NB Financial Health

Monday
June 9
2014

James Militzer

Mainstreaming the Movement: Toniic CEO Stephanie Cohn Rupp discusses the future of impact investing

Toniic is a global network of impact investors that aims to “harness the incredible potential of socially minded impact investors to catalyze the broader impact investor movement and support the growth of high-impact entrepreneurs and funds.”

The network hopes to bring investors and entrepreneurs together for the benefit of both, expanding social businesses’ access to investment, professional networks and knowledge that can amplify their impact, while bringing deals to investors that are both profitable and socially beneficial. And along with increasing the quality and volume of impact investing by existing investors, it hopes to inspire others to include impact investments in their portfolios.

I recently spoke with Toniic CEO Stephanie Cohn Rupp to discuss the network’s approach, and the evolution of the impact investing sector in general. In part one of our interview, she talked about the need for more connections among investors, and the tactics Toniic uses to bring investors and entrepreneurs together. In part two, below, she shares her thoughts on current trends, and what they mean for the future of the impact sector.

James Militzer: What key trends have you noticed in impact investing in your time at Toniic?

Stephanie Cohn Rupp: I think the big question mark for me is the evolution of the eco-system map. There are a lot of players coming out of the woodwork, whether they’re consultants, investors, conference organizers, researchers, or academics who are positioning themselves as experts. The ecosystem map is in full development, and it’s hard at this stage to really know who is here to last, who are the true quality players. We are all, to some extent, newcomers, including in the legal and banking field, so assessing quality or level of expertise is quite difficult. The regulatory framework is also undefined, which increases the uncertainty around the future of the sector.

Another big question in the sector has to do with: Is impact investing an asset class? Our position is that it is not. Impact investing is a value-based lens through which you can look at all asset classes. The other big question for the sector is impact measurement – especially if you invest across different asset classes, it’s very hard in the public equities market, or in the hedge fund space, to be able to say what your impact truly is. There are issues around attribution, even if you are able to quantify impact – truly, where is the cause for that specific effect? It’s very complicated to attribute such and such outcomes, in terms of literacy or health, only to one single company – and especially as it becomes more esoteric, with fixed income products and funds, it’s hard to know truly what your dollars have done to help. So I think impact measurement is still a weakness for our sector. Yet another issue is the need for subsidies for infrastructure players, like Toniic. In my view, you want to have a vibrant ecosystem with many different infrastructure players who offer support – whether it’s research products, or best practice sharing, or another public good – and all of these require subsidies to expand these services.

The list goes on and on. There’s a dearth of information on exits. There’s insufficient transparency on how these deals are performing. A lot of people talk about capital deployed or deals done, but truly what matters is performance – both in terms of financial return and real impact on the ground. Have any of these members, or investors, seen exits? If yes, is it the kind of exit that creates mission drift? There’s all sorts of questions there, and lack of transparency.

Another interesting development is the 100% Impact Network, which was created by Charlie Kleissner. This is the real bleeding edge of the impact investing space. In my view, there’s nothing more groundbreaking. He’s assembled families of a certain wealth (though not all are very wealthy), and all these members have committed to investing all of their assets into impact progressively over time. That’s why they’re called the 100% Impact Network. That is incredible because today this group represents at least $3.5-$4 billion committed to impact. They are looking once again at investing across all asset classes with the lens of doing good in the world. And that’s a revolutionary way of looking at impact investing. It’s no longer the anecdotal “I’ve invested in this solar lantern, and that’s helping X individuals in Kenya” – this is really saying “everything I touch has to be about positive impact.” And it’s not just about negative screening, which is, you may know, no guns, no alcohol, no adult entertainment. This is really looking at absolutely every asset class and selecting investment products pro-actively. This network is not about divestment but investment. The focus here is really on investing in those companies and funds and fund managers and products you believe in.

I do think we’re at an inflection point, where the excitement around the sector, and the fact that the G8 even has a task force on impact investing, shows incredible momentum and recognition that it’s a growing sector. But the final thing – and this is where the media should play a role I think – is mainstreaming the sector. There’s a lot of interest now in the general public, but there’s a dearth of real understanding about what it is. Can I invest locally in impact? Can I be a responsible investor? The answer is yes. You can, for example, move your bank account to New Resource Bank, which is a community bank that has a complete filter for impact. There’s a lot of things that any individual can do, but your average income earner doesn’t really know how he or she can play a role. And I think the media has a very big role to play in educating them – or us, because I count myself among them – to talk about impact investing and the democratization of the movement, and how you can invest for the good of people and planet.

JM: If impact investing goes more mainstream, is it realistic to expect a retail investor who just wants to ensure their retirement income to spend the time to develop an accurate assessment of a company’s social impact?

