Chapter 7. Foundations as Conscious Investors: A Case Study

By Peter Scheuch and Julia Oestreich

Introduction

THE COMPLEX ENVIRONMENTAL as well as social challenges of the 21st century, such as climate change, poverty and biodiversity loss, require a drastic shift in the way investments are being made if we want to tackle them successfully. The logic behind it is simple: invest less in fossil fuels and more in green technologies and social innovation. Sure enough, in reality this is not always that easy. However, influential players such as the Rockefeller Family Fund⁸⁴ or initiatives such as the 100% Impact Network, a global peer-to-peer network of high net worth individuals, family offices and foundation principals, who intentionally commit 100% of their assets to positive social and/or environmental impact⁸⁵, demonstrate what such a shift can look like.

Foundations can play a crucial role when it comes to conscious investing. They are usually set up to manage and preserve significant fortunes for many generations, which requires their thinking and planning to be oriented to the future and long term. Hence, foundations above all organizations should be interested in making only such investments that comply with the organizing principles of sustainable development and contribute to a state of society where “economic, social and environmental development is achieved without compromising the ability of future generations to meet their own needs.”⁸⁶

The following chapter zooms in on the ongoing conscious investing journey of an Austrian family foundation called the Scheuch Family Foundation whose entrepreneurial approach has engaged them in investment in India and Austria. Each of the steps the foundation has made toward a more conscious investment approach is outlined and underlined with practical examples, ranging from solar products for off-grid regions for disadvantaged communities in India, to a Social Impact Bond tackling the vicious cycle of domestic violence against women, to an online job platform for refugees.

1. The founders

In the beginning, there was curiosity. Born in 1934, the 29-year-old tinsmith Alois Scheuch took over his father’s handicraft business with six employees. He understood early on that in the long term the family profession was not a very future-oriented craft. Alois sought out new ways of making a living and an application for his talent for tinkering. Soon he landed the job of installing a local hospital’s ventilation system and was introduced to a much more exciting world for him: ventilation engineering. His business benefitted further from the distinct business acumen of his wife, Anna-Elisabeth. Already at age 20 she was responsible for bookkeeping, billing, final costing and collections – all things for which the tinkerer and technician Alois could not muster enthusiasm.

The union of these two talents produced one of the biggest family business success stories of the Innviertel region in Austria. Today Scheuch GmbH, as a specialist in technology for clean air, is an international leader in its field, actively tackling one of the most pressing ecological problems of our times: air pollution.⁸⁷ With its many patents in air and environmental technologies, the company contributes to the reduction of particulate matter in our atmosphere and is thus a prime example of a family business motivated by sustainability for more than 50 years. Looking back, Alois Scheuch always says, “we never sought after quick growth and short-term financial success. Our goal was always to work sustainably – for our customers, for our employees and for the future of our company”.⁸⁸

Along with economic success came the opportunity to do more for the community and the environment, with which the family had always been deeply connected, and so a foundation was born in 1999: the Scheuch Family Foundation. During the first years of its existence the foundation mainly gave grants to local NGOs. However, based on their experience as business owners, the Scheuch’s belief started to grow that the best way to promote systemic change was through conscious investments in sustainable business solutions. Thus, over the years the Scheuch Family Foundation established different vehicles to support entrepreneurial activities that are human-centered and environmentally friendly, as well as economically sustainable.

2. The Scheuch Family Foundation’s road to a more conscious investment approach

The underlying vision of the Scheuch Family Foundation is to promote a society in which positive social, ecological and economic impact go hand in hand. In such a society, economic development comes at a cost to neither social equality nor the environment. Therefore, the foundation aims to foster entrepreneurial innovations that have a sustainable impact on the lives of marginalized people as well as natural ecosystems in Austria and developing countries, most notably India.

The foundation believes that enterprises whose primary purpose is to solve a specific social or ecological problem, such as limited access to clean energy sources in rural off-grid regions, or high unemployment rates among disadvantaged groups, often called social enterprises,⁸⁹ can play an important role in tackling sustainability challenges. This is because it is part of their core business to solve these challenges, which distinguishes them significantly from regular companies. In order to support them on their path to fully grown businesses, enabling them to have the highest possible impact on their target groups, new forms of capital are needed, namely capital that puts the generation of social and ecological impact on the same level as the generation of financial returns.

