We at BNY Mellon applaud the Global Impact Investing Network and Cambridge Associates for pulling together data that confirms what committed investors have long understood—that impact investing can generate positive financial returns and play an important role within investors’ portfolios. It’s an important milestone in the continued development of the market.
We hope that, going forward, others in the social finance space—including those working with SRI (screening), environmental finance and development finance—will use the Impact Investing Benchmark as a call to action and develop metrics that allow investors to assess these opportunities against standardized financial and social performance criteria. Overcoming this measurement challenge is critical to unlocking the full potential of social finance, translating growing investor interest into significant capital flows into social finance investments.
I was a huge proponent of SRI in the very early 90’s when with Susan Davis I co-created a series of events and programs that led to the investment and business thesis of, “Making A Profit While Making A Difference”. However, having seen SRI morph into ESG, TBL, and most recently Impact, I have been a proponent (since 2000) of writing a very heartfelt and classy obituary for all of them as I believe the nomenclature itself has been polarizing and that there is a real danger of the “baby being thrown out with the bath water”. The baby in this case being the underlying investment and business imperatives that SRI, TBL, ESG and Impact are all founded upon, i.e., the use of humanitarian and environmental screens in selecting the assets and instruments that will eventually deliver the future’s highest and most sustainable returns for all stakeholders, including financial. We all know that capitalism abhors high rates of return (including the generation of fees) and moves to kill them. Whether the tulip market in the 17 century, or the derivative/real estate debacle of 2008, there are numerous examples in history of how markets and assets can, and continue to, implode. Based upon this thesis, our Foundation is fearful that many of the overnight “experts” throwing themselves into raising capital for and/or running Impact funds and deals will unconsciously implode Impact Investing resulting in a lack of investor confidence in the underlying imperative investment thesis upon which it is built.
At the request of a client, our Foundation recently conducted research to gather the following information about the Impact Investing “industry”:
1. The average length of experience of companies and executives working within Impact who are:
Forming, raising or running Impact funds;
Raising capital for funds;
Promoting direct Impact Investments;
Running Impact companies looking to raise Impact capital.
2. The average historical returns generated by Impact fund managers within any other fund they ran/worked at.
3. The percentage of funds that are first time funds.
4. The percentage of fund managers who are raising a first time fund.
5. The average financial returns that executives involved in Impact Investing believe investors should receive based upon the addition of “Impact”.
Above market returns market returns.
25% below market.
50% below market.
75% below market.
No financial return.
Loss of capital.
6. The average tenure in financial services of executives now in Impact Investing and the average tenure within true asset management.
The above results were benchmarked against what is deemed acceptable experience in the “main stream” for GP’s to raise and manage capital.
Secondly we reviewed as many Impact Investment memorandums as we could and found (in our opinion) too many cases where the likelihood of a return of capital, let alone an ROI, appeared very unlikely. The question we pose for these instances is why not make “the ask” a charitable donation? We have our thoughts, we are sure you will have yours.
Needless to say, we have become quite unpopular in some circles when we liken sectors of the “industry” of Impact Investing to the derivative debacle where bright people took a perfectly good asset and sliced and diced it six ways to Sunday purely to generate new, incremental, and excessive fees. We all witnessed what the result of that was. However, our lack of popularity in some circles is balanced (and quite frankly exceeded by) the way our thesis has been received by numerous CIO’s of plan sponsors, endowments, foundations and private family offices, as almost 100% of them agree with us.
The use of humanitarian and environmental screens in identifying the assets or instruments that will likely deliver the future’s highest and most sustainable returns for all stakeholders is growing exponentially, and in our opinion is nothing more or less than the next evolution in investing. This is being driven by:
Climate change becoming a reality in the minds of many more investors and consumers who are now using humanitarian and environmental screens as imperative factors in where they buy their products and/or services and invest their capital (see point 6 below to understand that this is not just the “retail” market).
The ubiquity of information making it much easier for consumers and investors to obtain the data they require to align their purchases and investments with their values.
The transition in leadership from the value systems of the Baby Boomers to those of the next generation.
Technology driving market efficiencies for the widespread use of clean renewable energy resulting in the potential of significant stranded assets.
The use of environmental and humanitarian screens as measures to develop risk/return metrics for investments in portfolio companies, real assets and financial instruments expanding among investment managers.
