Scaling Up Impact Investing: Hurdles and Trends
I was recently invited to be the keynote speaker at the Wharton Social Impact Conference this March in San Francisco.
The question I was asked to address was, “What lies ahead on the horizon for the social impact space and how social impact can scale.” I was also asked to think outside the box. I am pleased to be sharing my thoughts with you, and welcome your thoughts and comments ([email protected]).
Here are some of the highlights.
My vantage point is from the world of ultra-high net worth investors, foundations and families – all of whom are trying to do the right thing as well as from impact investing networks.
What do I see in the market place now? I see three groups of actors: investors, intermediaries and asset managers/product issuers. In all cases, all three groups of actors are growing significantly, and my prediction is that we will be seeing exponential growth of the socially responsible investing (SRI) and environmental-social-governance investing (ESG) markets. Professionally managed assets have grown by 15% between 2012 and 2014, from $62 trillion to $72 trillion, while SRI (including negative screening and ESG) has grown by 61%, from $12.4 trillion to $19.1 trillion.
Meanwhile, the deep impact investing market has grown more than 216% in two years, dwarfing the growth of traditional investing. This category has grown from $800 billion to $1.8 trillion – this includes investing in solar lanterns, in microfinance institutions in India or community development financial institutions (CDFIs) in the U.S. This data is from the Global Sustainable Investment Review 2014. In short, capital seeking social or environmental impact is crowding in.
As a result, the norms of the financial ecosystem are changing. What does this mean?
On the investor side, we are entering what I see as the age of the conscious investor. There is significant disillusionment with the philanthropic model and the democratic deficit of public institutions and of our electoral processes. Climate change, the poverty trap and population growth are but a few reasons for investors to feel that their financial assets need be stewarded in a responsible way – not only in terms of financial returns but also in terms of planet and people. As a result, individual investors (accredited or not) are looking to express their values through their investments. The rise of socially responsible community banks like New Resource Bank in San Francisco is a sign that small depositors are aligning their cash with their values.
On the intermediary side, we have seen new types of advisors and service providers in the last five to ten years – from Impact Assets to B Lab, Toniic, HIP investor, just to name a few.
And on the asset manager side, we are seeing new impact fund products in both private and public markets. We are also seeing the world’s largest asset manager, BlackRock, building an impact investing offering – the most recent meeting I attended at BlackRock was to discuss a wind and solar fund. These are all developments to crowd in more capital.
However, when I think of the main bottlenecks to scale for the industry of impact investing, there are many … but three main ones come to mind.
The first bottleneck I see is meaningful data. We need more data on financial performance of “impact examined” products in all asset classes against benchmarks. There are too few proof points, and most investors believe that investing with meaning requires giving up on financial returns. Two great developments offering new proof points in our sector were:
- Cambridge Associates and GIIN report Impact Investing Benchmark (2015). Impact Investing Benchmark comprises 51 private investment funds. Funds in the benchmark pursue a range of social impact objectives, operate across geographies and sectors, and were launched in vintage years 1998 to 2010.
- Wharton Social Innovation publication: Great expectations - Mission Preservation and Financial Performance in Impact Investing published in 2015. Market-rate-seeking impact investments in the sample, may be financially competitive on a gross basis with other equity investing investment opportunities. This financial performance may be why impact fund managers often assert that there is little inherent tension between profits and “purpose.”
That being said, we also need to ensure that impact white washing is kept at bay – and that we keep ourselves honest. There is information floating around – by some big banks which are portraying themselves as doing impact or responsible investing, when this is more of a marketing effort.
The second hurdle to get to scale is lowering the barrier to entry for more diverse sources of capital or what I call democratization – for individuals or for institutions representing pension-holders. Deep impact investing is still the field of the wealthy, and certain products are not available on a Schwab or Fidelity platform for smaller accounts. As Fran Seegull notes in her article in Conscious Capital this February, some catalytic efforts have taken place. Last October, the Securities and Exchange Commission passed rules to implement Title III of the JOBS Act, which allows equity crowdfunding from unaccredited investors. Internal Revenue Service and Department of Labor guidelines now allow foundations and pension funds regulated by the Employee Retirement Income Security Act (ERISA) to take impact factors into account when making investments, without jeopardizing their fiduciary duty. Yet, there are not enough vehicles, and we will need greater institutional capital to come in through the creation of more socially responsible products and a more impact-friendly regulatory framework which incentivizes the creation of more investment products in all asset classes.
The third hurdle I see is frankly the most important: human capital – which I think is often overlooked. … Actually, if I were to do a SWOT analysis of impact investing, I would say it is both an internal strength and a tremendous weakness. Whether on the investor or the product issuer/asset manager side, or the intermediary side, we need a new breed of professionals. Actually, let me go further and say we need a new form of consciousness as professionals, regardless of our sector and celebration of the impact artisan.
What does this mean? This sector, being so nascent, is requiring sacrifice and innovation ABOVE the needs for maximizing income and safety of career. This is not typical entrepreneurship - as the very measures of success have not yet been determined. The aim is not an IPO, it’s field building. Impact measurement is new, products are new, business models are new, the regulatory framework is new. As a result, most financial firms and professionals are curious but remain on the sidelines of impact investing, and much of the leadership may not have embraced a certain level of social consciousness required to enter this space. This consciousness also requires them to understand societal and environmental issues- which is not typical of financial professionals.
The good news is that this risk related to career risk is only temporary – and the market will move toward those who have chosen the path of greater social and environmental good. The Good decision will eventually become the Right decision. I am convinced of that.
For this sector to scale, the professional, or the artisan of impact investing, as I call it, and his/her willingness to take risk is the crux of this movement getting to scale. It takes courage to try get into a nascent sector, to build a new business model, or to be an intra-preneur for impact in a large institution whose culture is not impact focused. I encourage you to take this risk by entering the world of impact investing – as a professional. And to know that while this is risky as this way of doing business and investing is quite new – and needs more proof points, more incentives and more products, that you will only be pre-empting a megatrend- and I believe those impact professionals will be ahead in their careers because of it.
And lastly, to ensure that this human capital issue does not become a bottleneck to growing the sector, I encourage us to recognize and applaud the artisans of impact – Fran Seegull, Tim Freundlich, Jed Emerson, Luther Ragin (a Threshold Group board member), Julia Sze, Dana Lanza, Beau Seil, Paul Herman, Gil Crawford and so many more. These impact artisans made our sector a reality. I thank them for the risks they have taken in building out the impact investing ecosystem, without necessarily having a security-net, and for having chosen Robert Frost’s “road less traveled by”.
I invite you to do the same, for what will be a rewarding road ahead – as the only way we can scale this sector, is if each of you decides to take part either as a professional or an investor. Regardless of what assets you own, what matters is how you own it, consciously, while understanding “where our money sleeps”.
,2014 Global Sustainable Investment Review, GSIA, http://www.gsi-alliance.org/wp-content/uploads/2015/02/GSIA_Review_download.pdf
Quote from Vince Siciliano, CEO of New Resource Bank, San Francisco.
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