Our Top 5 Impact Investing Lessons We Learned From Luther Ragin, Jr
“I believe this is the first time that I’ve had such an intimate conversation with a jazz soundtrack in the background,” began Luther Ragin, Jr.*, festively kicking off an Investing for Impact luncheon hosted by Threshold Group. Our Philadelphia associates, Luther, and our Philadelphia impact investing friends/community gathered to discuss the past, current, and future state of impact investing. This group had varying levels of experience in impact investing - from first timers to highly-experienced. Most participants were focused on Foundations. These were the main take-aways from the conversation.
*Luther is a longtime Threshold Group Board member (2008-2012; 2015-present), former VP of Investments at The F.B. Heron Foundation, & retired (and first) CEO of Global Impact Investing Network.
LESSON #1 – The Importance of Authenticity
Authenticity is a core value at Threshold Group, so we are always pleased when it is the first principle in an analytic framework or an emerging thought movement. As impact investing gains traction and popularity, we believe investors must be cautious and careful in the due diligence of “impact investment” managers. Some investment product providers use “impact” more as a marketing label, rebranding existing investment products rather than offering a true mission-aligned investment opportunity. Our Chief Investment Officer, Ron Albahary, gave the example of interviewing a clean energy “impact” investment manager professing to a long history of impact investing. After sitting through a long sales pitch, Ron’s first question was a softball, “Can you tell me what the aggregate carbon abatement has been as a result of your portfolio companies in Funds I-III?” The manager, quite back on his heels, couldn’t answer the question, confirming what Ron suspected was the “greenwashing” of an existing investment product. Needless to say, that manager did not end up on our approved impact manager platform. To be an authentic impact manager, the manager should have demonstrable target impact outcomes and at a minimum, track and report on the progress towards those outcomes. Asking the question about the tracking of their non-financial impact objectives is an easy and quick litmus test of authenticity.
As one attendee noted, “Greenwashing is alive and well, and real depth of mission alignment and impact needs constant due diligence.” Luther advised everyone to become educated, be wary, challenge your incumbent investment advisor to evaluate the true impact merits of an investment strategy, and feel comfortable questioning your “impact” investment managers.
LESSON #2 – Pros & Cons of Allocating a Sleeve
There are so many ways to begin to implement impact investing, whether it’s starting with a community development financial institution (CDFI), program related investment (PRI), or just allocating a sleeve of an existing investment portfolio. The first step towards an impact investing/mission-aligned portfolio is often the hardest, and Luther noted that the “sleeve” approach is a great first step. By allocating a sleeve of the portfolio, investors are able to dip their toe in the water, and it’s a way to get experience and build investment acumen in the space.
Luther also pointed out the cons to the sleeve approach. Some of the cons include: 1) not having a coordinated asset allocation if an impact advisor handles the impact-focused sleeve while another advisor manages the rest of the portfolio. Today, since there are readily available impact investments in virtually all asset classes, an impact sleeve built in isolation could be an inferior solution to a fully diversified portfolio with total activation (our term for being fully mission-aligned in a portfolio); and 2) sometimes investors never get past the “toe dip” of the sleeve allocation, and their impact journey ends there.
One attendee noted that, “the sleeve approach supports what our family is doing- while the end game is to use impact investing as a lens across all investments, it is completely understandable and probably the best approach for the impact movement as a whole to have investors start off with a “carve-out” to test the waters, a more controlled and less daunting approach than the fully activated strategy.”
LESSON #3 – Continuous Evolution & Refining of Impact Measurement
It may seem as though there will never be an impact investing conversation without a focus on impact measurement, as there are several challenges to accurate and consistent reporting. Luther noted that some impact is easier to measure (carbon intensity or regional job growth) than others (human and labor rights), and some impact measurements may take a decade or longer to be fully realized. But just because something is difficult to measure doesn’t mean that managers and advisors shouldn’t be trying. Luther also advised that investors need to demand metrics and reporting from both their advisors as well as their investment managers.
Threshold Group continues to develop processes to measure and report on impact, such as partnering with Trucost to offer a carbon audit for client portfolios. We use a proprietary impact scoring framework to rate all of our investment managers with an Environmental, Social, & Governance (ESG) lens. We also work with clients to develop an ESG framework within their individual investment policy statement and can then map the client’s particular ESG goals with the appropriate investment solutions. Luther mentioned the availability of the GIIRS and IRIS ratings methodologies but added these methodologies haven’t been unilaterally adapted.
Several attendees were heartened as accepted measurement standards for impact outcomes are needed to attract more investment capital. Luther thinks impact measurements and metrics will continue to be refined as impact investing moves into the mainstream.
LESSON #4 – Connecting the Investment & Programmatic Teams of a Foundation
Bridging the gap between a foundation’s investment team and programmatic team is an ongoing struggle. Luther provided an example of how you need both sides evaluating investments, such as when an “impact investment” private equity real estate fund was going to buy subsidized multi-family housing and convert them to market-rate rentals. Luther, having had the insight and experience, asked the question about displacement – what is the impact of (and who is considering) the displacement of lower income households in these multi-family housing units? The “impact” manager was dumbfounded, and Luther (and many of our attendees) immediately said, “The programmatic staff would have known to ask that question!”, which is exactly the type of collaboration that we feel would benefit foundations (also, see Authenticity lesson above). Luther observed that many foundations are gradually rotating trustees so that the ones who serve are dedicated to mission alignment. And luckily for us in Philadelphia, several local organizations are developing curriculum to bring investment staff and programmatic staff together.
We are working with the Philanthropy Network to develop educational content centered on impact investing for their members – stay tuned! And later this year, Threshold Group is co-teaching impact investing for The Center For High Impact Philanthropy’s Funder Executive Education Program.
LESSON #5 – The Future is Bright!
Good news everyone – impact investing is gaining momentum and shows no signs of stopping. Due to investor demand, advisors are becoming more attuned to impact investing as an offering, and investment managers are looking to provide impact solutions for end clients. Impact investing is growing more rapidly than non-impact investing, in both liquid and illiquid markets1. With increased investor demand and millennials having a seat at the table, impact investing is growing by leaps and bounds, and it’s filtering into the corporate world. As one attendee observed, “ESG criteria are increasingly becoming the norm in terms of corporate reporting and behavior.”
We all need to be patient and remember that impact investing is a marathon, not a sprint. Investors need a pathway to total portfolio activation, and it could take years to get there.
We are all hopeful and excited to watch authenticity, measurement and metrics, and collaboration continue to evolve in the impact investing space.
Pictured: Attendees with Luther M. Ragin, Jr.
 Data found in 2014 Global Sustainable Investment Review, GSIA.
Footnote: At Threshold Group, we use “impact investing” as an all-encompassing term that includes program-related investments (PRIs), mission-related investments (MRIs), mission-aligned investing, socially responsible investing (SRI), etc.
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Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances. Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise. Impact investing occurs across asset classes, for example private equity / venture capital, debt, and fixed income.
Impact investors are primarily distinguished by their intention to address social and environmental challenges through their deployment of capital. For example, criteria to evaluate the positive social and/or environmental outcomes of investments are an integrated component of the investment process. In contrast, practitioners of socially responsible investing also include negative (avoidance) criteria as part of their investment decisions. Threshold Group makes no representations or guarantees that any specific investment opportunities will meet such goals of impact investors or impact investments.