The financial instruments range from equity, to mezzanine, to debt with below market to market rate return expectations (depending on the sector), and these instruments are closely tied to the generation of a specific social or ecological return. Since high social impact and entrepreneurial success do not only depend on the right financial support, the foundation collaborates closely with the entrepreneur and provides expertise as well as a strong network of partners to maximize the potential for new ideas. Especially in the first years of the life of a young enterprise, the business model is still in the making and the organizational structures are still unsteady. The right mentors are crucial for helping them navigate the early lifecycle stages to ensure the start-up’s long-term success.

The Scheuch Family Foundation’s theory of change is thus focused on providing early stage start-ups that, due to their risk profile, do not have the chance to get capital on the regular market, with sufficient access to patient capital as well as non-financial support. This thereby equips them with the resources they need to scale their activities as well as their impact, and develop into fully grown independent businesses.

2.1 The first steps

The foundation’s own conscious investing journey started in 2008. Inspired by Peter Scheuch, Alois’s and Elizabeth’s second son, the foundation started to take a closer look at the concept of impact investing.⁹⁰ Back then, Peter Scheuch had already been working for international organizations such as CARE, IUCN and other NGOs for more than ten years in Africa and Asia, and was disillusioned by philanthropic approaches purely based on grant giving. Peter thus suggested to establish a small impact investment fund. After months of research, many meetings with leaders in the field and preparation, the foundation started its first impact investment fund, equipped with €2 million, at the end of 2008: the Impact Investment Holding.

Since its early days the main goal of the Impact Investment Holding has been to support entrepreneurial activities in India by actively investing in start-ups that create a sustainable impact in low-income markets. Its investment strategy is to transform those early-stage enterprises into professional, efficient and scalable organizations by providing capital and by adding value. Each investment must yield social, economic and environmental returns and be in line with the investment criteria shown in the following table.

Table 2.1: Investment criteria of the Impact Investment Holding

The Impact Investment Holding investments range from €20,000 to €300,000. The holding periods typically vary between five to seven years. Up until now, six investments have been made in seed or early-stage start-ups providing access to affordable education, health care and renewable energy for low income households in India.

2.1.1 From theory into action

Having set the structural framework for the fund’s operations, Peter Scheuch, as part of the foundation’s advisory board, and Johannes Krahwinkler, who had joined the Scheuch Family Foundation as managing director in 2008, went on several trips to India to meet entrepreneurs and develop a clear picture of the Indian impact investing market. They quickly realized that in order to be successful in finding the right entrepreneurs, the foundation needed a reliable partner with local knowledge of India´s political, economic and social system. Hence, Peter Scheuch decided to establish Ennovent, an organization with a strong base in India to back-up the foundation’s activities on the ground and for managing the Impact Investment Holding. Over the past seven years, Ennovent has grown to a business innovation catalyst for sustainability with a global network of investors, mentors, experts and service providers, which enables them to amplify their expertise to create sustainable impact in developing countries.

Ennovent’s first objective was to find innovative renewable energy solutions for off-grid communities in India, where around 75 million out of its 226 million households are completely off the grid and an additional 71 million households are under-electrified.⁹¹ In 2009, Ennovent thus launched its first discover challenge on behalf of the Impact Investment Holding to find proven, for-profit solutions from around the world that can meet some of the critical energy needs of India’s poor. The winning solution had to provide affordable renewable energy to people with low income, it needed to be affordable and convenient to use, and last but not least it had to be based on a scalable for-profit model at the stage of proof of concept.

After a five-month application phase and a multi-step assessment process, Barefoot Power, an Australian company that provides small solar home lighting systems for low-income households in off-grid regions around Africa, Latin America and Asia, was selected as the winner from among 70 applicants and 175 nominations.