Private family offices, endowments, foundations and even plan sponsors continuing to shift their capital into what are deemed conforming or compliant investments. Almost $6 Trillion has been shifted since 2009.
Decisions by Fortune 1000 corporations to procure all of their products and services from fully sustainable supply chains resulting in thousands of global corporations and SME’s having to adopt compliant stewardship programs.
Emerging market countries building their entire emerging economies on the principles of People, Planet, Prosperity.
The 80,000,000 Millennials in the US (representing 4.4% of the global Millennial population) who are going to inherit over $30 Trillion and over 60% of them (more than 48,000,000 soon to be leaders, decision makers, consumers, investors and donors) believe that corporate profit and investment returns need to be values aligned.
Given the above and the fact that the underpinning of the majority of the total return strategies for many of the worlds largest asset allocators remains long term value investing, why are we polarizing SRI, ESG, TBL and Impact when the underlying thesis they were all built upon should become standard screens used across 100% of portfolios?
Our summary of all of this is one of great concern as too few of those blinded by the exuberance of the Impact Investing “industry” are considering the implications of a market implosion. Of course, there are numerous incredible people and managers who are exceptions to our thesis, but, having had a ring side seat for the rapid growth and eventual spectacularly damaging collapse of the ABS industry, we are afraid the “industry” of Impact Investing is mirroring the mistakes made by the ABS market.
We believe it is time to stop “selling” the idea of Impact Investing and move directly to helping asset, wealth and investment managers embrace the latest evolution in investing which is the use of humanitarian and environmental screens as overlays to the existing financial risk/return metrics and screens across 100% of portfolios.
Well said. I remember Susan’s work well, via SVN. I have stated similar concerns as the Social Responsibility of the early 90s (triple bottom line) has moved to sustainable business, which incorporates enthusiasm for the next potential home run green widget and rarely mentions anything about “people.” After a piece I wrote, I remember that I had one reply that said “sustainable business and social justice are two separate issues.” So, thanks. The increasing opportunism in the Sustainable Investing space is troubling. I continue to consult every single day with small, often fragile, socially responsible early stage businesses that incorporate all three legs of the stool into their mission. It ain’t easy, but their passion and their purpose continue to inspire me.
GIIN have worked tirelessly to raise the profile of impact investing and to establish it as a mainstay in the investing landscape. But this article, as well as the report that it is based on, blithely skip over a full half of the topic: The name of the game is ‘impact investing’, but where is impact to be found?
In the benchmark report there is a strong focus on financial returns, and the resulting buzz is all about enabling fund managers to finally take the plunge into this new asset class. The uncomfortable truth is that in order to exploit the real potential of impact investing, impact must be taken to heart and operationalised. Needing to go that extra mile is something that we must make newcomers aware of, and not simply sweep it under the ‘market-returns’ rug. I’ve voiced similar concerns in a Forbes article together with Ashoka ( http://onforb.es/1NEbbqk ) and on Impact Alpha ( http://impactalpha.com/impact-investing-financial-returns-are-only-half-the-story/ ).
I hope this debate will remain open until an appropriate solution is found: One where the relation between social and financial returns is balanced and transparent.
Cambridge Associates and the GIIN are to be commended for introducing the Impact Investing benchmark last August. The benchmark adds to the accumulating data on impact investing, and also provokes some further thinking about how benchmarks like this can help and hinder the realization of impact investing’s potential.
To the authors’ credit, they are careful to point out how this first iteration of the new benchmark may not be a good comparable for many impact portfolios:
• The benchmark only includes data from PE and VC funds that target “risk-adjusted market rate returns”, while, JP Morgan’s 2015 impact investor survey finds that 45% of impact investors target below market returns.
• The report notes that Cambridge tracks 392 PE and VC funds for its MRI database; the benchmark is based on data for 51, or 13%, raising the likelihood of selection, in addition to survivor, bias.
• Even in this small sample, something less than half have largely completed the typical ten year life so the results rely on – usually optimistic!—projected results.
• Over 50% of the total capital of the funds analyzed is directed towards Africa; this compares with the JP Morgan survey which finds less than 16% of total AUM of the impact investors it surveyed were directed to that region.
These mismatches likely explain some of the discrepancy between the benchmark’s realized and unrealized returns of 6.9% and those actually realized by some impact investors to date.
