We discussed active versus passive investment in an article last year, but what about impact investment? It comes after socially responsible investment (SRI) and environmentally sound, socially beneficial and excellent governance investment (ESG). Is it more than just another marketing tool for investment managers, and how does it rank in corporate governance compared with traditional investment?
Wealthy people putting their funds towards good causes has a long history and generally comes under the heading of philanthropy or charity. An early example in the City of London was Sir John Cass, a successful businessman in the late seventeenth century, who became a Sheriff of London and Member of Parliament for the City. He founded a school for boys and girls and his will provided for a Foundation which supported education, and three centuries later had evolved to embrace the London Metropolitan University, City University and Cass Business School.
There were many later examples in the UK, such as Peabody Trust, a fund set up by American banker George Peabody in London to provide social housing after he had previously established a public education system in the States following the American Civil War, and the Wellcome Trust founded in 1936 from legacies of pharmaceutical entrepreneur Sir Henry Wellcome, to fund research to improve human and animal health. A nineteenth century successful Quaker businessman with a social conscience was Joseph Rowntree who, after seeing the devastation from the Irish potato famine, set up four trusts to effect social reform and to tackle the causes of social problems. And in 1885 William Lever set up a business with his invalid brother to make bars of soap. With a chemist partner, they invented a new type of soap and Lever Brothers became enormously successful, in due course becoming Unilever. Lever built a model village, Port Sunlight, for his workers so that they could enjoy good quality accommodation.
In the US, nineteenth century Scottish émigré to the US, Andrew Carnegie, became a hugely successful steel baron and after selling his steel business to J P Morgan in 1901, gave away 90% of his wealth, contributing especially to education and scientific research. Most recently, Microsoft co-founder, Bill Gates, has established the Bill and Melinda Gates Foundation focused globally to enhance healthcare and reduce poverty and Warren Buffett, founder of Berkshire Hathaway, has promised to give away 99% of his fortune, largely through the Bill and Melinda Gates Foundation.
In India, the philanthropist who topped the list in 2014 was Azim Premji, chairman of IT company Wipro, much of his donations going to his Azim Premji Foundation, which focuses on education.
But the term Socially Responsible Investment is associated with relatively recent attempts to involve fund managers who deal with the investments of the rest of the (non-billionaire) investing public and to persuade them to invest in situations where there is a demonstrable social benefit.
So Calvert Investments Inc. is a US investment management company, established in 1976, which is regarded as one of the largest responsible investment companies in the US. One of its guiding principles is to actively engage with companies on behalf of their investors to focus on environmental, social and governance issues. And its investments are aimed at addressing problems such as widespread poverty and sub-standard living conditions worldwide.
Who defines Responsible Investment and what is Impact Investing?
The United Nations’ Principles for Responsible Investment (UNPRI) defines responsible investment as
“…an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns”
This begs the question what is responsible investment and what is ESG?
The UNPRI says that examples of ESG factors “are numerous and ever shifting” and include:
- environmental: climate change, greenhouse gas (GHG) emissions, resource depletion, including water, waste and pollution, deforestation
- social: working conditions, including slavery and child labour, local communities, including indigenous communities, conflict, health and safety, employee relations and diversity
- governance: executive pay, bribery and corruption, political lobbying and donations, board diversity and structure, tax strategy
In answer to the question is Responsible Investment the same as Socially Responsible Investment or Impact Investing, the UN says “NO”. It says it has similarities with socially responsible investing (SRI), impact investing, sustainable investment, ethical investment, and green investment. But it distinguishes these five forms of investment as aiming to combine financial return with a moral goal, whereas investors who are purely seeking a financial return should also be guided by the above ESG factors, because they have an effect on risk and returns, and this is what constitutes responsible investing.
If the reader is confused by now, let’s see if we can find a simple definition of Impact Investing. The Global Impact Investing Network (see below) says
“Impact investments are investments made into companies, organizations, and funds with the intention to generate 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.”
Players in the field of Impact Investing
One of the signatories to the UNPRI is Bridges Fund Management, founded in 2002, which features its Responsible Investment Policy, its Ethical Charter and its Sustainable Property Policy.
It states that its charter requires it to invest only in situations with both a financial and a social goal. It has therefore been investing for impact since its inception and has created tools and frameworks to help the investment teams to analyse, measure and manage the impact of potential and current investments.
It has developed a training programme for potential impact investors which it runs in association with Wharton University’s Social Impact Initiative.
The Rockefeller Foundation put together a team in 2007 to discuss the growing number of investments that were trying to combine financial returns with achieving a clear impact for social benefit and claims to have coined the term “impact investing”. One of the consultants working for Monitor Institute in this process was Amit Bouri who in 2009 went on to become the CEO and co-founder of the Global Impact Investing Network (GIIN).
GIIN is a not for profit organisation whose purpose in life is to be the fount of wisdom and experience regarding impact investing. In this role, it provides what it calls a Knowledge Centre and Tools and Training for those working in this field and has set up a global network of impact investors. It characterises professional impact investing as comprising an intention to achieve social good, an expectation of a financial return, albeit in a broad range and across a potential range of industries, and a commitment to measure the social impact. In respect of the last element, it provides a catalogue of generally accepted performance metrics by which investors can assess how well their investments are achieving the social goals.
Another organisation the Rockefeller Foundation has supported is GIIRS, which is run by B Analytics which has launched the Measure What Matters initiative, and describes GIIRS as providing “the gold standard” for impact measurement in impact investing, providing comparable ratings of a company or fund’s social and environmental impact.