2.1.2 Barefoot Power – the foundation’s first conscious investment

Founded in 2005, Barefoot Power aims at replacing traditional sources of lighting in many rural areas in developing countries, i.e. kerosene or firewood, known for being inefficient, unsafe, and harmful for the people and the environment,⁹² by providing an extensive range of affordable quality solar products, installation packages, as well as after sales services and maintenance programs. Over the years Barefoot Power has made clean as well as healthy energy products accessible to more than 800,000 households, predominantly in Kenya, Rwanda, Papua New Guinea and India. The company’s diverse and supported distribution strategies, usually implemented together with micro-finance banks, non-governmental organizations, and local retail shops, enable it to even reach out to the most remote regions in developing countries.⁹³

Back in 2011, the Impact Investment Holding along with Insitor, Oikocredit and The Grace Foundation invested in Barefoot Power with the goal of scaling the company’s approach to India’s millions of off-grid communities. However, India’s unique environment posed several obstacles to market entry. Among the main barriers of implementing Barefoot’s business model were India’s custom duties, lengthy bureaucratic certification processes, and competition from local kerosene subsidies. In addition, the management was faced with challenges that arose from India’s diversity and complex cultural, language and geographical circumstances. To overcome these barriers and to expand Barefoot Power’s operations in India, the Impact Investment Holding provided considerable scale support. It included connections to local HR agencies, market consultants and distribution agencies to recruit a well-equipped India team of experts and to develop distribution models and pricing strategies. Furthermore, the Impact Investment Holding also helped Barefoot Power to engage with other ecosystem players to strengthen their local market knowledge and refine their business model for India.

With the provided support, Barefoot Power was able to execute a two-pronged distribution approach which has helped them to successfully deal with the aforementioned barriers. On the one hand, Barefoot Power engages with rural distribution companies, non-profit organizations, community groups and faith-based organizations with established distribution networks. On the other hand, the company also collaborates with thousands of micro-entrepreneurs in India to further their impact, by training them to sell and service their products.

2.2 Back to the roots: the next step on the conscious investing path

After the first years of consciously investing in social start-ups in India, the Scheuch family was ready to take the next step on their conscious investing path. With their 50 plus years of innovative air and environmental engineering experience in the industrial sector and their belief that environmental technologies are key to the integration of social welfare and environmental sustainability, the family wanted to establish an investment vehicle that would support the next generation of cleantech start-ups in Austria. Consequently, they founded FSP Ventures in 2011. Fully owned by the Scheuch Family Foundation, it aims at turning cleantech innovations in Austria and bordering countries into successful and thriving businesses by providing equity, mezzanine and debt (early-stage) financing, as well as non-financial support.

FSP Ventures looks for investments in innovative, high-growth clean technology companies, which ideally have provided ‘proof of market’ and whose technology has the potential to promote lasting change. Portfolio companies are selected based on the criteria shown in the following table. These vary slightly from those of the Impact Investment Holding due to a different focus and higher financial return expectations.

Table 2.2: Investment criteria of FSP Ventures

The holding periods typically vary between five to seven years. Up until now, eight investments have been made in early-stage cleantech start-ups, solar parks and wind turbines. One of FSP Ventures first investments was into the Austrian start-up Swimsol.

2.2.1 Swimsol

In remote tropical islands, such as the Maldives, French Polynesia, Fiji and many off-grid coastal regions, electricity is primarily produced with diesel generators. A typical Maldivian hotel island for instance consumes 2 million litres of diesel annually, while the country of the Maldives spends an equivalent of 25% of their GDP on fuel imports. Such means of energy production create a heavy financial, logistical and ecological burden.⁹⁴

Although solar PV electricity is cheaper than diesel power in the tropics, solar panels are rarely installed because they require a lot of space, and the inherent land scarcity prevents large scale solar expansion in most islands. This is why Swimsol, founded in 2012, together with the Vienna University of Technology and the Fraunhofer Society in Germany, developed the world’s first floating solar power plant for the marine environment. By using the free space on the water, the technology makes large solar systems not only possible even for islands that do not have enough roofs or land for solar panels, but Swimsol has also succeeded in making it less expensive than diesel-generated electricity. This is a precondition for a gradual replacement of diesel generators through clean solar power solutions in those regions.