Grassroots has compiled data on the nine microfinance PE and VC funds launched in 2001-2005: microfinance remains the largest impact sector after housing, and these nine funds should be nearing full liquidation. Four have in fact largely liquidated on schedule; two extended under duress and the other three are only partially liquidated. Excluding the early estimates for these three, the other six are returning roughly 3%, on weighted average, to LPs. In contrast to the GIIN/Cambridge benchmark, there is no selection or survivor bias in this data set: the nine funds encompass the entire universe of microfinance equity funds of that first vintage.
It can be debated whether the GIIN / Cambridge or the inaugural MF vintage data set more accurately reflects the financial returns impact investors are likely to realize going forward. But the more fundamental issue is the context in which financial return should be viewed, and it is from this perspective that the GIIN / Cambridge benchmark threatens to distort investor perspectives and inadvertently promote an approach to impact investing that will corrupt the concept and undermine its potential.
The GIIN / Cambridge benchmark frames a question: can comparable or greater financial value be created by applying an impact approach to a business or investment? And it appears to confirm intuition and anecdotal evidence: of course it can! There are many examples of “impact” businesses that command premium prices and profit margins and enjoy exceptional customer loyalty and employee productivity. Can greater profitability be generated by adding impact to a product’s features? Will customers pay more, employees be more productive? Might investors offer better terms? The answer is clearly yes. In particular, positioning products to appeal to the non-financial values of affluent customers with substantial discretionary spending can increase profitability.
But this type of win-win opportunity does not always occur. Unfortunately, not all our social and environmental challenges can be solved by selling premium-priced products to affluent consumers. In contrast, if we are talking about very poor customers with limited disposable income and few choices for quality products, the idea of them choosing to pay more makes no sense. In this case, should impact investors still require that providing essential services to such clients nevertheless beat a conventional financial benchmark?
As many commentators have noted, impact investment is not an asset class, it is an approach to defining and creating value in any asset class. Conventional investment defines value solely in terms of the financial dimension – returns, volatility, correlation – from the perspective of a single stakeholder group – shareholders. In contrast, impact investing is the proposition that value should be defined in multiple dimensions – environment, community cohesion and resilience, economic justice, gender equity, as well as financial parameters – and with respect to multiple stakeholder groups – employees and customers, their families, the immediate and the global communities. Each impact investor can weight these stakeholder groups and types of value differently, but when they collapse back towards financial value to shareholders, as the benchmark seems to encourage us to do, there is a legitimate question of why we bother to distinguish it from conventional investing, other than for marketing purposes.
By positioning superior financial returns as the threshold consideration and key driver for impact investors, the GIIN / Cambridge benchmark implicitly demotes the other dimensions of value that in our view give impact investing its meaning and transformative potential.
Some impact investors see an opportunity for a high multi-dimensional return from providing poor customers with high quality essential services – health care, housing, financial products, skills training – even if the financial dimension may not match or better conventional comparables. Others might see a compelling value proposition in an investment that addresses environmental degradation or climate change, even if the financial value creation did not beat conventional benchmarks.
But by applying the conventional value lens to one dimension of value and one stakeholder group, the benchmark reinforces the tendency to ignore the core questions that every impact investor needs to answer – What kinds of value are being created? And for whom? – and instead reverts to the conventional and antithetical view that money is the measure of all things. Prioritizing financial performance as the primary or the threshold dimension of value cramps and ultimately extinguishes the transformative potential of impact investing.
Going forward, we hope that the next iteration of this and other benchmarks will explicitly highlight the other types of value being created and for whom. Only in this way can impact investing continue to transform the relationship of values-driven investors to the capital markets, and shift more capital markets activity from enabling destructive activities to promoting solutions to poverty, economic injustice, environmental degradation and our other pressing challenges. Without including these multiple value and stakeholders in the forefront of all discussions of impact investing we risk losing its potential for good, and condemning it to a short life as a marketing fad.
COMMENTS
BY John Buckley
ON September 4, 2015 10:03 AM
We at BNY Mellon applaud the Global Impact Investing Network and Cambridge Associates for pulling together data that confirms what committed investors have long understood—that impact investing can generate positive financial returns and play an important role within investors’ portfolios. It’s an important milestone in the continued development of the market.
