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Metrics
Impact Investing
Impact investing and responsible investing: what does it mean?
Impact Investing
Impact investing and responsible investing: what does it mean?
http://ecoopportunity.net
Note: The TSSS link that was originally related to the following has been taken down!!!!!!!!!!
Peter Burgess COMMENTARY
I am sure you have all heard the one liner 'If you change the way the game is scored, you change the way the game is played'. In the way we play the game of life for people, place and planet we need to change the way the game is scored.
Let us get back to basics. The purpose of economic activity is to produce the goods and services so that people can buy to satisfy their needs. Most economic activity is implemented by business (corporate) organizations and funded by investors with the help of capital markets. The performance of an organization is measured by its profit, and the investor judges performance by return on investment. All of this is organization centric.
For people there is quality of life, standard of living, personal financial wealth etc. and essentially no metrics. People meed money to pay for the goods and services they need for a 'normal decent' life.
For place (community) there is little in the way of metrics that matter. The people that make important decisions do it without any meaningful formal framework of management metrics!
For planet there is massive analysis of complex data, and conclusions about the state of the planet, the changes in state that are difficult to understand without a big effort and a lot of specialized technical knowledge. Worse ... most of the impact results from complex natural systems that do not stop at national borders!
Analysis at the national level is interesting, but not very useful except to indicate how poor the economic performance, but nothing about what exactly is the dysfunction and how it might be addressed.
On the other hand for the organization, there is a massive amount of data that can be mobilized to help optimize the profit performance of the organization, and many generations of business school graduates that understand this and are very good at it.
The situation is made worse by an industry that promotes much of what is the worst of business practice ... advertising and PR facing the customer, and lobbying and all that is involved with that facing the policy makers and legislators.
The metrics about people is confusing. There are lots of data about people but these data are in the hands of governments for security purposes or in the hands of various corporate entities to enable business efficiency in one form or another ... like credit scores, purchasing preferences, Facebook likes and the rest of social media transactions. These data are not yet being used to build metrics about quality of life, to inform the decisions we make and how society is progressing. but are being used to focus sales growth to customers.
Most, if not all, the initiatives to improve the metrics being used in the context of impact investing remain organization centric. Where impact is good for society, but even better for the organization it will get funded ... otherwise if there is social impact but nothing for the profit performance of the organization it is not worth doing.
There is a huge amount of work ... economic activity ... that is needed around the world that would have huge social impact, but will not satisfy profit performance criteria for investors using any profit measure of investment performance ... the whole economy surrounding the famous Bottom of the Pyramid (BoP), not to mention a very large part of the world's infrastructure, both building and maintenance.
We need meaningful metrics about economic activity that can be summarized by implementing organization, by funding organization, by place and by product. Accountants have principles of consolidation (roll up) that could be modified to suit this architecture. The meaningful metrics of economic activity would include (1) impact on people, jobs on the one hand and delivery of useful goods and services on the other; (2) impact on planet in terms of carbon footprint; (3) impact on planet in terms of natural resources used; (4) impact on planet in terms of waste and pollution; and (5) impact on people as a result of the use of products and services being produced.
A corporate organization that operates in more than one place has an easy way to avoid accountability under the existing regime of performance measurement and reporting. In a system that will work, there has to be accounting and reporting at the local level where it becomes possible to validate the reasonableness of the data simply by 'walking around'.
A product is a critical piece of this framework. A single organization may have its name on the product (or service), but the supply chain is long, and bad impact can occur at any place along the chain. People make discrete decisions about goods and services and get info about these in the form of reviews. A broader review model algorithm would enable information about impact at the product level easily accessible to buyers.
Product is also important, because at some point there is the long tail of waste and pollution from our massive consumption and so-called convenience.
These concepts are all relatively simple, and in my view have the potential to be a clear change in the way the game is played.
Peter Burgess TrueValueMetrics
Peter Burgess
Written by TESSA HEBB
Published: AUGUST 19, 2013
Currently, the market for impact investing is estimated at anywhere from $1 trillion to $14 trillion when global infrastructure investments are included. We hear a lot about impact investing these days, but what is it and how does it relate to responsible investing? As we know, responsible investing takes environmental, social and governance factors into consideration in investment decision making. Impact investing is a sub-set of responsible investing. Here the investor intentionally invests to achieve positive social and/or environmental impact in addition to financial return.
Often institutional investors (both asset owners and asset managers) believe that impact investing simply refers to micro-finance (another area that has recently dominated the news).
