NB Financial Health

Thursday
May 1
2014

James Militzer

More Questions than Answers: Impact investors struggle to present their sector to the general public

What qualifies as “impact” investing – and how exactly should non-financial impacts be measured? Those may seem like pretty basic questions – yet at the recent Sustainatopia Impact Conference last month, clear answers were in short supply.

That’s not a knock against the participants at this conference or the sector they represent. It’s more of an indicator of a young sector that’s still groping toward a consensus on the best way to present itself to the investing mainstream. But these definitional issues have a particular importance for those tasked with convincing investors to give hard money to companies and funds, while looking beyond money when considering returns.

So what’s the best way to frame impact investments to those who aren’t familiar with the concept? As Tom Scriven, partner and chief counsel at RENEW saw it, “It begins with education. Ethiopia isn’t the place that people know from the 80s. It’s not all starving children – investors there are killing it, quite frankly. But a lot of investors’ perspectives are shaped by the Nigerian email scam – ‘You’re just gonna take my money.’ We’ve got to assure investors that their investment is actually going to go to the company that it’s targeted for, and that the company is prepared to use it.”

But Scriven, like many participants, seemed a bit confounded when describing how his investment company approaches impact measurement. “Intuitively, we think we’re having an impact. We’re in the process of measuring. The challenge many face is how can we measure impact affordably, because we don’t want to increase the burden that the companies we work with face.” He seemed more comfortable talking financials: “Early returns are that an average investment in local businesses in developing countries returns $13 in value to people in the local economy per dollar invested. If you invest this way, and then recycle the investment when it’s paid off, its impact could be 100 times greater than the impact of giving that same amount to a non-profit.”

His remarks highlight an interesting question: is economic development in underdeveloped countries a social impact in its own right? What about job creation, or improved corporate governance? Could an investment in a major multinational that commits to sustainable environmental practices be considered an “impact investment”? Where exactly should we draw the line between impact investing and traditional investing?

A clear answer to those questions was hard to find among panelists and attendees. Rob Hanna, founding partner at Social Wealth Partners, painted with a broad brush: “Social [impact] is a value add, but you still need a core business proposition. You need to start from the financial returns perspective. We’re doing something additional to the underlying discipline of deploying capital – maybe improving governance, maybe other things. All investment has an impact, but how do you know what that impact is?”

Equally important for many in the sector: how do you frame a socially focused investment’s impact to the people who are putting up the money? As Steven Schueth, president of First Affirmative Financial Network, put it, “We use stories. A particular set of standards might work for some [investors], but not others. We’re talking about a different kind of investor, one who brings their values to the game and intends to do something different with their money when they invest. But no matter how progressive and socially responsible a client is, they want a competitive rate of return. Once they have that confidence, they want to hear stories about the companies they’re invested in, so they can speak freely about it at cocktail parties.”

Other panelists spoke of targeting investors of a different social strata. Helen Rake, president of Synergy Asset Strategies, said, “So many institutions are focused on building funds around the top 1-2 percent, but there’s 10 trillion dollars in IRAs and pension funds that could be put to use, if people who want to do some good with their investments had the opportunity. With my clients’ portfolios, I embrace the term values-based investing, because it’s about fitting each individual’s investments to their values. And a lot of my clients don’t even know that this is an option.”

But Toby Prosky, a partner at Willauer Prosky Willauer Asset Management, raised a concern with targeting retail investors. “People don’t know what to do with their money, so they end up putting it into Fidelity, a pension, whatever – and in 99.9% of the cases, investors aren’t engaging or disengaging with companies based on the quality of their corporate governance. Our goal is to raise the awareness of people who don’t know that their capital is going into companies that are using it selfishly or unsustainably. If we could get even a significant portion of capital markets to short companies that are being abusive, then that’s what we would call a win.”

But would removing abusive companies from their portfolio make someone an “impact investor” – and how would they go about identifying these companies in the first place? As First Affirmative Financial president Steven Schueth put it, “There’s interest in matching [social values] to investments – and so potentially more money – but the mechanisms for doing this in an intelligent way are not there. People don’t have any idea how to do due diligence, to determine what to invest in and what not to invest in. And lots of things are free on the internet, which scares me, because there’s nobody who’s set up the mechanics of the due diligence process to help less wealthy, theoretically less sophisticated investors make good decisions. If you’re going to make illiquid investments, you have to know enough to diversify them, because some will fail, a few will succeed. So I believe it is risky, though some will disagree.”

Sure enough, some did. David Dorr, managing principal at Dorr Asset Management, said, “There’s definitely diligence that needs to be done, but I don’t think we need to approach it on the regulatory side and bubble wrap investors to protect them. You have to spell out the risk, but once someone signs the document, they’re on their own – we’re adults. And as funny as it sounds, I think shows like “Shark Tank” are a step in the right direction. When my wife, who’s a chef, watches it, and she says, ‘That’s not a sound equity investment,’ I have hope! There’s growing awareness.”

As public awareness of the overall social impact of capital investments grows – and perhaps influences investors’ decisions on a larger scale – what will happen to impact investing? Scott Schmith senior banking adviser at the U.S. Department of Commerce raised some concerns. “Since identifying yourself as an ’impact investment’ opens more opportunities to access certain funds, there is some greenwashing happening, to go after millennial wealth. So I think a focus on measurement is important to keep out charlatans, and to focus the sector more on standards and measurable outcomes. When I got involved years ago, it seemed like a small tribe – impact investing was defined as things that mainstream investors would not do. But if that divide goes away, does ’impact investing’ just become a positive screen?”

Abigail Noble, head of Impact Investing Initiatives at the World Economic Forum, had an answer. “If in 20-30 years the term impact investing went away, because that was the way all investors went about investing, I would be ecstatic. And it could go that way. Other trends, like banning sweatshop labor or valuing civil rights, have become the standard rather than the exception. I think impact investing is a lot smaller than we all thought it would be by now – but just because it doesn’t have huge bold numbers doesn’t mean it should be dismissed. The sector has so much potential, but we’re a long way off.”

For more, please check out one of the plenary sessions from the conference below.

Exploring the Future of Impact Investing, Part 2 – A Plenary Session at the 2014 Sustainatopia Impact Conference

Categories
Entrepreneurship, Environment, Impact Assessment
Tags
conferences, Impact Assessment, impact investing, SME finance, social impact, sustainability