We hope that, going forward, others in the social finance space—including those working with SRI (screening), environmental finance and development finance—will use the Impact Investing Benchmark as a call to action and develop metrics that allow investors to assess these opportunities against standardized financial and social performance criteria. Overcoming this measurement challenge is critical to unlocking the full potential of social finance, translating growing investor interest into significant capital flows into social finance investments.
John Buckley
Global Head of Corporate Social Responsibility
http://www.bnymellon.com/socialfinance
BY Stuart Williams
ON September 7, 2015 11:54 AM
I was a huge proponent of SRI in the very early 90’s when with Susan Davis I co-created a series of events and programs that led to the investment and business thesis of, “Making A Profit While Making A Difference”. However, having seen SRI morph into ESG, TBL, and most recently Impact, I have been a proponent (since 2000) of writing a very heartfelt and classy obituary for all of them as I believe the nomenclature itself has been polarizing and that there is a real danger of the “baby being thrown out with the bath water”. The baby in this case being the underlying investment and business imperatives that SRI, TBL, ESG and Impact are all founded upon, i.e., the use of humanitarian and environmental screens in selecting the assets and instruments that will eventually deliver the future’s highest and most sustainable returns for all stakeholders, including financial. We all know that capitalism abhors high rates of return (including the generation of fees) and moves to kill them. Whether the tulip market in the 17 century, or the derivative/real estate debacle of 2008, there are numerous examples in history of how markets and assets can, and continue to, implode. Based upon this thesis, our Foundation is fearful that many of the overnight “experts” throwing themselves into raising capital for and/or running Impact funds and deals will unconsciously implode Impact Investing resulting in a lack of investor confidence in the underlying imperative investment thesis upon which it is built.
At the request of a client, our Foundation recently conducted research to gather the following information about the Impact Investing “industry”:
1. The average length of experience of companies and executives working within Impact who are:
Forming, raising or running Impact funds;
Raising capital for funds;
Promoting direct Impact Investments;
Running Impact companies looking to raise Impact capital.
2. The average historical returns generated by Impact fund managers within any other fund they ran/worked at.
3. The percentage of funds that are first time funds.
4. The percentage of fund managers who are raising a first time fund.
5. The average financial returns that executives involved in Impact Investing believe investors should receive based upon the addition of “Impact”.
Above market returns market returns.
25% below market.
50% below market.
75% below market.
No financial return.
Loss of capital.
6. The average tenure in financial services of executives now in Impact Investing and the average tenure within true asset management.
The above results were benchmarked against what is deemed acceptable experience in the “main stream” for GP’s to raise and manage capital.
Secondly we reviewed as many Impact Investment memorandums as we could and found (in our opinion) too many cases where the likelihood of a return of capital, let alone an ROI, appeared very unlikely. The question we pose for these instances is why not make “the ask” a charitable donation? We have our thoughts, we are sure you will have yours.
Needless to say, we have become quite unpopular in some circles when we liken sectors of the “industry” of Impact Investing to the derivative debacle where bright people took a perfectly good asset and sliced and diced it six ways to Sunday purely to generate new, incremental, and excessive fees. We all witnessed what the result of that was. However, our lack of popularity in some circles is balanced (and quite frankly exceeded by) the way our thesis has been received by numerous CIO’s of plan sponsors, endowments, foundations and private family offices, as almost 100% of them agree with us.
The use of humanitarian and environmental screens in identifying the assets or instruments that will likely deliver the future’s highest and most sustainable returns for all stakeholders is growing exponentially, and in our opinion is nothing more or less than the next evolution in investing. This is being driven by:
Climate change becoming a reality in the minds of many more investors and consumers who are now using humanitarian and environmental screens as imperative factors in where they buy their products and/or services and invest their capital (see point 6 below to understand that this is not just the “retail” market).
The ubiquity of information making it much easier for consumers and investors to obtain the data they require to align their purchases and investments with their values.
The transition in leadership from the value systems of the Baby Boomers to those of the next generation.
Technology driving market efficiencies for the widespread use of clean renewable energy resulting in the potential of significant stranded assets.
The use of environmental and humanitarian screens as measures to develop risk/return metrics for investments in portfolio companies, real assets and financial instruments expanding among investment managers.
Private family offices, endowments, foundations and even plan sponsors continuing to shift their capital into what are deemed conforming or compliant investments. Almost $6 Trillion has been shifted since 2009.
