NB Financial Innovation
Mainstreaming Impact Investing: 12 Takeaways from ‘The Economist’ Event
“Every investment is an impact investment.”
“The Millennial generation is transforming investment, and capitalism itself.”
“Impact investing can deliver competitive returns – but it mustn’t overlook social impact.”
Go to enough impact investing conferences, and you’ll hear variations on these themes (and a few others) more times than you can count. So when I went to The Economist’s event on “Mainstreaming Purpose-Driven Finance,” I was listening for something new. And to a surprising extent, the conference delivered.
Sure, there was plenty of discussion of the evergreen topics that continue to shape the conversation around social investing. And there was a bit of the cheerleading that’s inevitable when passionate investors and advocates discuss their sector’s emergence. For instance, take a wild guess how the audience responded to this poll question:
— NextBillionFI (@NextBillionFI) February 15, 2017
But there were also many memorable and sometimes unexpected insights from panelists throughout the day, related to the event’s focus on how socially focused investing can truly go mainstream. Here are a few takeaways:
Impact Investing: Already Mainstream?
For more than one speaker, the fact that a venerable publication like The Economist was hosting the event was one key indication of the sector’s growing mainstream clout. As David Blood of Generation Investment Management put it in the opening panel, investing for social impact is not a 5 percent niche anymore – it’s more like 20-30 percent of the market, and it’s clear that many major investors are increasingly focused on sustainability. In the view of Blood’s co-panelist, Warby Parker co-founder and CEO Neil Blumenthal, just as the distinction between online and bricks-and-mortar retail will increasingly blur in the next 10 years, so will the distinction between impact and mainstream investing.
How to Out-Recruit Silicon Valley
Yet as Blumenthal pointed out, most customers are still buying products based on factors like price and quality more than the company’s social impact. But there are other reasons to incorporate social impact into your business strategy and brand – and for Warby Parker, one of these reasons is employee recruitment. “We can’t compete for talent with Facebook and Google based on money, but we can make employees feel their work matters,” he said, citing his company’s social focus as a selling point for young recruits.
There’s More than One Way to Influence a Company
There was a lot of talk, during the opening panel and throughout the day, of the best ways to move investees in a sustainable direction. According to Roland Lescure of Caisse de dépôt et placement du Québec, Canada’s second largest pension fund, one key is to behave more like a business owner than like an investor. He emphasized that his fund’s focus on the long-term social impact of its investments is key to its work. “Influence goes beyond what you do, includes what you get others to do. … Capital is very easy to replace, but influence isn’t,” he said, explaining why the fund is actively engaged with the boards of investees, aiming to improve their responsible business practices.
Calling (Out) Major Investors
Sitting on the panel with Lescure, DBL Partners founder Nancy Pfund sparked some laughter among the audience by calling him out, as a representative of a major fund, for not taking enough risks on impact investments. It’s far too difficult to get a first or second impact fund together, she said, and major investors like Lescure “need to get off the sidelines” to take the sector to the next level.
Start Early for Impact
Pfund, who made a name for herself as an early investor in Tesla, among other accomplishments, said early-stage investing is a great approach if you’re focused on impact. It’s in venture capital that you can really shape an investee’s culture, she said, fusing a social impact focus into a company’s DNA from the start.
Know When to Fold ’em
In spite of the focus on how investors can influence companies to embrace impact, the opening panel had few illusions about the limitations of this approach. As Blood pointed out, some businesses are able to change and improve their social impact – but others are not, and engaging with them is waste of time. Pfund put it more succinctly: “It’s hard to work to prevent diabetes when your business is selling insulin.”
Creating ‘21st Century Icons’
Pfund had another memorable quote from the panel, as she described the impact sector as creating “21st century icons” that are replacing the old 19th-20th century companies “that left us with all these problems.” Asked to name the key sectors from which these “icons” will emerge, the panelists named transportation, urban development and climate as likely focuses.
