Social Impact Finance & Accounting Dec 2, 2016

What Is the Future of Impact Investing?

Peo­ple are revis­it­ing the rela­tion­ship they want their cap­i­tal to have with the world.”

Lisa Röper

Based on insights from

David Chen

Amit Bouri

Over the past decade, investors rang­ing from indi­vid­u­als to large funds are increas­ing­ly putting their mon­ey where their mouths — and their futures — are, in ven­tures that prove their com­mit­ment to social­ly and envi­ron­men­tal­ly sus­tain­able prod­ucts and strategies.

This grow­ing aware­ness around issues of sus­tain­abil­i­ty has led to an expan­sion of the field of impact invest­ing. In the process, investors have been devel­op­ing bet­ter and bet­ter strate­gies and prod­ucts for their port­fo­lios, while com­pa­nies pre­sent­ing them­selves to investor net­works have had to step up their games and show that they are con­cerned about impact and results. 

Kel­logg Insight sat down with Amit Bouri, CEO of the Glob­al Impact Invest­ing Net­work (GIIN), an orga­ni­za­tion formed to help the indus­try grow and oper­ate more effi­cient­ly, and David Chen, an adjunct pro­fes­sor of finance and pro­gram direc­tor of impact invest­ing at the Kel­logg School and chair­man of Equi­lib­ri­um Cap­i­tal Group, to dis­cuss the future of impact investing. 

This inter­view has been edit­ed for length and clarity.

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Kel­logg Insight (KI): How is impact invest­ing today dif­fer­ent than it was, say, five or ten years ago? 

Amit BOURI: We are see­ing more client demand. Peo­ple are revis­it­ing the rela­tion­ship they want their cap­i­tal to have with the world. They are seek­ing a role for cap­i­tal to play beyond just max­i­miz­ing prof­its for a giv­en lev­el of risk, and think­ing about social and envi­ron­men­tal issues that can be addressed through investment. 

We’re see­ing this from wealthy indi­vid­u­als who have a lot of cap­i­tal, as well as con­trol and influ­ence over how that cap­i­tal is invest­ed. But we are also see­ing this from ordi­nary cit­i­zens, pen­sion­ers who are ask­ing those pen­sion funds to respond to local com­mu­ni­ty issues, or glob­al issues like cli­mate change, through their invest­ment strategies. 

David CHEN: A lot of the first-gen­er­a­tion impact prod­ucts were ven­ture cap­i­tal funds that tar­get­ed devel­op­ing countries. 

But in the last few years, you’ve seen both sus­tain­able invest­ing and impact invest­ing expand beyond the ven­ture cap­i­tal mod­el into instru­ments across the entire asset allo­ca­tion, includ­ing pri­vate equi­ties, pub­lic equi­ties, fixed income and debt offer­ings, and real assets.

We’re find­ing that main­stream invest­ment firms are respond­ing to two pri­ma­ry cat­a­lysts. Their clients are look­ing for impact-invest­ing strate­gies. You have one group of investors ask­ing for impact prod­ucts who tend to think, my mon­ey should do more than bring returns.”

Then you have insti­tu­tion­al investors who have a slight­ly dif­fer­ent focus. They are think­ing about sus­tain­abil­i­ty as affect­ed by glob­al demo­graph­ics, resource con­sump­tion, asset pro­duc­tiv­i­ty, and cli­mate change. Insti­tu­tions exam­ine their port­fo­lios from a risk-man­age­ment stand­point: If these fac­tors are in fact real, what do we have to be doing to pro­tect our long-term assets? How can we make sure that we are ben­e­fit­ing from these trends and rid­ing the right macro­eco­nom­ic shifts?

Tra­di­tion­al invest­ment firms are respond­ing to both sets of client require­ments. In the past five years, we have moved from white papers and strat­e­gy to main­stream tra­di­tion­al invest­ment firms bring­ing out prod­ucts. The qual­i­ty of these prod­ucts has dra­mat­i­cal­ly increased over the past 24 – 36 months.

BOURI: And this diver­si­fi­ca­tion is key. Peo­ple are explor­ing how they can achieve impact through­out their port­fo­lios. As Dave men­tioned, there are impact-invest­ment strate­gies in a vari­ety of asset class­es, from low-risk, low-return cat­e­gories like cash man­age­ment all the way up through high-risk, high-return alter­na­tive spaces.

Some larg­er insti­tu­tion­al firms are start­ing in a spe­cif­ic sec­tor — maybe some­thing like micro­fi­nance or renew­able ener­gy — and then diver­si­fy­ing from wher­ev­er they begin. Oth­ers are start­ing with a spe­cif­ic allo­ca­tion toward impact invest­ing and then tak­ing a mul­ti-sec­tor approach. Tra­di­tion­al firms like Bain Cap­i­tal, or more recent­ly Texas Pacif­ic Group, have launched ded­i­cat­ed impact-invest­ment funds and are either build­ing a team inter­nal­ly or part­ner­ing with strate­gic part­ners to exter­nal­ly man­age those funds.

KI: What areas are investors iden­ti­fy­ing for invest­ment opportunities?

CHEN: Spe­cif­ic exam­ples include car­bon cred­its to ful­fill the Cal­i­for­nia AB 32 car­bon cap pro­to­cols, water, renew­able ener­gy includ­ing solar and wind, and afford­able housing.

The scal­ing of sus­tain­able organ­ic farm­ing is anoth­er oppor­tu­ni­ty area. Most peo­ple, when they use the words organ­ic farm­ing,” think about farm stands. They’re not think­ing about the fact that every gro­cery store in the U.S. car­ries organ­ic veg­eta­bles and fruits. What farm sys­tem is nec­es­sary to make that happen? 