Decisions by Fortune 1000 corporations to procure all of their products and services from fully sustainable supply chains resulting in thousands of global corporations and SME’s having to adopt compliant stewardship programs.
Emerging market countries building their entire emerging economies on the principles of People, Planet, Prosperity.
The 80,000,000 Millennials in the US (representing 4.4% of the global Millennial population) who are going to inherit over $30 Trillion and over 60% of them (more than 48,000,000 soon to be leaders, decision makers, consumers, investors and donors) believe that corporate profit and investment returns need to be values aligned.
Given the above and the fact that the underpinning of the majority of the total return strategies for many of the worlds largest asset allocators remains long term value investing, why are we polarizing SRI, ESG, TBL and Impact when the underlying thesis they were all built upon should become standard screens used across 100% of portfolios?
Our summary of all of this is one of great concern as too few of those blinded by the exuberance of the Impact Investing “industry” are considering the implications of a market implosion. Of course, there are numerous incredible people and managers who are exceptions to our thesis, but, having had a ring side seat for the rapid growth and eventual spectacularly damaging collapse of the ABS industry, we are afraid the “industry” of Impact Investing is mirroring the mistakes made by the ABS market.
We believe it is time to stop “selling” the idea of Impact Investing and move directly to helping asset, wealth and investment managers embrace the latest evolution in investing which is the use of humanitarian and environmental screens as overlays to the existing financial risk/return metrics and screens across 100% of portfolios.
BY Mac McCabe
ON September 21, 2015 06:55 AM
Well said. I remember Susan’s work well, via SVN. I have stated similar concerns as the Social Responsibility of the early 90s (triple bottom line) has moved to sustainable business, which incorporates enthusiasm for the next potential home run green widget and rarely mentions anything about “people.” After a piece I wrote, I remember that I had one reply that said “sustainable business and social justice are two separate issues.” So, thanks. The increasing opportunism in the Sustainable Investing space is troubling. I continue to consult every single day with small, often fragile, socially responsible early stage businesses that incorporate all three legs of the stool into their mission. It ain’t easy, but their passion and their purpose continue to inspire me.
BY Bjoern Struewer
ON October 30, 2015 07:18 AM
GIIN have worked tirelessly to raise the profile of impact investing and to establish it as a mainstay in the investing landscape. But this article, as well as the report that it is based on, blithely skip over a full half of the topic: The name of the game is ‘impact investing’, but where is impact to be found?
In the benchmark report there is a strong focus on financial returns, and the resulting buzz is all about enabling fund managers to finally take the plunge into this new asset class. The uncomfortable truth is that in order to exploit the real potential of impact investing, impact must be taken to heart and operationalised. Needing to go that extra mile is something that we must make newcomers aware of, and not simply sweep it under the ‘market-returns’ rug. I’ve voiced similar concerns in a Forbes article together with Ashoka ( http://onforb.es/1NEbbqk ) and on Impact Alpha ( http://impactalpha.com/impact-investing-financial-returns-are-only-half-the-story/ ).
I hope this debate will remain open until an appropriate solution is found: One where the relation between social and financial returns is balanced and transparent.
BY Paul DiLeo
ON November 5, 2015 07:06 AM
Cambridge Associates and the GIIN are to be commended for introducing the Impact Investing benchmark last August. The benchmark adds to the accumulating data on impact investing, and also provokes some further thinking about how benchmarks like this can help and hinder the realization of impact investing’s potential.
To the authors’ credit, they are careful to point out how this first iteration of the new benchmark may not be a good comparable for many impact portfolios:
• The benchmark only includes data from PE and VC funds that target “risk-adjusted market rate returns”, while, JP Morgan’s 2015 impact investor survey finds that 45% of impact investors target below market returns.
• The report notes that Cambridge tracks 392 PE and VC funds for its MRI database; the benchmark is based on data for 51, or 13%, raising the likelihood of selection, in addition to survivor, bias.
• Even in this small sample, something less than half have largely completed the typical ten year life so the results rely on – usually optimistic!—projected results.
• Over 50% of the total capital of the funds analyzed is directed towards Africa; this compares with the JP Morgan survey which finds less than 16% of total AUM of the impact investors it surveyed were directed to that region.