A Splash of Cold Water
In one of a series of presentations from prominent impact investors on how their work can move further into mainstream capital markets, LeapFrog founder and CEO Andrew Kuper pushed back against the notion that the sector is poised to conquer the world. “We aren’t being ambitious enough,” he said. Mainstreaming impact investing is not about “managing to get into The Economist,” or “clapping wildly as major funds allocate five people in a vast institution toward impact.” Instead, it’s about generating outsized social impact and outsized returns. Indeed, he said, the common refrain that impact investing delivers “competitive returns” is not compelling for fiduciaries, because of the elevated costs and risks of these investments. Social progress notwithstanding, large investors haven’t changed their worldview in terms of risk and reward, and they won’t accept more risk and work without expecting more money. The question, he said, is how can impact investing create the kinds of synergies that could lead to the outsized returns that will draw large investors, while also showing major social impact across markets and regions? His answer: Focus on hyper-scalable models, and move beyond the attitude that “small is beautiful” and the fixation on inspiring anecdotes about “amazing small entrepreneurs.”
‘Sustainable Investing’: Redundant in Five Years?
In a panel on how to create investment products that appeal to mainstream customers, Audrey Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing, laid out some promising stats:
71 percent of U.S. investors are interested in sustainable investment, and one out of every five dollars under professional management already have a sustainability element. “We’ve seen real maturing of the industry, as more asset managers are looking at impact investing,” she said, predicting that maybe in five years, but certainly in 10, sustainable investing will be seen as “a redundant term.” Debra Schwartz, MacArthur Foundation managing director, added that though donor-advised funds, family offices and foundations are all getting into impact investing, the need to “crowd in” more investors is greater than ever.
How to Reach Main Street?
One way to draw these investors: Go local. “There is tremendous appetite to invest locally,” Schwartz said. Another approach: Focus on investments that are highly liquid and easy to transact in, said Choi. But their co-panelist, OpenInvest co-founder Joshua Levin, pointed out an obstacle: Though 70 percent of investors want to align their investments with their values, the lack of interest and offerings among financial advisors make this difficult. To prove his point, he asked the audience how many of them were 100 percent invested in impact. No more than half a dozen raised their hands – a stunningly small number in such a sympathetic crowd. When Levin asked why they’ve held back, audience members blamed the lack of investment products among advisors, and restrictions on retirement accounts. According to Levin, that’s why the sector needs to disintermediate – a service that OpenInvest, coincidentally, provides.
The Elephant in the Room
The global and national political situation provided an unsettling – but perhaps hopeful – backdrop to the day’s discussion. Many panelists bemoaned the impact of recent election results on climate change action and other social issues. But as Levin put it, movements like Black Lives Matter and the Women’s March can be seen as promising signs of the times, and signals of the pent-up desire for social investment options. If you want to know how the market is moving, he said, look out the window – “protest is the new brunch,” and the youth who are driving these movements are natural impact investors. Later, a panel on social impact bonds explored their rare appeal to both the political right and left – a solution that links free market forces with a social focus to improve government services. But the approach has its limitations: As Tracy Palandjian, co-founder and CEO of Social Finance put it, these bonds require politicians to do something they’re not known for: looking past the next election to produce results that may not be seen for years or even decades. Perhaps that’s one reason why the audience responded with an overwhelming “no” to a poll question about whether social impact bonds could be the “killer app” than helps mainstream impact investing.
The Question of the Day – And Maybe the Millennium
To my mind, the most thought-provoking presentation of the day wasn’t directly focused on investing at all. It came from Ela Madej, a founding partner at Fifty Years, an early-stage VC fund that backs entrepreneurs solving global problems with technology. The problem she’s most concerned with: artificial intelligence. As she put it, “The most important question that humanity will ever ask is ‘What if our AI systems succeed?’” Specifically, what will happen when AI is doing many things better than humans do – including not just blue-collar factory work, but the kinds of jobs that until now have been unthreatened by industrialization? As Madej put it, in the next 50 years or less, we could be living in an “autonomous capitalist” world, where many professions are obsolete, and corporate decisions are made not by human executives but by sophisticated algorithms. Disruption on that level implies “not necessarily happy scenarios,” she said – and impact investing and the broader world need to prepare. “AI safety,” as she termed it, “sounds like sci-fi, but it’s very real, and very urgent.”
Some of the panels were broadcast live on Facebook, and you can view the recorded videos at the links below:
James Militzer is the senior editor of NextBillion.