Their first floating pilot system is currently operating in the Maldives and demonstrates great potential for other marine regions. One platform of 196 square meters annually prevents burning 12,000 litres of diesel for generators and can supply 25 households with clean energy that is up to 50% cheaper. In the long run, Swimsol can potentially make clean energy possible for over 360 million people living in remote tropical islands and crowded coastal cities.

2.3 Using more capital for conscious investing – new approaches of social engagement in Austria

In early 2014, the Scheuch family together with the Scheuch Family Foundation started an internal dialogue on how the foundation could achieve the biggest impact with limited resources for social activities in Austria against the background of their experiences in the Indian context. Until then, the regional engagements had been purely based on donations. The family felt the need to expand their conscious investing activities beyond clean technology investments.

At about the same time, the foundation was asked if they wanted to co-finance the first Austrian Social Impact Bond (SIB).⁹⁵ What convinced them in the end was the fact that the goals and structure of SIBs are very much in line with what the Scheuch Family Foundation expects from a conscious investment. They tackle a clearly defined problem of a disadvantaged group, the project outline allows to measure the impact on the target group, which produces transparent and reliable results, and gives clarity about the extent to which this approach does or does not work. In addition, SIBs foster close cross-sector cooperation and if successful the foundation gets the money back and can reuse it for another conscious investment. Hence, the foundation took the opportunity at hand and joined the group of up-front financiers for the SIB, called PERSPEKTIVE:ARBEIT (Perspective:Work), in early 2015.

The SIB PERSPEKTIVE:ARBEIT tackles the vicious cycle in which women affected by domestic violence are often trapped. In Austria, one-in-five women experience domestic violence. Of these women, 40% have not completed their secondary education, have discontinued a workforce education or compulsory schooling.⁹⁶ These circumstances make them socially and financially dependent on their mostly male abusers. The SIB supports women affected by violence through individual guidance and close cooperation with the Violence Center of Upper Austria, the Women’s Shelter of Linz, and the Unemployment Office, as well as the government of Upper Austria. Apart from a cross-sector network the project uses a variety of resources to help women work through their experiences, find secure work, and exit the cycle of violence for good.

From the SIB PERSPEKTIVE:ARBEIT onward the Scheuch Family Foundation slowly but surely opened up its conscious investing focus in Austria from being purely cleantech oriented to being more broadly ecological and social. Remaining true to its entrepreneurial approach, the foundation started to build additional organizational structures upon the existing vehicles. This enabled it to offer targeted financial as well as non-financial support to early-stage start-ups that address either specific problems of a marginalized group or a relevant ecological challenge, and demonstrate an indirectly measurable lasting impact in Austria. The investments in this area range from €50,000 to €300,000 and the holding periods typically vary between five to eight years. The first two investments were made in 2016, one in a Social Venture Fund and the other one into a start-up named refugeeswork.at.

2.3.1 refugeeswork.at

Refugeeswork.at is Austria’s first online job platform bringing refugees and employers together. The platform serves as a one-stop shop supporting both sides throughout the entire application process to tackle one of the most pressing challenges in Europe right now – the social integration of refugees. Successful employment of asylum seekers and refugees plays a key role in the integration process. It is beneficial for each individual because it reinstates a sense of dignity and encourages financial independence, meaning fewer costs for the state in providing social assistance.⁹⁷ Yet, numerous legal regulations, bureaucratic hurdles and prejudices often prevent refugees from accessing the Austrian labor market and create uncertainty amongst employers.

With professionalism and dedication, the management of refugeeswork.at overcomes the aforementioned barriers. Refugees can register for free on the platform by creating a personal profile and then get access to various free services preparing them for job interviews, including, but not limited to, software-supported assistance for creating résumés, automated application management, multi-lingual coaching, and an eLearning area to improve their knowledge about the Austrian job market. The information on the platform is offered in four languages: German, English, Arabic and Farsi.

Employers, on the other hand, profit from support services like ‘smart matching’ and suggested best candidates through a matching algorithm based on three main criteria: qualification, knowledge of German, and whereabouts. They also receive guidance concerning legal status, bureaucracy and available grants, as well as assistance with communication and appointment scheduling with potential candidates. After a successful hire, the start-up assists employers with workplace integration, such as onboarding and workshop opportunities, in order to secure the best possible start for the businesses and the refugees. Depending on the number of employees, companies pay an annual membership fee.

