NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, December 1, 2015

Impact investing—the art of creating portfolios that earn market-rate returns while also seeking to advance social or environmental aims—is a mercurial child of the 21st century. Hard to pin down with precise definitions and interpreted in a variety of ways, impact investing is nonetheless a fast-growing force below the surface of our financial markets, effectively blurring the lines between philanthropy and investing.

Liesel Pritzker Simmons is a Hyatt Hotel heiress, a leader of the impact-investing movement, and a co-founder of the impact-investing family office Blue Haven Initiative, which she runs with her husband, Ian. Two years after winning a 2005 lawsuit against her family and extracting $500 million in inheritance, Pritzker Simmons and her husband were traveling in Rwanda and thinking about how their investments could have a more direct impact on the lives of impoverished Africans. After returning home, she ran their idea by her financial advisor, who sneered, saying, “How much money do you want to lose?”

The advisor was fired. Today, with the help of the Caprock Group’s Matthew Weatherley-White and impact consultant Jed Emerson, Blue Haven’s portfolio is 100% invested for impact, aiming to earn market-rate returns across asset classes. “This isn’t philanthropy,” the 31-year-old Pritzker Simmons insists. “The people I know who are thoughtful about impact investing are not crunchy tree-huggers. This is part of the way investing should be done.”

Pritzker Simmons is a kind of poster child for an entirely new generation of investors coming up the ranks and rattling conventionally minded private bankers. From 2007 to 2061, $59 trillion in assets will pass on to heirs, many of them as socially conscious and demanding as Pritzker Simmons. These folks want their investments to not just make money but also make a better world. An industry association, the Forum for Sustainable and Responsible Investment, or US SIF, using a very loose and broad definition of impact investing, claims it is already a $6.57 trillion business in the U.S., after growing 76% from 2012 to 2014.

Top concerns for impact investors today include climate change, gender equality, education, and agricultural sustainability, but below the surface, it seems that most of these investors are either consciously or unconsciously aiming to end global poverty. More importantly, today’s devotees argue that impact investments don’t mean sacrificing financial returns in an effort to do good, and toward that end they are investing in everything from private equity to exchange-traded funds. Some go even further, insisting that impact investments are, in fact, less volatile and outperform traditional financial benchmarks, especially in bear markets.

Of course, many eminent financiers are skeptical about the wisdom of trying to combine investment objectives with social causes. Venture capitalist Marc Andreessen, of Andreessen Horowitz, expressed this view best when he once said that impact investments are “like a houseboat. It’s not a great house and not a great boat.”