Can Impact Investing Change the World?

More Capital Is Needed to Scale Good Ideas to Benefit Society

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Impact Investing is an exciting, arguably new way to invest while attempting to have a positive impact on society.  

The concept involves attempting to create investments which have a financial benefit, a local benefit and an environmental or social benefit as well, all at the same time. A classic example would be financing a wind farm on a First Nation in Canada, which would have a financial, environmental and local positive outcome all at the same time.

One says that Impact Investing is arguably new as other forms of investing for the benefit of local communities have been in place for some time, such as the work of the Calvert Foundation for just one example. Community investing in fact was the financially outperforming sector of 2008, the year of the Global Financial Crisis, which argues that Impact Investing could be looked at as something of a hedge, especially these days where every traditional asset class appears to be at full value.

At any rate, how is Impact Investing doing, and what is it really capable of?

Organizations to Watch for Impact Investing

Three organizations to watch on this subject are: 

  1. The Rockefeller Foundation, something of the original champion of this cause, who hosted an event where this phrase was first championed back in 2007.
  2. JPMorgan, who has published leading reports on this field and its ongoing progress, and
  1. The Global Impact Investing Network (known most commonly as the GIIN)

JPMorgan's Eyes on the Horizon report from 2015 is still worth a look. The report found $60 billion in investments seeking Impact, most of which were in access to healthcare, housing, financial services, education. Only 10 percent or $6 billion was in energy, not very much if you think about it.

Impact Investing's Potential for Solving Social Issues

Still, Impact Investing retains much potential, at a minimum, to help solve social issues. An example of where this is working somewhat well pertains to so-called Social Impact Bonds designed to help reduce recidivism.

Partnerships between government and investors, for example, have been struck to share the societal benefit of projects which help people stay out of jail, reducing costs to society through reducing the number of prison cells required. Such bonds can yield as much as 10 percent or more, creating an ideal scenario of dividends in a returns-challenged year as well as a positive societal outcome.

Social Impact Bonds have not been without their challenges, as Goldman Sachs' first attempt was not successful, but the potential remains.

Microfinance, small loans to the neediest to help them start new businesses can also be considered a form of Impact Investing, as it was in this JPMorgan report, but not all see it that way.

Size of Impact Investments

This 2016 report of the GIIN surveyed as many impact investors as they could find and 156 with 77.4 billion in impact investing assets responded. The field is, therefore, approaching 100 billion.

Even 100 billion would be a relatively small amount versus the size of other asset classes such as the much larger private equity and venture capital spaces, let alone the 70 trillion in value of publicly traded companies.

B Corporations and Benefit Corps

Another way of leapfrogging these ideas would be for more public and private companies to become B Corporations or Benefit Corps.

B Corporations are certified to have met certain standards for community and employee relations as well as good governance and environmental consciousness. 1,888 companies have achieved this certification to date, including large public companies such as Natura in Brazil, which has a score of 88 out of 200. 80 or more is required to achieve certification. 

Interestingly, B Corporation lists 55 as the median score of those who have taken the assessment, inferring that many more companies are examining whether they qualify than actually make the cut.

If 10 percent of public companies achieved this level of certification it would be one way for social businesses to achieve meaningful scale.

Benefit Corps differ from B Corporations in that they establish in their by-laws a commitment to return value to all stakeholders, not just shareholders: another interesting trend to watch.

As an example, highlights of their assessment are as follows:

  • Governance: Performance evaluation includes execution of company's social or environmental mission and goals; Board reviews social and environmental KPIs; Company produces a public-facing annual report that is reviewed/validated by a third-party.
  • Workers: Provides private supplemental insurance to full-time employees; >75% of employees participate in company’s profit-sharing plan; new employees receive an average amount of training 1 week-1 month.
  • Community: >50% of managers are women; Company has advocated for positive reform at private, local and international levels to improve environmental standards; Company contributed 3% of profits to public education and community investment; Works with small community suppliers and provides technical assistance to improve their sustainable operations.
  • Environment: Company tracks and reports on environmental aspects of Significant Suppliers' operations, including energy use, water use, and waste; Company has studied the GHG emissions of its entire operation and supply chain and had a carbon neutral program with strategies for improvement; Company uses renewable energy generated on-site."
  • See their full assessment from November 2014. B Corporation has added a 5th score on Customers since this assessment was made.

Natura claims to be seeking "to become an international brand, identified with the community of people who are committed to building a better world, based on better relationships with themselves, with other people, and with the nature they are part of. More than contributing to society with the adoption of sustainable practices, we wish to promote a growing movement of awareness and search for solutions to a more balanced and fair future with a social, economic, and environmental perspective."

Unilever claimed to be attempting to follow suit back in 2015, which would be a major coup, but a search of the B Corporation did not find the company certified as of yet.  Unilever's subsidiary Ben and Jerry's is a B Corporation however with a score of 101 and has been certified since 2012.

Another noteworthy B Corporation is Method whose consumer friendly cleaning products scored 132 and features four full reports at the B Corporation website going back to 2007.

Method claims to "run its business in a values-driven manner, building social & environmental benefit into its products and everything it does. Method relies on green chemistry to power our formulas. Our team of formulation chemists (known as the green chefs) finds and develops advanced applications of innovative materials, relying on smart science rather than hazardous concentrations of conventional chemicals with unknown effects. Every material method uses is assessed by an external material science firm to ensure health and environmental safety."

Top-Down for Impact Investing?

Another mark of progress for Impact Investing is the offerings all the banks are rushing into, including the aforementioned Bank of America, Goldman Sachs, and JPMorgan as well as Morgan Stanley.

Some argue for Impact Investing to be championed by smaller players, but it would seem optimal to let a top down, bottom up race for quality play out and let the best solutions win.

BlackRock, the world's largest investor managing roughly $4.5 trillion, blends Impact and Sustainable Investing, and there can be grey areas between the two to be sure. In less than a year after joining BlackRock, Deborah Winshel was helping to set strategies for $7.5 billion in investments including $6 billion in renewable energy.

The other large banks mentioned above also have seen billions of dollars of new capital come in for a range of solutions and have been hiring extensively. In decades past. these firms had very few if any staff dedicated to these questions.

These are some of the signs of progress we are seeking. How much more capital is needed to solve the world's problems? Many are still left behind by the modern economy to be sure, whether through the forces of globalization or automation, making the rise of social business one of the best areas of hope for us all.