Can Investors Have a Positive Impact?

Measuring Impact Remains a Challenge for Investors

463580549.jpg

With record levels of interest, new efforts continue to emerge to try and help investors have a positive impact on society with their investment dollars, but how is this area of work doing, and how can it really become effective?

We previously featured an article early last year from a guest author on this subject, but what has happened since?

BlackRock, the world's largest investor with 4.5 trillion dollars of assets under management, is one of many with brand new "impact" offerings, but have only garnered 20 million dollars in assets or .0004 percent of their assets.

JPMorgan's excellent "Eyes on the Horizon" report from May 2015 saw less than 100 billion dollars invested in impact investing, with most of the allocations made towards access to healthcare, education and financial services for those less well off.  Noble causes to be sure, but if your interest is in the environment, then a key question becomes is impact investing for everyone, and what is it and what is it not?

Some definitions of impact investing include renewable energy and other low-carbon solutions, but with Bloomberg New Energy Finance seeing 318 billion in 2014 (and a bit more than that if you include M&A activity), that clearly is a much larger figure than the JPMorgan one above, yet some definitions of impact investing include environmental solutions.

This causes great confusion in the market, so our recommendation would be to clarify that impact investing is really social impact, but that doesn't work either for the following reasons:

1)  A classic example of impact investing would be a First Nation in Canada financing a wind farm for its own energy consumption.  This would result in the ideal triple play of a local benefit, an environmental benefit, and a financial return.  And so impact investing can at least in some cases bridge environmental, social and financial realms.

2)  Then there is the Ford Foundation.  This excellent article highlights the Ford Foundation's new commitment to solve for inequality as the complete new remit of the foundation through President Darrell Walker.  

Is it useful to limit impact investing then to social realms, especially if as in the example in 1) above, there can be environmental and social benefits from a single investment?

Yet, practices to date are a mere drop in the bucket of investment overall.  Hence the Ford experience will be very important.

All this said, one problem impact investing has yet to solve for is the fact that every investment could have both positive and negative impacts, certainly from an environmental perspective.

We applaud experimentation with social constructs from B Corporations and the related Benefit Corp construct as well as other forms of social capital, and environmental investment attempts such as Climate Bonds.

However, given that all investments can have negative impacts such as carbon dioxide and other greenhouse gas emissions, it is important for all investors that the net impacts of any investment are understood.

This way environmental investments can build confidence and integrity unlike say corn-based ethanol which turned out to have quite a few negative ramifications such as higher food prices or hydro power instances which turn out to not be of net benefit to the environment.

Only through understanding and demonstrating a true net benefit will investment experiments gain traction among a larger group of public investors.  This remains an enormous opportunity for the financial sector in regaining confidence lost during the last financial crisis and not yet fully regained.  

And it includes asset classes such as Infrastructure as well where standards for sustainability are still a work in progress with new coalitions forming, a new standard with net impacts embedded would seem a necessary outcome for success.

Goldman Sachs saw the importance of this trend and recently acquired Imprint Capital last year and I personally don't recognize this Lloyd Blankfein.

But if there's money to be made, Goldman will be all in, and that would be a good thing if better net impacts on society would be the end result.

For investors interested in all they can do, one would refer to the recent work of the PRI where a Framework for Action emerged.  This involves making intentional choices on impact investment solutions on environmental and/or social criteria, combined with engagement with companies, policymakers and outsourced fund managers, and to sell positions only after a thoughtful process.  

(Consumers can also have a voice by caring more about where and how the products they buy and the food they consume are made.)

While aimed at large asset owners, this new PRI Framework also can apply to individual investors by:

A)  Make intentional investment choices and let your brokers and mutual funds know what you want and why

B)  Vote your proxy statements and otherwise use your voice as a shareholder, and

C)  Sell positions which no longer fit your personal values and have no business case, and perhaps buy more of companies who do have both of these features.  

Then you will join the ranks of large, thoughtful investors such as AXA in Europe, as well as Norges Bank and the large Dutch pension funds, who have taken these sorts of steps.

You can have a positive impact as an investor, as long as you are thoughtful, and you might just outperform at the same time.