The social impact of refugeeswork.at lies in the early, low-threshold and independent access of refugees to jobs, volunteer work placements and training courses. In addition, the platform also contributes to a reduction of prejudices through its sales talks with companies and its media presence. At the end of 2016, six months after the launch of the beta version, more than 4,500 refugees and 275 businesses, NGOs and universities from a variety of branches registered on refugeeswork.at. Around 2,500 application materials have received feedback online and hundreds of refugees have received coaching to find employment based on their backgrounds, from kitchen assistants to doctors.

3. Some things to consider – foundations as conscious investors

Conscious investing starts with a certain mindset and the awareness that money, if invested in a sustainable manner, cannot only increase in the traditional sense but can contribute to solving pressing social and ecological problems. In the case of the Scheuch Family Foundation, the journey began with one entrepreneurial family, ready to align its values and understanding of doing business with the investment activities of the foundation. From then on, the Scheuch Family Foundation has been almost exclusively focused on finding answers to the question of how to promote young mission-driven social enterprises financially, but also non-financially, to take them through the challenging early life cycle stages with the ultimate goal to scale their impact and increase the capacity to pay the investment back. Here are some of the lessons the Scheuch Family Foundation has learned over the years:

Using the already existing network

Foundations do not need to reinvent the wheel when setting up additional structures for direct investments. They can use their close-knit pool of experts such as lawyers, accountants as well as social impact advisors to support the core activities around direct investments such as deal sourcing, due diligence and portfolio management. This decreases the initial implementation costs and puts foundations in an excellent position to start looking into direct investment opportunities.

Considering a combination of financial and non-financial support

The combination of financial assistance in the form of equity, mezzanine or debt investment and non-financial assistance is crucial to help start-ups navigate the early life cycle stages. Impact-focused businesses have suboptimal return profiles, particularly at the early stage. The provision of technical support thus helps to refine the business model, enhances the conditions for scaling and increases the start-ups’ attractiveness for follow-on rounds of funding. In this regard, foundations are excellent partners in regard to non-financial support. Within their operational focus, foundations have an in-depth knowledge of the root causes of a certain social or ecological issue. Sharing this knowledge with the social enterprise might lead to better results, e.g. improved livelihoods of refugees, as the social enterprise can turn this knowledge into new or slightly adapted services or products.

Starting with smaller ticket sizes

It is always a challenge to fully convince the foundation’s board members of direct investments in social enterprises; even if the internal decision was made to go down this road, often scepticism remains. In the case of the Scheuch Family Foundation it therefore was essential to start with smaller ticket size investments between €50k to €200k. First of all, two to three of these investments allowed the staff and board members to learn more about the chances and risks of such investments, with a fairly small amount of money in comparison to the foundation’s total assets. At the same time, the foundation stepped into the gap of financing available for early-stage enterprises to launch their operations in the market and prepare for scaling by providing smaller ticket size investments. Experts often speak about the ‘missing middle’ in reference to the lack of smaller ticket sizes available to early-stage (social) enterprises and by offering ticket sizes between €50k to €200k the foundation is working to address this problem.

Co-investing with others

Especially in the beginning, it helped the Scheuch Family Foundation to co-invest with other more experienced conscious individual or institutional investors because it accelerated the foundation’s learning process and minimized the high transaction costs, such as deal flow and due diligence costs, associated with smaller ticket size investments. Furthermore, co-investing with others builds confidence in the company within the market and among future investors. Last but not least, is has proven to be an effective strategy to increase the size of the investments, as it reduces the risk profile associated with the prospective investee.

