers
Alexei Bonamin TozziniFreire Advogados, São Paulo
Christian Herbst Schönherr Rechtsanwälte, Vienna
Doug Duckjun Lee Global Steering Group for Impact Investment, Seoul
Maria Fernanda Mierez Beccar Varela, Buenos Aires
Marco Nicolini Chiomenti, Milan
Nicola Charlston and Alejandro Payá, acting as moderators of the session, introduced the topic by explaining that impact investment was defined as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Three main forms of impact investment could be distinguished: social enterprises; social benefit bonds/social impact bonds; and social impact investment funds. The trends were that this type of investment has become more conventional and widespread and is no longer just limited to impact investment funds. Moreover, the tendency was no longer just ‘negative screening’, thus avoiding industries considered harmful like tobacco, alcohol and guns. Rather, investors required a positive screening, given that they increasingly showed a preference to invest in companies with higher environmental, social and governance (ESG) ratings.
Following that introduction, the moderators steered a panel discussion covering the following aspects of impact investment: practical impact on M&A, with examples; impact investment around the world; and benefits and risks and how impact investments were assessed and impact/return judged by potential investors, as well as the role of the adviser to an investor or an entity receiving the investment.
Doug Duckjun Lee provided interesting, practical examples of how D3 Jubilee Partners (founded in 2011 and operating from Korea and Silicon Valley) had made venture capital investments in start-ups in Africa, Asia, Korea and the United States, the lessons learnt and challenges.
Marco Nicolini commented on different development paths of different types of impact investing, with examples of socially responsible investing and ESG investing.
Christian Herbst commented on how impact investment practically differed from traditional M&A and inter alia explained: socially responsible and impact investing, considering to what extent the possible target companies have or are taking measures to minimise ESG risks and actively follow ESG possibilities yet with investors still not seeing a need to forgo dividend yield when requiring compliance with ESG requirements from companies considered as targets. Practically, this meant market screening as to negative, positive and best in class, valuation of ESG criteria and ESG due diligence.
Moderators then invited the panellists to briefly comment on impact investment around the world, with Maria Fernanda Mierez commenting on the different sources of impact investment in Argentina and, more broadly, in Latin America and the types of investments being the key focus. Alexei Bonamin commented on the trends of impact investing in Brazil with Nicolini commenting whether legislation in Europe was helping to make impact investment more widespread. Herbst, using the data of an EU study from 2018, commented on which EU member states – based on the criteria of market infrastructure, demand and supply side – had developed and performing markets for impact investment: unsurprisingly the United Kingdom topped the list, followed by France, Germany, Italy and Portugal. Finally, Lee explained what the Korean Global Steering Group of Impact Investment did to stimulate or promote impact investing in Korea and throughout Asia.
As to the topic benefits and risks, Bonamin commented on the benefits of blending traditional and investment capital with philanthropic funds and development finance for the purpose of impact investment. Mierez explained how the ‘triple bottom line’ model was used within traditional for profit companies, focusing on planet, people and profit and the emergence of ‘benefit corporations’ in the US, which are for profit organisations which define shareholders best interests to include social impact and social ‘returns’. Nicolini commented on whether clients were ready to invest out of their core business in order to rebalance their positioning towards impact investing and what the drivers were. Practical examples showed that companies having attractive ESG policies could indeed attract a broader investment base, particularly millennials with strong ESG preferences.
The last part of the session focused on how investment decisions were made in the impact investment space and how an investor, like D3 Jubilee Partners, measured the impact of their investments and, finally, how the analysis differed from traditional investment, questions which Lee answered giving again practical examples. Key recommendations to target companies to enhance their governance to become more attractive to impact investors were explained by Bonamin.
As to the role of advisers to investors or target companies receiving an investment, Mierez commented on the challenges corporate lawyers and their clients face when structuring and negotiating impact investment transactions to reflect the ESG goals in negotiations and contractual documentation, as well as how special governance issues were addressed. Bonamin gave practical examples in the context of green bond placements. Herbst commented on how ESG aspects were integrated into due diligence using selected ESG criteria and key measurements as evidenced by rating systems, specialised consultants and conducting management interviews. ESG due diligence results were then applied in the contract negotiations and, in the extreme and in certain industries, sellers might be contractually obligated under conditions precedent to obtain commitments from suppliers to secure responsible supply chain management.
The moderators concluded the session with an outlook on the future of impact investing and some of the challenges facing the industry, which included appropriation of capital across the risk/return spectrum, suitable exit options and country and currency risks.
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