The basic definition of impact investing combines the words well with good: doing well and doing good. Back in the old days, say, a few years ago, if you wanted to invest money in a company or stock or industry, you would look at the single bottom line: the financial return.
With impact investing, you look at two bottom lines: the financial performance and how the company benefits the greater society and environment as a whole, the social performance. The new double bottom line, doing well and doing good at the same time. For those who have not realized that impact investing is a major trend, and especially a trend that will be growing as the GenX-Yers grow older here are two ice-water-in-the-face statistics.
The Monitor Institute, a group that tracks the evolution of many philanthropic endeavors, projects the market will grow from its current value of about $50 billion to $500 billion in the next ten years, as more and more foundations, family offices, high net worth individuals and for-profit institutions seek out impact investing vehicles and advisement. In addition, the field has grown 600% over the past four years.
Impact investing has antecedents in the social unrest of the 1960s, which created a kind of awakening of the environmental and social consequences of economic activity. Today, many institutions around the globe are experimenting with new forms of investment designed to generate both market rate returns and positive social and environmental impact. The idea of using for-profit investment strategies for this dual purpose has moved from the periphery to the mainstream.
Now, there are websites, conferences, and books on the subject. The sector is drawing a high level of interest because it seems to be the result of a perfect storm of foresight, hindsight, and angst. First, given the multiplicity of socio-economic and environmental challenges, it has become apparent that individual philanthropic efforts or governmental responses are just not substantial or timely enough to address all that needs doing. Second, and happily, many actual impact investments did well in the recent market downturn because they are not generally associated with broader markets.
Third, much global capital sees new commercial and social opportunities in developing countries. And fourth, many exceptional fortunes have been accrued by those in the 30s, 40s and 50s, thus creating a new generation of philanthropic venture capitalists, who have assessed a more substantial return on investment when they help fund a business rather than handing out money.
The mission and the call to impact investing has been heard by many substantial institutions and philanthropic groups: The Rockefeller Foundation, the KL Felicitas Foundation, the Annie E. Casey Foundation, The F.B. Heron Foundation, Meyer Memorial Trust, the Skoll Foundation, and the Bill and Melinda Gates Foundation. These believe that a greater portion of philanthropic or endowment monies should be directed toward projects related to a foundation’s mission/vision/scope/focus rather than funneled into mainstream investments.
It is these foundations, trusts and endowments where impact investing is taking hold. Much younger companies and funds also are doing this. Even now, a seminal article on the Agora Fund website, written by Ben Powell, Managing Partner, has split the impact investors, into three basic “camps.”
Here they are:
Impact-First Investors (also called Social-First) are groups whose main interest is investing in entrepreneurs rather than investing in projects. These foundations wanted to get capital to real entrepreneurs who could then turn it into measurable impact. For this group, which includes most of the founding members of ANDE, the primary purpose of impact investing is social; to serve the needs of society, as quickly and tangibly as possible.
Return-First Investors (also called Finance-First); This is a group of mostly mainstream investors interested in creating products for their clients that allow their money to generate a triple bottom line return — meaning a market rate of return and a measurable social and environmental return. The hope is that traditional finance companies will unlock billions in investment capital that also demands to know its social impact. Return-first investors are trained in closing deals that make money. For them, the defining feature of an impact investment is that it can favorably compete with the financial returns of a traditional investment. Ignia Fund is a good example of this approach.
Entrepreneurs and Field Builders; the third group doesn’t consist of investors at all, but of non-profits and some foundations that are focused on entrepreneurial eco-system development and supporting the field at the entrepreneur level. The basic allegiance of this group is to the entrepreneurs on the ground. An impact investor might ask, “How can I find good deals that created blended value?” The entrepreneur camp, on the other hand, asks, “How can we help entrepreneurs make better decisions that result in increased growth and increased impact?” B Lab is a great example of this camp.
Robert Balentine, CEO of Balentine, a high end investment group in Atlanta, works with a growing number of these investors. His cautionary suggestions encompass three things. “First,” he says, “when making the decision to eliminate certain assets from your portfolio, consider the risk and return tradeoffs. While the social impact could be meaningful, ultimately, the ability to adequately diversify your portfolio and hedge against risk could be seriously limited by restricting your investment options. As an investor, it is important to consider how much risk you’re willing to take in pursuit of portfolio returns and social results.
Second, investors should conduct the same level of research for an impact investment that they would for a more traditional investment. Through the due diligence process, verify that there will be adequate transparency and clear reporting to quantify the value the investment adds to your portfolio over time. And third, as with any investment, it’s important to regularly review your impact investments to set guardrails and monitor benchmarks. Always keep in mind that successful investing is more about the management of risk rather than the management of return.”
This last caveat is crucial; as there has indeed been wariness about this idea and its long term viability. But generally these caveats deal with the need for more regulation and more valid metrics. Suggestions like this usually come from businesses that have been very successful, very quickly. We will comment further on this trend as we discuss events, thought leaders and new terminology, in Part 2.