Certainly, such a conscious investment approach might not work for every foundation due to the increased risks early start-up investments can bear. Nevertheless, it is worth considering the adoption of direct investments into a foundation’s investment strategy, for several reasons. Direct investments in young social enterprises can teach foundations how to deploy their capital in line with their social mission beyond or in addition to traditional philanthropic means. They make it possible for foundations to recycle money and use it for other projects once the social enterprise has repaid the investment. Moreover, foundations have the best structural preconditions for such an approach because they have a long tradition of providing non-financial support to their grantees and maintain a diverse network of experts. Last but not least, foundations, unlike more ‘traditional’ types of investors, are driven by a social mission. That makes them the perfect match for social enterprises because it is easier for foundations to understand the holistic (the social and/or ecological as well as financial) return of a conscious investment.

About Peter Scheuch and Julia Oestreich

Peter Scheuch is the founder and managing director of Ennovent and serves as an advisor for the Scheuch Family Foundation in the areas of social and ecological innovation. He worked more than ten years as a full-time staff member and consultant for international development and environmental organizations such as CARE, IUCN, WWF, and UNDP in Africa and Asia. Peter received an MBA in Environmental Management from the University of Vienna, Austria, MSc in Protected Landscape Management from the University of Greenwich, UK, and has an educational background in industrial engineering.

Julia Oestreich is Impact Investment Manager at the Scheuch Family Foundation. She studied cultural anthropology and political science at the University of Hamburg and holds a master´s degree in Public Policy from the Willy Brandt School of Public Policy. Her deep interest in social entrepreneurship and impact investing has brought her to Sri Lanka and Austria where she has worked for several social ventures such as Selyn and Ashoka.

84 ‘Rockefeller family charity to withdraw all investments in fossil fuel companies’, Guardian (2016).

85 “The 100% Impact Network is a growing community and currently includes more than 130 individuals representing 85 members globally with cumulative committed capital of approximately $4.5 billion.” www.toniic.com/100-impact-network.

86 United Nations World Commission on Environment and Development, ‘Our Common Future’, www.un-documents.net/ocf-ov.htm#1.2 (1987).

87 According to the Organization for Economic Co-operation and Development (OECD), outdoor air pollution has a concerningly high impact on human health and our environment, causing around two to three million premature deaths per year and affecting crop yields as well as our biodiversity. OECD, ‘Policy Highlights: The economic consequences of outdoor air pollution’, OECD Publishing, Paris (2016).

88 www.scheuch-foundation.org/en/about-us/#Our_Story.

89 The European Union defines a social enterprise as an “operator in the social economy whose main objective is to have a social [or ecological] impact rather than make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to achieve a social objective. It is managed in an open and responsible manner and in particular, involves employees, consumers, and stakeholders affected by its commercial activities.” (Communication from the Commission, 2011/682 final.)

90 Impact investments are made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. They target a range of returns from below market to market rate, depending on investors’ strategic goals. The impact is actively measured. (GIIN & Bertelsmann Foundation.)

91 International Finance Corporation, ‘Lighting Asia: Solar Off-Grid Lighting, Market analysis of: India, Bangladesh, Nepal, Pakistan, Indonesia, Cambodia and Philippines’ (2012).

92 The Climate Group, ‘The Business Case for Off-Grid Energy in India’ (2015).

93 Barefoot Power, www.barefootpower.com/about-us/history.html (2017).

94 Asian Development Bank, ‘Sector Assessment (Summary): Energy, Interim Country Partnership Strategy: Maldives, 2014–2015’, www.adb.org/sites/default/files/linked-documents/icps-mld-2014-2015-ssa-01.pdf (2012).

95 A SIB is an innovative financial instrument based on a ‘pay for success’ concept. It allows the public sector to use prevention measures and experiment with new project approaches. The public sector defines the content and financial framework of an SIB, as well as the central criteria for success. Up-front financiers such as foundations, banks or private investors take over financing and default risk. Only in the event that the project’s goals for success have been achieved, are the up-front financiers repaid their capital, adjusted for inflation, by the public sector. Specialized organizations, for example NGOs, execute the project. Whether an SIB was successful is determined by an independent business agency review, based on the pre-defined criteria.

96 Juvat, ‘The first Austrian social impact bond: Economic and social empowerment for women affected by violence’ (2014).

97 The Parliamentary Assembly of the Council of Europe, Committee on Migration, Refugees and Displaced Persons, ‘Refugees and the right to work’, Doc. 13462 (2014)