KI: How can investors iden­ti­fy local, region­al, nation­al, or glob­al invest­ing opportunities? 

BOURI: One of the things that GIIN is invest­ed in is build­ing a com­mu­ni­ty, a net­work of investors. Our mem­ber­ship is now over 230 orga­ni­za­tions, in 32 coun­tries. Hope­ful­ly, through those con­nec­tions, we will help facil­i­tate the flow of oppor­tu­ni­ties, ideas, and capital.

We also have tools like Impact­Base, which is a free, search­able online direc­to­ry of impact-invest­ment funds and prod­ucts avail­able to accred­it­ed investors. It start­ed with about 30 impact-invest­ment funds and prod­ucts, and now has over 400. You can use this tool to get a sense of the oppor­tu­ni­ty that is out there.

The com­ment I couldn’t find these prod­ucts’ may have been accu­rate three years ago — but today there’s no excuse for not being able to iden­ti­fy the best-in-class prod­ucts.” —David Chen

CHEN: Many of the port­fo­lio con­sult­ing firms that serve the large endow­ments, foun­da­tions, and pen­sion plans are build­ing sig­nif­i­cant data­bas­es of impact- and sus­tain­able-invest­ment funds. The com­ment I couldn’t find these prod­ucts” may have been accu­rate three years ago — but today there’s no excuse for not being able to iden­ti­fy the best-in-class products.

KI: What steps can star­tups take to get on the radar of impact investors?

CHEN: Keep in mind that Ven­ture cap­i­tal rep­re­sents less than one per­cent of the total asset allo­ca­tion — even if they occu­py 90 per­cent of our cock­tail-hour con­ver­sa­tions. Star­tups are a very small part of insti­tu­tion­al portfolios. 

But to the extent that firms want to make them­selves more attrac­tive to social and impact ven­ture funds, they need to move beyond slideshows. The world has now moved to quan­tifi­able met­rics. No mat­ter what met­rics you use, show me tan­gi­bly how you’re impact­ing lives, how you’re impact­ing the envi­ron­ment. Don’t show me a slideshow that says, We’re bet­ter for poor peo­ple.” I want to know how. This need for quan­tifi­ca­tion has increased.

One mis­take that social enter­prise entre­pre­neurs will make is to think that they will be treat­ed dif­fer­ent­ly because they’re chang­ing the world — that the bench­marks will be loos­er or more char­i­ta­ble when investors look at them. That’s no longer the norm or the expec­ta­tion. If we invest in a firm, we expect good per­for­mance, sol­id growth, prof­itabil­i­ty, and the abil­i­ty to sus­tain growth. Just because you’re solv­ing the woes of soci­ety, you don’t get off the hook on that.

BOURI: Rig­or in terms of a business’s strat­e­gy and oper­a­tions is real­ly crit­i­cal, from both finan­cial-per­for­mance and impact stand­points. You don’t get a free pass on either of those just due to good inten­tions. Rather, you need to be incred­i­bly thought­ful about how you’re going to be a suc­cess­ful busi­ness and sophis­ti­cat­ed about how you’re going to achieve an impact. Nei­ther of those is par­tic­u­lar­ly easy to do, but both are cer­tain­ly possible. 

CHEN: If you want to change the plan­et, you bet­ter learn your way around a spreadsheet.

KI: What do you see as the future of impact investing?

BOURI: When we start­ed the GIIN sev­en years ago, big firms stood out if they were doing impact invest­ing. I think we’re mov­ing to a world in which you’ll start to stand out if you’re not doing impact invest­ing in some way or another. 

What is real­ly excit­ing is we’re see­ing the pro­fes­sion­al­iza­tion of this field — a tran­si­tion from it being a niche mar­ket to some­thing much more main­stream. The adop­tion of impact-invest­ment strate­gies — the pur­suit of them around the world, from major insti­tu­tion­al investors to indi­vid­ual investors — real­ly speaks to a pow­er­ful trend that we hope con­tin­ues for quite some time. 

We’re still in the ear­ly stages of under­stand­ing the true impact that invest­ing can have in terms of any num­ber of social and envi­ron­men­tal issues. We have a strong evi­dence base now, a track record in the mar­ket, but we haven’t hit the bound­aries. I don’t think we’ve even approached them in terms of the impact that we can have. That’s why this mar­ket is so excit­ing for me per­son­al­ly — and I think there is still an oppor­tu­ni­ty for every tal­ent­ed indi­vid­ual to make their mark in this market.

CHEN: Knock on wood that it actu­al­ly stays in place, but the 2015 ERISA clar­i­fi­ca­tion from the Depart­ment of Labor says it all — basi­cal­ly, that while cor­po­rate pen­sion plans still have a pri­ma­ry fidu­cia­ry duty to the pen­sion­ers and to the pen­sion plan, envi­ron­men­tal, social, and gov­er­nance (ESG) fac­tors are to be viewed as mate­r­i­al input into the invest­ment deci­sions process. 

Which means fidu­cia­ries have per­mis­sion in their legal juris­dic­tion as pen­sion trustees to con­sid­er ESG as a legit­i­mate part of the invest­ment deci­sion-mak­ing process. This sets a tone for the future that these fac­tors are just anoth­er part of good, sound investing.

Featured Faculty

David Chen

Adjunct Professor of Finance

About the Writer

Fred Schmalz is the business editor of Kellogg Insight.

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