Value what you value
A rose by any other name would smell as sweet
– William Shakespeare
Over the past 13 years, the term impact investing has increasingly been used to define investments that not only make money, but also have social and environmental benefits in the results of those investments. Examples can include everything from investing in clean energy solutions like wind or solar, to investing in new education technology that can help improve learning outcomes. The specific moniker of “Impact Investing” is traced back to a convening that the Rockefeller Foundation held at their Bellagio property in Italy back in 2007. As a part of one of their program areas to help foster the growth of for-profit models to advance positive social outcomes, they pulled together groups from across the US and Europe to discuss the topic. At that fateful event, the term “Impact Investing” started to be commonly used by the participants and it has snowballed ever since. But this doesn’t really answer the question, “What is impact investing?”
Terminology matters……
The analogy I like to use is related to another area of finance and another term that was coined roughly 40 years ago. The story goes that Antoine van Agtmael (an employee at the IFC in the early 1980s) was looking to raise a fund. He was pitching this concept at an event at Solomon Brothers for a “Third-world equity fund”. There were a range of views about the idea, but the name was one thing that most attendees hated. Rumour has it that someone at Solomon went to far as to say “Solomon Brothers doesnt’ do anything third!” So Antoine went home and with that feedback came back the next week with the concept of an “Emerging Markets” fund. This got a far better response, which led to his creation of Emerging Markets Management LLC to manage funds investing in – you guessed it – Emerging Markets. And for the next few decades, investors referred to investing in Emerging Markets.
So what?
So how exactly is this relevant to impact investing? The analogy I see is that you need to define the impact you’re looking for. That can occur on many levels, but the two main vectors I see are 1) what financial performance you need from your investments and 2) what impact themes resonate with your values.
The first vector is returns. There is an open question if it’s possible to generate ‘market rate’ returns with impact investments. Put another way, do you need to compromise financial performance to achieve impact. Taking this even further, is it therefore necessary to reduce returns even more if you want to dial up the impact? This question in itself is hugely complicated and is the subject of a separate blog post. But suffice it to say that there is an entire continuum, so your values would determine where you are likely to be on the amount of returns you require from your impact investments. Indeed, anyone that uses philanthropy to achieve impact has made the decision that a -100% IRR is ok if the impact is worth it.
The second factor is what you consider to be impactful. More specifically, what outcomes are you trying to achieve or groups are you trying to reach? It could be that you’re most concerned about climate change and that we may not have a habitable planet for humans in the next few decades. It might be that you think the lack of access to basics like food and water that still affects hundreds of millions of people every day is more pressing than a long-dated problem like climate change. Perhaps you’re most concerned by the educational system that may not be optimized for the future of work and is setting our children up for failure. Regardless of what outcome or theme you are most passionate about, that’s what would determine if you feel something is an impact investment. In my opinion there aren’t right or wrong answers, as you very quickly get into moral relativism.
In light of values defining impact, it’s possible that almost anything could be justified as an impact investment. In reality there are a handful of sectors that most individuals would view as impact investments. They are often broken down into social and environmental (although I argue in a separate post that it’s all social investing). The industries or verticals that affect social outcomes would include:
- Education
- Health Care
- Financial Services (Inclusion/Wellbeing)
- Real Estate (affordable housing, etc.)
Beyond this, there’s also the broader horizontal theme of Diversity and Inclusion (gender, ethnic, LGBTQ, etc.) that tends to have a more social application.
Among the Environmental themes:
- Clean Energy
- Sustainable Transit
- Industrial Efficiency
- Waste and Materials
- Agriculture
- Water
- Ecosystem Services (carbon markets, timber, etc.)
- Real Estate (greening the built environment)
There are very few investors I’ve ever met who are against any of these verticals. Afterall, who’s against healthcare or having a bank account? But what tends to happen is that individuals feel an emotional pull towards certain themes that resonate most with them. So they may believe in climate change and acknowledge its importance, but they get the most excitement and satisfaction out of education outcomes and investments. As it’s a reflection of their values, it’s not for me to say they are wrong or it’s not an impact investment.
I’ll use the following real-life example. An investment manager had decided to raise a fund to address what they saw as a huge challenge in the United States, namely how our civic society was eroding. This isn’t unique to this group, as there are a number of individuals and foundations concerned with the state of our civic society. Indeed when I asked attendees at a conference for foundations if they supported this objective at a high level, almost half the audience raised their hands. This manager, however, believes that in the wake of the Sandy Hook and Marjorie Stoneman Douglass school shootings, more and more individuals and institutional investors were no longer investing in weapons manufacturers – gun manufacturers in particular. They felt this was a significant threat to the second amendment, which in their view was paramount for a functioning free civil society to prevent a tyrannical government from controlling them. So their impact thesis was to invest in gun manufacturers to make sure that the second amendment wouldn’t be at risk from the lack of capital for gun makers. When I then asked the foundations in the audience how many would support this impact fund, not a single hand was raised. And yet, I believe the fund manager was authentic in their belief that funding gun manufacturers was a key to our civil society. So it’s really not my place to say that isn’t an impact investment, but more to say it’s not aligned with my values, so I wouldn’t fund that.
Values Matter
So the key takeaway I see from all this, is that Impact Investing is Values-based investing with a better moniker. The two values in my mind that are key are: 1) what kind of returns are you expecting for putting your assets at risk and 2) what kind of impact is most aligned with your values. I’d further say that there is likely to be a continuous theme through these blog posts about Values really underpinning everything. Although this may seem like motherhood and apple pie, I’m constantly reminded of the inconsistencies that we have in societies and individuals (myself included) where our actions aren’t always aligned with our stated values. I’ll end this post by laying out my own personal goal – to put myself out of business. As opposed to impact investing being considered a separate activity or discipline, I would like all investing to consider and efficiently incorporate social and environmental externalities.