For some time, the field of impact investing has been developing robustly and rapidly, but in the shadow of definitional ambiguity. The lines between the “s,” “r,” and “i” in sustainable, responsible, and impact investing have been blurred, often intentionally.
Until recently, impact investing suffered from the “impact-first” or “financial-first” dichotomy—the entrenched dissonance between making a difference and making a dollar. Mainstream investors doubted that serving two masters was even possible.
And so the pioneering work in sustainable and responsible investing to disprove the inevitability of the tradeoff between social and financial return provided a useful foundation, and a strong incentive for emphasizing the many similarities between those strategies and impact investing, rather than the differences.
Now, in just the last year, it has become commonplace to hear investors describe the leap from sustainable or responsible investing to “targeted” impact investing. Why? Because we have performance data from Cambridge Associates, The Wharton School, and investors like RS Group and Christian Super, showing that impact investments can be executed with discipline, and achieve solid results. According to the data, impact investments are competitive with non-impact investments, within their own asset classes, and in some cases provide strong portfolio diversification benefits, thanks to uncorrelated risks.
Consider two notable examples of practitioners emphasizing the distinctiveness of impact investing: Blackrock’s framework for impact investing, which delineates “screened”, “ESG-factor,” and “targeted impact” investments, and RS Group’s recent social impact report, which reveals that, after five years of concentrated effort, the family office has succeeded in achieving a 61 percent allocation to “socially responsible” investments, and a 30 percent allocation to “targeted impact” investments. Similarly, Tideline’s own work with Cathy Clark at Duke University, on impact classes, is, in essence, an effort to create simple, meaningful labels for impact investments that are more or less targeted.
Against this backdrop, the article by Paul Brest, Ronald Gilson, and Mark Wolfson makes a valuable contribution. In a conclusion appropriately titled “advice for investors,” the authors draw clear definitional boundaries around impact investing, which they argue includes:
- Investments provided in private markets on advantageous terms, to an impactful enterprise;
- More rarely, non-concessionary investments in private markets where knowledge and expertise in an impactful sector is not widely held by others; and
- More rarely still, investments in public companies where a concerted, activist effort in collaboration with consumers, employees, and regulators truly affects firm outputs or behavior
While this appears to be a relatively narrow interpretation of impact investing, the authors may have inadvertently laid the groundwork for a more dynamic definition. After all, markets, knowledge, expertise, and cross-sector partnerships shift and evolve over time.
Previous attempts to define impact investing have tended to focus somewhat myopically on the instant a deal is consummated, when an investment is judged to be additional or not. In reality, impact investors operate within complex ecosystems and know too little about the many ways impact is created at the investee, intermediary, and systems levels to claim certitude, which is why the more nuanced concept of impact management is gathering steam. In any case, markets remain imperfect, shaped by investors with mixed motivations, investing on the basis of information that leaves much to be desired when it comes to pricing externalities.
The author’s skepticism rightly challenges investors to show exactly how their unique knowledge and expertise translates into generating impact, and to prove that there might be another way to influence the cost of capital and therefore firm behavior in public markets, for example through an especially rigorous, fundamentals approach to ESG integration.
However, there’s no question in my mind that investors will in fact show and prove that a more dynamic definition is appropriate—and there’s also no question that Brest, Gilson, and Wolfson’s strong baseline stands as an important milestone in the transition from the past to the future in impact investing.
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