New ‘Ammunition’ For Impact Investing

Jacob Gray of the Wharton Social Impact Initiative. Courtesy photo

Jacob Gray of the Wharton Social Impact Initiative. Courtesy photo

LOOKING FOR THE ‘RED HERRING’ OF IMPACT

But the limitations still exist. As Gates and others have asked, should one really expect any sort of return on an impact investment besides social or environmental return? And even if the answer is a yes, how do you begin to measure social or environmental impact? For that matter, how do you compare one organization’s social impact to another to make the most worthwhile investment?

“The biggest challenge from a researcher’s perspective is how we start to measure and report on social impact in any kind of way that’s different from a series of anecdotes,” Gray says bluntly. “The field needs to settle on something—and relatively quickly, I think—if it’s going to communicate properly about the impact.”

However, deciding on a universal measurement very well could be impossible, admits Gray. For instance, social impact and measuring that impact not only differ from organization to organization, Gray says, but from people to people, too.

“Maybe we’re looking for a red herring and instead what we ought to be doing is kind of what we’re doing right now, which is saying, hey this field is worthy of your scrutiny—and the whole spectrum is worthy of your scrutiny—so if you’re sitting on the sidelines, take a look at these market rate funds producing and then take a look at some that aren’t and make a very subjective judgment call about what is important to,” Gray explains. “What kinds of impacts are important to you? Because your desired impact in the world is probably going to be different from mine.”

ADVICE FOR THOSE READY TO GET SOME SKIN IN THE GAME

For those wanting to jump off the sidelines and explore impact investing, Gray says to re-think your advisor. “If your advisor is saying they don’t have any offering in this space or if they are saying some sort of blanket statement about competitive returns not being possible, you might want to re-think them,” Gray says.

The ‘off the sidelines’ part is key too, explains Gray. “This isn’t the space yet where you can make a decision in half an hour and sort of dust off your hands and say that’s it,” he says. “Because there is such a qualitative and subjective nature to the impact. You’re going to have to dig in yourself to some of this stuff.”

So it’s essential to know yourself and the impact you want to make.

“Know the impact that you want to see,” Gray insists. “It’s a lot easier to come into it and say, I really care about economic development in sub-Saharan Africa and then find someone who’s doing that kind of work. It’s a lot easier to say that than say, I want to find who’s making the biggest difference in the world and invest in them. Because that’s just a wild goose chase.”

A real-life example of this is whe Dutch development bank, FMO, invested in a company called Clean Energy solely to finance Mongolia’s first wind farm.

ASKING THE ‘BEN & JERRY’S QUESTION’

As more research like the Wharton study surfaces, ‘mainstreaming’ impact investing will persist.

“This field for a long time has been focused on what’s the next concern,” Gray says. “First it was, well there aren’t enough investors. Then it was, well we don’t know if there are going to be exits in the field. What appears to be one of the issues that was raised very early on was will mission persist through these exits.”

Gray likens the question to Unilever’s purchase of Ben & Jerry’s in 2000.

“It’s kind of like the Ben & Jerry’s question,” Gray claims. “What’s going to happen to Ben & Jerry’s when it gets sold to Unilever? Is the social mission going to be enhanced? Is it going to be degraded? And we know by at least one measure, a lot of social missions are going to be persisting.”

In these instances, Gray says to look at the history of the company’s leader.

“There’s no substitute for the ethical commitment to mission of the owner of the company,” explains Gray. “And I think those people who are really serious about wanting to see these companies grow and thrive might want to consider longer-term investment strategies.”

Which could be the key to seeing social impact through, Gray claims.

“It’s not a normal private equity five to seven year hold,” he says. “But thinking more in the way of Berkshire Hathaway thinks about investing and invest in a very long-term value and growing the companies up from relatively small to large and powerful. And that’s a new headset for the space, but if we really want to see the social mission persist over time, it may mean we have to think a little bit differently about the model that might stop looking like traditional private equity in that sense.”

‘A LACK OF UNDERSTANDING IN HOW TO USE IMPACT INVESTING’

If all of this comes off as ambiguous or convoluted, you’re not alone. A September Barclays Study also examining impact investments found that while a large amount of investors want to participate in impact investing, only about one in 10 have actually done it.

“The key problem our research uncovers is a lack of understanding in how to use impact investing most effectively to meet investor’s financial and social goals,” the report reads. “Many, daunted by even standard investing, quite reasonably shy away from the added complexity of incorporating social good. Most find the sector difficult to understand and navigate.”

DON’T MISS: THE FUTURE OF RESPONSIBLE INVESTING; NET IMPACT CEO LIZ MAW ON THE STATE OF SUSTAINABILITY & SOCIAL ENTERPRISE

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