These mismatches likely explain some of the discrepancy between the benchmark’s realized and unrealized returns of 6.9% and those actually realized by some impact investors to date.
Grassroots has compiled data on the nine microfinance PE and VC funds launched in 2001-2005: microfinance remains the largest impact sector after housing, and these nine funds should be nearing full liquidation. Four have in fact largely liquidated on schedule; two extended under duress and the other three are only partially liquidated. Excluding the early estimates for these three, the other six are returning roughly 3%, on weighted average, to LPs. In contrast to the GIIN/Cambridge benchmark, there is no selection or survivor bias in this data set: the nine funds encompass the entire universe of microfinance equity funds of that first vintage.
It can be debated whether the GIIN / Cambridge or the inaugural MF vintage data set more accurately reflects the financial returns impact investors are likely to realize going forward. But the more fundamental issue is the context in which financial return should be viewed, and it is from this perspective that the GIIN / Cambridge benchmark threatens to distort investor perspectives and inadvertently promote an approach to impact investing that will corrupt the concept and undermine its potential.
The GIIN / Cambridge benchmark frames a question: can comparable or greater financial value be created by applying an impact approach to a business or investment? And it appears to confirm intuition and anecdotal evidence: of course it can! There are many examples of “impact” businesses that command premium prices and profit margins and enjoy exceptional customer loyalty and employee productivity. Can greater profitability be generated by adding impact to a product’s features? Will customers pay more, employees be more productive? Might investors offer better terms? The answer is clearly yes. In particular, positioning products to appeal to the non-financial values of affluent customers with substantial discretionary spending can increase profitability.
But this type of win-win opportunity does not always occur. Unfortunately, not all our social and environmental challenges can be solved by selling premium-priced products to affluent consumers. In contrast, if we are talking about very poor customers with limited disposable income and few choices for quality products, the idea of them choosing to pay more makes no sense. In this case, should impact investors still require that providing essential services to such clients nevertheless beat a conventional financial benchmark?
As many commentators have noted, impact investment is not an asset class, it is an approach to defining and creating value in any asset class. Conventional investment defines value solely in terms of the financial dimension – returns, volatility, correlation – from the perspective of a single stakeholder group – shareholders. In contrast, impact investing is the proposition that value should be defined in multiple dimensions – environment, community cohesion and resilience, economic justice, gender equity, as well as financial parameters – and with respect to multiple stakeholder groups – employees and customers, their families, the immediate and the global communities. Each impact investor can weight these stakeholder groups and types of value differently, but when they collapse back towards financial value to shareholders, as the benchmark seems to encourage us to do, there is a legitimate question of why we bother to distinguish it from conventional investing, other than for marketing purposes.
By positioning superior financial returns as the threshold consideration and key driver for impact investors, the GIIN / Cambridge benchmark implicitly demotes the other dimensions of value that in our view give impact investing its meaning and transformative potential.
Some impact investors see an opportunity for a high multi-dimensional return from providing poor customers with high quality essential services – health care, housing, financial products, skills training – even if the financial dimension may not match or better conventional comparables. Others might see a compelling value proposition in an investment that addresses environmental degradation or climate change, even if the financial value creation did not beat conventional benchmarks.
But by applying the conventional value lens to one dimension of value and one stakeholder group, the benchmark reinforces the tendency to ignore the core questions that every impact investor needs to answer – What kinds of value are being created? And for whom? – and instead reverts to the conventional and antithetical view that money is the measure of all things. Prioritizing financial performance as the primary or the threshold dimension of value cramps and ultimately extinguishes the transformative potential of impact investing.
Going forward, we hope that the next iteration of this and other benchmarks will explicitly highlight the other types of value being created and for whom. Only in this way can impact investing continue to transform the relationship of values-driven investors to the capital markets, and shift more capital markets activity from enabling destructive activities to promoting solutions to poverty, economic injustice, environmental degradation and our other pressing challenges. Without including these multiple value and stakeholders in the forefront of all discussions of impact investing we risk losing its potential for good, and condemning it to a short life as a marketing fad.
BY Cate Finpari
ON December 3, 2015 02:30 AM
25 pages of in depth analysis. It was a great read. Thank you Amit for sharing it.
BY Due Diligence
ON April 9, 2016 02:49 AM
Very shortly this web site will be famous amid all blog people, due
to it’s pleasant content