In their article, Paul Brest, Ronald Gilson, and Mark Wolfson begin by discussing the “socially neutral investor” and go on to posit that a “but for” test for impact additionality must be satisfied for true social value creation to be realized. I’d like to respond to both points, starting with the concept of social neutrality in the investment context.
Webster’s defines neutral as “not helping or supporting either side in a conflict, disagreement, etc.” I would argue that socially neutral investors are actually leaving money on the table, and by not taking social or environmental factors into account are also—even if inadvertently—perpetuating structural inequities in our society and negative environmental outcomes.
Focusing on “good corporate citizens” with exemplary environmental, social, and governance (ESG) practices is helping investors beat the market. For example, Generation Investment Management’s $11 billion long-only, sustainability investing strategy has outperformed its benchmark (MSCI World Index) over the last 10 years by 559 basis points. The $929 million TIAA Social Choice Bond Fund employs ESG screens and allocates at least 10 percent of its assets to explicitly socially beneficial issuances, and it has outperformed its benchmark (Barclay’s US Aggregate Bond Index) by 125 basis points since inception. Similarly, the 2015 Cambridge Associates Impact Investing Benchmark study of 51 impact venture capital funds (between 1998-2010) revealed that the impact funds with $100 million or less in assets outperformed conventional venture capital funds of the same vintage years by more than 400 basis points.
What these examples make clear is that social and environmentally “aware” investing—when done well—does not lead to concessionary returns and in fact it does quite the opposite. Companies that are solving big social problems while properly caring for their employees and being attentive to their socio-political context and cognizant of operating in a resource-constrained planet, are inherently better positioned for long term success.
This realization is contributing to the growing tide of sustainability and impact investing activity. The Global Sustainable Investment Alliance reported in its 2015 “Global Sustainable Investment Review” that while professionally managed assets overall grew by 15 percent between 2012 and 2014 to $72 trillion, assets under management by those using socially responsible strategies grew by 61 percent to $19 trillion, and assets by those using “deep impact investing” strategies grew by 216 percent to $1.8 trillion.
Much of the capital flowing into these strategies would also likely question the concept of a socially neutral investor, whether from the perspective of risk management, or moral courage, or both. One can argue that a socially neutral investor is actively supporting the status quo in our markets—a status quo that perpetuates the wage gap, funding gap, and advancement gap for women and racial minorities and enables certain businesses to operate without their true environmental impacts being priced in. Of these issues, I will focus on one in particular: the gender gap.
A 2014 the Kauffman Foundation issued a report revealing that women-led private technology companies are more capital-efficient, achieving 35 percent higher return on investment than the men-led companies, and, when venture-backed, bringing in 12 percent higher revenue than men-led tech companies. In 2015, First Round Capital reported that out of its 300 seed stage investments, the women-led portfolio companies outperformed men-led companies financially by 63 percent. UBS reported in 2016 that companies with a higher representation of women in the top management team faced fewer lawsuits overall, particularly lawsuits related to product liability, environment, medical liability, labor, and contracts.
Yet, only 3 percent of all venture capital dollars today go towards women-led businesses. This has barely changed in 20 years and is driven, in part, by the fact that only 5.7 percent of all venture capital partners today are women. While surprising on its own, the potential ripple effects of these statistics are even more profound. In many ways, venture capital decisions not only influence how (and what) companies are built and how (and what) products are designed, they also influence the make up of the public companies of tomorrow. Without an intentional shift by capital providers to invest in women, the imbalances and gaps we hear so much about are likely to persist.
Going beyond the debatable concept of social neutrality, where does impact really live and whose responsibility or right is it to define it? Take for example, Geneticure, a personalized health company using genetic data to more effectively treat chronic hypertension, a $40 billion global market. A conventional venture capital investor might see in Geneticure the next Assurex Health, which recently sold to Myriad for $410 million. An impact investor would also consider the fact that chronic hypertension affects five million new people in the United States every year and has a disproportionate and negative effect on low-income populations and communities of color. African American men age 45-64 with hypertension are twice as likely to suffer a stroke as hypertensive men who are white. Globally, hypertension is responsible for 1.6 million deaths each year, with 80 percent of those deaths occurring in low- and middle-income countries.
A disruptive approach to radically improve the treatment of hypertension could positively impact classically disadvantaged communities in the United States and around the world. Even so, a gender lens impact investor—and a conventional investor for that matter—might look askance at Geneticure’s all male management team and all male advisory board.
Does the fact that investors with complementary but different aspirations for the same investment negate that company’s standing as an impact investment? Must an investment face a capital gap to be considered an impact investment?
Even if you wanted to apply the capital gap (but for) standard to every impact investment, an institutional-scale portfolio of tech-driven impact companies with women in leadership positions, for example, would be so entirely new, even if conventional co-investors were involved in each deal, it’s hard to argue that—if successful—such a body of work would not have field-level impact, influencing asset managers about what is possible under a gender or impact lens. As such, the impact of such a portfolio might be greater even than the sum of its parts.
Thus, using a but for threshold to judge all impact investments without fully appreciating the nuanced impact goals of each capital provider, and that investment’s specific portfolio context, risks being overly-limiting in terms of unleashing the market’s potential to create positive change at massive scale while driving appropriate returns along the way.
Read the rest of the responses.