The Rockefeller Foundation itself has launched what it calls Zero Gap, which it describes as a venture philanthropy model and is exploring innovative financing mechanisms such as micro levies and social impact bonds to mobilise public and private capital for such projects as preserving the environment and tackling childhood malnutrition.
Another organisation recently formed was given the name Toniic (cf GIIN) and aims to bring together investors globally who can apply their first hand knowledge and monitoring skills in the impact projects which they fund. It also provides its investor members with tools with which they can measure impact performance.
Among this new generation of specialised impact investing organisations is Revolution, founded by Steve Case, of AOL fame, which last year raised $525 million in its latest fund, Revolution Growth III. Case and his team are focussed on supporting “break-out” start-ups, not just financially but in any other way they can – hence their quest to find only 3-4 companies per year to back. They also make a point of investing outside San Francisco and New York.
Steve Case on how focusing on purpose can actually help, not hinder profit
(forgive the advert, this is a Fortune interview)
Of course, the big funds and financial institutions have found this an important niche in recent years and BlackRock have set up their Impact investing which focuses on three “key sustainable investing segments”.
These are what it calls Exclusionary Screens, ESG Factors and Impact Targets. As it puts it : “Avoiding exposures that conflict with your social objectives and excluding companies or sectors that are not aligned with your values or mission, such as fossil fuels, tobacco or weapons. Focusing on companies that adopt your social and financial objectives, such as low carbon and sustainability. And targeting outcomes that advance your social and financial objectives, such as green bonds and renewable power”.
BlackRock Impact stresses the importance of transparency and also its set of proprietary tools to enable it to measure social and financial returns from data not publicly available.
In 2015, Goldman Sachs Asset Management bought impact investment firm Imprint Capital signalling its intention to build a significant presence in the impact investing field.
And Bain Capital in 2015 recruited a former state governor who had launched social impact bonds, giving him a brief to build a new business in raising money to deliver good social results while still making a good financial return.
Then there are “angel investors”. In the UK something called Clearly Social Angels is a network of angel investors who are interested in achieving social and environmental change through their investments. And in the US, California-based Investors Circle similarly provides a network for investors aiming to make a social impact.
On a grander scale, Warren Buffett’s son Howard has launched a company to invest in social impact and support other investing organisations in this field. This company, i(x) investments, says it will take a long term view (shades of Buffett senior) and has tools which can measure results in ways that no-one else can.
Finally, there is the Pope. The Vatican has run two conferences on social investing, and the latest, in June 2016, was actually called the Vatican Conference on Impact Investing. It brought together speakers with experience in this field from round the world, including Amit Bouri of GIIN. Impact investing clearly has the approval of the Holy Father, notwithstanding his general mistrust of capitalism.
Is the impact investor different from the ordinary investment manager?
Is impact investing just another product to get investors’ money? Is ESG just another brand? If so, does it matter if the end justifies the means?
A judgement of Impact investing would seem to depend on the measurement of the results. Conventional investment success is usually measured in purely financial terms, though we at ACG would argue in favour of a broader, holistic assessment. So if impact investment is to be assessed on its own terms, progress against goals needs to be measured and published.
From the above summary of major players in the field, it appears that measurement is recognised as of key importance and a number of frameworks and tools seem to have been developed for this purpose. They purport to measure the impact of the investments and, in this respect, they attempt to measure at a level of detail different from that of fund managers when they examine the trading results of the companies in which they normally invest. So the impact investor would appear to be quite distinct from the typical investment manager.
This is a relatively new field of investment and it probably needs a few years and some independent research to establish how many of these initiatives manage to achieve both their social and financial objectives. Charities find it difficult enough to combine delivering their social objectives with raising funding to pay for them. Achieving a consistent financial return on top of consistent measurable impacts on the social environment is going to be demanding – the operative word being consistent.
Does impact investing have good Corporate Governance by ACG standards?
Our watchword in corporate governance is holistic and the key to delivering good performance is independent measurement.
In the first respect, impact investors would appear to come out well in regard to an ethical approach and a goal that reflects a balance of the interests of the key stakeholders. They also stress accountability and transparency. Whether their strategies and the organisation they bring to their investments are fit for purpose is difficult to say. The biggest would seem to be very well funded, which in principle would imply that they could survive underperformance for quite a long time. But by their own objectives, they need to achieve financial targets while (probably) prioritising their social goals. So it’s too early to tell whether a number of these funds will quietly fade away or transform themselves into something different.
Where they do tick the box is in their attention to frameworks and measurement tools. Hopefully league tables will emerge which show how all these new initiatives are performing in regard to their own goals and in relation to their peers. We look forward to reviewing their performance in future years as and when there is a wealth of published data from these impact investors.
- Calvert Investments Inc.
- United Nations’ Principles for Responsible Investment
- Bridges Fund Management
- Wharton University’s Social Impact Initiative
- Global Impact Investing Network
- B Analytics
- Zero Gap
- Clearly Social Angels
- Investors Circle
- i(x) investments
- Vatican Conference on Impact Investing
- Shareholder Value and Corporate Governance
- Active vs Passive Management and Stewardship
- Sovereign Wealth Funds and the Santiago Principles: The ACG View
- Corporate Governance and Investing Institutions
- Corporate Governance and Investing Institutions Part 2: using e-board technologies
- What is stewardship?