We are grateful for the varied commentaries on our article, “How Investors Can (and Can’t) Create Social Value.” In the aggregate, they describe an innovative and rapidly growing segment of the capital market driven by socially-motivated investors who have goals besides maximizing their financial returns. At the same time, however, the commentary demonstrates the need for precision and consistency in defining how socially-motivated investors can actually have impact in achieving their social goals. 

Precisely because the socially-motivated sector is growing so rapidly, participants on both the sell-side and the buy-side of the market look to label their activities in a fashion that reflects either their aspirations or their marketing strategies. Our goal is to offer a lucid taxonomy of socially-motivated investments so that investors can clearly articulate their goals and asset managers can clearly articulate what they offer and how their performance should be measured.

The need for clarity and precision is most obvious with respect to the term impact investing. The attractions of impact investing are obvious. Socially-motivated investors seek change, and having an impact through one’s investments powerfully resonates with that aspiration. Yet this resonance has led to a grab bag of investment strategies that all claim the same mantle. The core of asset management is evaluation and comparison. Absent a clear framework, neither is possible—and without both, the socially-motivated market segment will suffer.      

The legitimate goals of impact investing are as broad as the universe of social needs, ranging from health, welfare, and the environment to women-owned enterprises and just plain jobs. Since our article focused mainly on a company’s products, we’ll use one commentator’s example of job creation here.

A socially-motivated investor can align his values with a company that creates jobs simply by owning its stock. For investors who want to create value, that’s not enough: they seek to have impact by increasing the number and/or quality of those jobs. Increasing jobs compared to what, however? In the context of impact investing, the comparison is with the number and quality of jobs that result from the investments made by myriad socially-neutral investors. The main ways that investors can impact jobs are to provide the company with capital that those socially-neutral investors would not otherwise provide, or provide it at a lower cost; or to use their power and expertise to affect the company’s policies (or public policies) to create or enhance jobs.

Our socially-motivated investor can have impact through a private market investment if the job-creating company could not have raised funds from socially-neutral investors at the same cost. But suppose that the socially-motivated investor is competing to be included in the deal with socially neutral investors. Here, she provides no capital advantage, and the most likely route to impact is by jaw-boning the company to create more jobs and/or using her special skills to assist the company in creating them. We don’t doubt that this can occasionally happen; how frequently and with what impact is an empirical question that we haven’t seen systematically considered.

Now suppose that our socially-motivated investor makes a public market investment in an IPO that succeeds and the company then increases the number of jobs. Here, as we explain at length in the article, hope as she may, the socially-motivated investor cannot increase the jobs created by the investee company. This is true, a fortiori, for purchasing stock in secondary markets.

We have used the example of job-creation, but the same analysis applies to increasing a company’s socially-valuable outputs, whether in health, energy efficiency, education, food and water security, poverty reduction, or abatement of gender, racial, or sexual-orientation discrimination.

A similar analysis applies to some commentators’ references to the performance of public mutual funds with an ESG investment strategy. The claim, that a particular fund—say TIAA’s Social Choice Fund or BlackRock’s Impact Fund—can create alpha through a superior assessment of the impact of social factors on expected return, is a claim that their fundamental analysis of the investee company’s value is better than those of competing asset managers. They may sometimes be right―though the claims often exceed the actual results―but it’s not clear how this creates social value.

In conclusion, our putting forward a clear articulation of “impact” is not, as one commentator put it, “prescriptive.” Actually, it’s merely a definition of what the term “impact” means: making a difference. Granted that social value can be created in different ways, the field badly needs a benchmark against which claims of social value creation can be assessed.  

Our standard of value creation—an increase in socially-valuable practices or outputs by the investee company—establishes a framework and then leaves it to socially-motivated investors to be disciplined in their own assessments of what they seek through a particular investment and how they can increase the investee company’s socially desirable practices or outputs. On the other side of the table, the standard provides an incentive for asset managers to state clearly how they propose to identify opportunities for social value creation and the measure by which investors should assess their performance.  

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