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A collection of posts relevant to agricultural and environmental matters such as farming, agribusiness, water, sanitation, natural resource management, and sustainability.

Wednesday, July 20, 2011

Emerson on Impact Investing: Passionately Pragmatic!

By Diana Hollmann

Editor's note: This post is part of a broder series of articles focused on the role of impact investing as part of The BIG Idea Page for July, where all posts in this series may be found.

Last week, I had a great conversation with Jed Emerson, inventor of the blended value concept and executive vice president of ImpactAssets – a non-profit financial services firm based in the U.S. As a thought leader in the impact investing space, Emerson has made significant contributions to the way impact investing is being perceived and discussed around the globe. In our conversation, he shared his thoughts on the current status of the impact investing industry, where he sees risks and what it takes to unleash the much quoted billions of dollars waiting to enter the impact investing space.

“In the next three to five years something is going to blow up! And we need to go into this with our eyes open!”

Throughout our conversation Emerson’s passion and excitement for impact investing was obvious. He is a strong advocate of impact investing and works deliberately on convincing more people to join the movement. However, Emerson’s approach and thinking are down-to-earth rather than carried away by the hype surrounding impact investing. Just as with any young and emerging industry, the impact investing community will see successes and failures - while we know more today than we did ten years ago, “people still need to go into this with their eyes open.” Emerson believes that “by definition, if you take more risk and you try to do something different you are not always going to win!”

Emerson is very appreciative of the many great ideas emerging from the field, but emphasizes that maintaining a good balance of excitement and sensitivity to potential risks is important. For example, one idea that has taken off like wildfire in the impact investing space is that of the Social Impact Bond (SIB) diligently developed by UK-based Social Finance. “Every time I turn around, I hear about yet another initiative around a Social Impact Bond," Emerson says. “Sometimes I get a little concerned by just how excited people are about SIBs.” Though the idea is great and the SIB pilot at Peterborough Prison is making good progress, the fact is we haven’t seen its successful termination just yet. Emerson feels our shared excitement needs to be tempered with thoughtful steps for moving SIBs – and other impact investing innovations – forward. 

With the impressions from the first SOCAP/Europe conference earlier this year still in mind, we talked about whether there might be cultural factors involved in shaping the impact investing discussion in the United States in contrast with Europe. While he feels making generalizations needs to be taken with a large grain of salt, Emerson finds that there is indeed a tendency of US-Americans to be “very excitable” (“SOCAP feels like Burning Man meets Wall Street”). Broadly speaking, U.S.-Americans like to think of themselves as being open to thinking of an opportunity and to execute on that idea while trusting it can be modified as it goes forward. Europeans, on the other hand, seem to plan very carefully, wanting to understand more fully the implications of things before committing to them. Bringing those different perspectives and approaches together “nurtures a very powerful conversation that is a good part of why impact investing has taken off around the world the way it has.”

“The challenge is that as an emerging space the impact investing market has been inefficient. We need to explore more carefully what is possible to remove barriers for capital to flow to worthwhile social ventures.”

There are still various barriers that have prevented the billions of dollars promised by recent studies from entering the field. One problem is that the market has been heavily fragmented and lacks a common language. Another barrier has been the continuation of what Emerson calls a “bifurcated capital market”: one either gives money away or one invests for financial return. The middle space still needs to be developed to go beyond this simple idea of “either/or”-capital. Emerson feels we need to continue our exploration and dialogue between investors and social entrepreneurs to define the types of capital available and what types of deals are possible. “We need to create investment vehicles that both meet the needs of emerging social enterprises while addressing the fiduciary and other responsibilities of capital owners.”

From his observations working in the U.S. and internationally, Emerson feels a growing number of asset owners are coming to the table with the intention of investing across the capital spectrum. These investors understand that while they may have various allocations of capital with differing impact and financial performance criteria, they have the opportunity to manage their total portfolio to optimize overall impact. Asset owners realize that investments in the “muddy middle” might bear higher risk and might not generate a greater financial return than they may otherwise seek. Nonetheless, they consider this kind of investment as an important part of a field building and infrastructure development process.

“There is hard work to do!” 

So, despite all the excitement, there is still a lot to be done. “While impact investing is an extremely promising area we need to be a little more cautious, in terms of how we move this forward and not let the rhetoric and the vision get away from the reality.” Emerson commented that Impact investing is not an off-the-shelf solution for funding public sector deficits or solving all the poverty and environmental challenges confronting us. As is described in the forthcoming book on Impact Investing he has co-authored with Antony Bugg-Levine of The Rockefeller Foundation, impact investing is complex – but “will get boring as we go forward.” This is because the industry is still nascent and many seemingly “dry” technicalities need to be worked out with regard to legal structures for investment vehicles as well as impact measurement tools and standards. There is a lot to be done to move beyond the vision of integrating social, environmental and economic interests to creating practical tools for overcoming our challenges to realizing that vision. 

Emerson feels much of impact investing has been an insider’s game: many available reports are long and filled with jargon, at conferences you tend to meet the same crowd of insiders and debates revolve around questions such as whether impact investing is an asset class or not. “High net worth individuals don’t care about all this! All they are trying to understand is whether they should pay attention to impact investing and how they can be part of the game.” Wealth managers and investment advisors have long lacked the right information tools to assist them in connecting with their clients with regard to this opportunity. To help them communicate with their clients regarding impact investing and unleash its potential, Emerson and his team at ImpactAssets are working on a number of initiatives as part of a knowledge development and dissemination strategy. 

ImpactAssets’ Issue Briefs provide an entry point for those not as familiar with the impact investing space and its jargon. Each brief is focused on a particular question so that in five to ten pages one can learn about issues such as unified investment strategies for impact, the relevance of risk, return and performance considerations, as well as how to go about assessing impact at the firm level.

The recently published ImpactAssets 50 (IA 50) constitutes another entry point to the space. This list of 50 pre-screened impact investing fund managers provides investors with a map of credible and experienced points of contact from which to begin their own due diligence.

And in addition to knowledge initiatives such as the Issue Briefs and IA 50, ImpactAssets is promoting investment vehicles, such as multi-manager strategies, to work with fund managers to help remove barriers to more capital moving into impact investing. The intention is to bring together a number of fund managers to allow for more significant allocations of capital from potential investors. Fund managers within a given thematic area (sustainable agriculture or microfinance, for example) can join into a single investment vehicle enabling a large number of investors to allocate capital. This avoids having fund managers wasting their time jetting around the globe for fundraising, allowing them to focus on managing portfolios to maximize impact. Investors, on the other hand, can put their funds into their thematic area of interest while diversifying their risk – and, given ImpactAssets nonprofit status, all at a probably lower cost than traditional fund of fund structures would offer.

“We are inviting people to join the impact investing space and those already involved to come together in new ways to help build it further!”

Emerson calls on those interested in exploring further ideas and issues to develop additional issue briefs that will help wealth managers and their clients overcome barriers of entry to the impact investing space: “I am very much looking forward to working with whoever may come forward with the best ideas for topics we can collaborate on in writing our next round of briefs.”

And jointly with Bugg-Levine, Emerson authored the book “Impact Investing: Transforming How we Make Money While Making a Difference” which will be released in September. Rather than being a “How to”-guide, the book explores the roots of impact investing and provides insights in what impact investing means for how we think about capital, leadership, metrics and other issues. Emerson describes this primer as an invitation to the impact investing conversation and, as he says, “There are investable opportunities in impact investing and they look different from what you are doing in your philanthropy or what you may be doing in your traditional socially responsible investing practice. So, come on: let’s see what we can make happen in the impact middle!”

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