The State of the Art in Impact Investing: People and Planet Returns in All Asset Classes
When the term impact investing was coined 10 years ago, it typically meant early-stage investments in social enterprises. That notion has evolved dramatically, judging by Toniic’s recently released T100: Powered Ascent report.
Toniic is the global community of active impact investors — family offices, individuals and foundations — which I proudly serve as CEO. The report is the latest from Toniic’s T100 project, which follows the journey of a growing number of Toniic members who have committed to a 100 percent impact portfolio. Toniic has nearly 200 members globally, and more than half are also members of the Toniic 100% Impact Network. T100: Powered Ascent includes 76 portfolios, up from 51 in the T100: Launch report from 2016. These investors are seeking impact not just in early-stage investments, but across their entire portfolio. Such a commitment requires time to realize, but the progress to date is measurable and defines the state of the art.
The 76 portfolios in this report represent $2.8 billion in capital committed to impact, with $2.3 billion already deployed. That deployment into impact represents a 9 percent increase from our 2016 report, which studied 51 portfolios. Those committed to 100 percent impact portfolios are deepening and broadening their impact in virtually all asset classes. These include not just private equity, but also fixed income, public equity, real assets, hedge funds and cash. The latter two asset classes are the most difficult for impact investors, and represent the lowest percentage allocation to impact in the study. We have a few hypotheses on why those asset classes lag, but the simplest explanation is that they offer few products that are appealing to impact investors.
A Nuanced Approach to Balancing Impact and Financial Goals
The report also shows the increasing discernment of these investors in balancing impact and financial goals in different parts of their portfolios. Most of the investors who participated in this report (73 percent of the total) are seeking commercial returns at the portfolio level, but the vast majority tune their return expectations to the impact opportunity. Only 15 percent of the portfolios studied never make an investment targeting less than commercial returns — which means that 85 percent make at least some sub-commercial investments if they think they can achieve deep impact.
What does this suggest? That impact investors are increasingly nuanced and sophisticated in their approach. Like traditional investors, they tune various parts of their portfolio to achieve different goals. Some investments contribute to liquidity, others to return or risk profile. But impact investors add one important — to them, critical — dimension, which is the degree to which the investment contributes to positive social or environmental impact.
These investors reject the very notion of “externalities,” a staple of neoclassical economics and modern portfolio theory. They are systems thinkers, seeing our planet as inherently interconnected. Where could an effect not experienced by a particular company or its stakeholders be experienced, except in some other part of this interconnected system we call life on Earth? So these investors voluntarily assume responsibility for all of the effects of their investments, whether they like those effects or not. By assuming such responsibility, these forward-thinking investors are iterating toward a “net positive impact” portfolio.
Capital as a Force for Good
They have two motives. The first is values alignment. They see their capital as a potential force for good in the world, and at the least, they want to avoid companies that are causing harm. The second motive is positive impact. It’s not enough for these investors to feel their investments align with their values — they also want tangible evidence that those investments are having a net positive impact on the planet and its inhabitants.
In some asset classes, like public equities, the move from broad values alignment to positive impact is harder to achieve than in other asset classes, like private equity. Nevertheless, this cohort is not content with ESG investing, even in public equities. They are pursuing strategies — such as best-in-class (investing in companies with the best social and environmental performance in their asset class) or shareholder engagement (using their power as shareholders to move companies to greater sustainability) — that are designed to achieve positive impact in public equities, despite the challenges of being purchasers in the secondary market.
In every asset class, these intrepid investors seek deeper impact than the current market and product availability suggests is possible. The impact investing market is growing — more mutual funds labeled “sustainable” have launched in the past five years than any other type of fund — and as that happens, impact investing will become more accessible to the mass market. The risk in this broad market growth, which our members are keen to mitigate with their leadership, is that impact investing will be reduced to the lowest common denominator of responsible (SRI) or sustainable (ESG) investing.
By sharing their detailed portfolios with Toniic and answering a comprehensive behavioral survey, T100 participants are seeking to provide both evidence and inspiration to hesitant and skeptical mainstream capital.
They are demonstrating, with their own money, that impact investing is both viable and infinitely more rewarding than traditional investing, and that the wise use of capital can make a significant contribution to the challenges we face as a global community.
Adam Bendell is CEO of Toniic, the global action community for impact investors. He has been investing in microfinance and social impact enterprises for nearly a decade.
Photo by Don Ross III via Unsplash.