SCR: Eventually, I think the victory will be when everyone who is investing, whether it’s a small investor, like me, or whether it’s a very large investor – can put their capital into impact. Of course, there are less impact products for the average retail investor. Another hurdle for your average investor is pension funds: we need large pension funds to be much more active, socially minded investors. They represent trillions of dollars in asset allocation that, for now, is mostly on the sidelines of this movement.

As for early stage impact investing, this type of investment is clearly better suited to the accredited investor, as this person can withstand greater losses, within limits, than your average retail investor. Toniic members are all accredited investors at a minimum, and in some cases Qualified Purchasers. We are not recommending that the average retail investor invest in private equity or venture deals in the impact space, which can be extremely high risk. We’re being responsible in terms of who we include in our investor network: namely members who can withstand the risk. Over time, however, we hope to offer a greater variety of products – including through crowd investing platforms – to attract any type of investor.

JM: So you’d like to see the big IRAs and pension funds offer an impact option to consumers?

SCR: Yes, absolutely. It makes sense, and the reason it makes sense is that the point of these pension funds is to prepare and protect your nest egg for either a rainy day or for your retirement. Yet what is the point of saving for your retirement, and then retire in a world where the air and water are polluted and there is greater poverty, inequality and unemployment? Your own quality of life will be lesser as a result. Investing with social and environmental impact in mind naturally aligns with investing for your retirement.

JM: Are you aware of any large pensions or IRAs that are moving in that direction?

SCR: There’s a lot of discussion as to their charters and whether it’s even responsible on their part to do this. As pension funds are common asset pools meant to generate stable growth over the long term for hard-working citizens, they’re conservative, of course. But one great thing that has started to happen in our sector is that the discussion is taking place.

I’ve met legal counsel to pension funds who are debating the appropriateness of socially responsible investing for their clients – in the end, how responsible is it as an investment policy since there is little track record on performance, in all asset classes? The first step, I think, has to be about tracking returns, and seeing how investing with an impact lens has performed over time. Then we will have a stronger argument to share with large institutional players. We have a moral argument, which is necessary but insufficient to get this movement to scale. And that’s why transparency is so key, to be able to set a precedent.

JM: So do you think there is a need to condition retail investors to expect less in returns, or is there enough data to say with confidence that you can make as good if not better returns, and also a social impact?

SCR: Toniic co-founders Charly and Lisa Kleissner have published the performance of their own portfolio, which is all in impact. The performance over the last seven years is really interesting, as they benchmark each asset class against relevant indexes. You can download it on our website. Actually, in many instances, their portfolio has outperformed the market – I think in all years outside of 2007. It’s a seven-year track record, but especially during the crash of 2008 and 2009, they way outperformed the market. So it’s interesting to see what the results are already.

I’m not a proponent of the trade-off philosophy. I think the point is to say that in the medium to long term, investing with a social mind yields better results because it’s just “good business,” and the best way to be stewards of our natural resources and human capital.

JM: Would a company that, for instance, treats employees better and tries to protect the environment qualify as an impact investment, even if it was not focused directly on providing a social good?

SCR: In my view, it is. Because my benchmark, more or less, is the benefit corporation certification, which we have, and it’s not just about the product. A lot of benefit corps create great consumer products, like baby food or juices or cleaning products. The juice or the baby food isn’t particularly high on social impact, but the value chain, the way in which the company is run, the way it negates its carbon footprint, the way women are treated, the diversity of the staff – all of that makes them socially responsible. So I would say yes. The product itself does not necessarily have to be focused on poverty or education, health or the environment. It could be anything, because what matters is how you work, how you treat people, how you impact the environment, etc. What matters is outcomes, not outputs. So it’s not about lessening the diversification of products out there, it’s really about how you treat planet and people. That’s my perspective, and I have to say that’s mostly the perspective of Toniic members and definitely of the B-lab movement.

JM: So would a company like Starbucks qualify as an impact investment, for example, because it has ethically sourced coffee?

SCR: I don’t know because I don’t know enough about how Starbucks scores on diversity, treatment of their staff, the environment … Just having one element is important, but that does not make you an impact investment. Impact investment is really looking at the company’s impact as a whole. And it could be. Method is a socially responsible company, and could have been categorized as an impact investment. The company produces eco-friendly soap and dishwasher detergent, etc. – they’re focused on modern design, etc., but they’re also one of the first B-corps. They care significantly about the environment and the use of chemicals in consumer homes. And if a company or project, regardless of size or stage, falls short in terms of its environmental or social impact, I don’t believe in demonizing executive teams or entire organizations. Instead, I think what matters is to focus on the intention of the organization and seeing how negative impact can be curtailed and positive impact can be enhanced. We are all prone to creating unintended negative consequences – what matters are our values and intentions, keeping an open mind to clearly understand our actual impact, and working together to correct course and engender better social and environmental outcomes.

James Militzer is the editor of NextBillion Financial Innovation.

Categories
Entrepreneurship, Environment, Impact Assessment
Tags
Impact Assessment, impact investing, investment fund, social entrepreneurship, social impact, sustainability