While impact investing includes micro-finance opportunities, it is much more than providing small loans to individuals in developing countries (Yunus and Weber 2007). Impact investing occurs any time there is a deliberate decision to achieve both a financial return and an ancillary social and/or environmental benefit from the investment opportunity. It spans multiple asset classes that include real estate, private equity, infrastructure, public equities and fixed income. Some go so far as to suggest that impact investing is an emerging asset class in itself (O’Donohoe et al. 2010).
Impact investing goes by many names. These include double and triple bottom line, mission-related investing, program-related investment, blended-value, economically targeted investing and social finance (Emerson and Bonini 2003; Godeke and Pmares 2009; Monitor Report 2009). Regardless of terminology, this new approach is seen as an important step in creating innovative ways to address social needs while at the same time generating financial return.
Currently, the market for impact investing is estimated at anywhere from $1 trillion to $14 trillion (O’Donohoe et al. 2010) when global infrastructure investments are included. Such investments can be made in affordable housing, clean technology, water systems, transportation systems and yes, micro-finance just to name a few.
The conceptual framework that underpins impact investing is best captured by the ‘Blended Value Proposition’ first articulated by Jed Emerson in the early 2000s. This proposition states ‘that all organizations, whether for-profit or not, create value that consists of economic, social and environmental value components – and that investors (whether market-rate, charitable or some mix of the two) simultaneously generate all three forms of value through providing capital to organizations’ (Emerson and Bonini 2003). Understanding the concept of blended value is the key to understanding the implications of impact investing for both the providers of capital and its recipients.
Those who seek social and environmental impact above financial return are called ‘impact first’ investors (Monitor Report 2009). They are prepared to take lower returns on their capital to achieve the social and environmental impacts they seek. Such investors are generally found in the philanthropic community. In contrast, a ‘finance first’ impact investor (ibid) is seeking a market rate risk-adjusted return on investment and is willing to take less social and environmental return to achieve this financial outcome.
Institutional investors with fiduciary duty are not allowed to give up financial return for corollary benefit. These ‘finance first’ impact investors must first judge their investments on financial merits and only then can they consider additional social and/or environmental returns. However, this does not mean that they are unable to find such deals, but rather that financial returns cannot be sacrificed to achieve positive social and environmental outcomes.
A good example of ‘finance first’ impact investing is market-rate mortgages that enable affordable housing projects to be built, or clean technology firms that encourage a shift to renew-able energy sources, or investment in infrastructure that provides communities with clean water, sewage systems and sustainable transportation. These investments are first judged on their financial return and appropriate asset class and only when these are deemed acceptable are the additional social and/or environmental outcome factored into the investment selection (Hagerman and Hebb 2009).
Because impact investments generate positive externalities, they are often encouraged by governments who may also be active partners in the investment and are able to structure these opportunities, mitigate risk and provide solid financial returns.
The first article in this collection ‘Blended Value Proposition: Practice and Policy’ takes an in-depth look at the relationship between public policy and the development of the impact investing marketplace. David Wood (IRI, Harvard University), Ben Thornley (InSight, PCV) and Katie Grace (IRI, Harvard University) built on a major report they undertook for the Rockefeller Foundation Impact at Scale detailing the role public policy plays to enable the impact investment market to develop beyond its current niche. They suggest that careful co-ordination will be needed between policy makers and institutional investors if this market is to grow and flourish.
Another critical dimension of the impact investment ecosystem is the way to measure the impact created by the investment. While we can effectively measure the financial performance of these investments, it is much more difficult to quantify the social and/or environmental impact(s) they may have. Edward Jackson (Carleton University) takes this issue head on in his article ‘Interrogating the Theory of Change: Evaluating Impact Investing Where It Matters Most’. He argues that linking the ‘theory of change’ (a key concept in program evaluation) to other tools used to evaluate impact could help move the yard stick beyond individual case studies into a more robust set of metrics for impact measurement. He suggests several new approaches to measuring impact at the individual, enterprise and community levels, where most impacts are generated.
Marguerite Mendell and Erica Barbosa (Concordia University) take up another facet in the development of a fully co-ordinated impact investing marketplace. In their article ‘Impact Investing: a Preliminary Analysis of Emergent Primary and Secondary Exchange Platforms’ they suggest that without the ability to exit from investments in a systematic way, impact investing will not be attractive to large institutional investors. They suggest that secondary markets that allow for liquidity are essential for these investments to flourish. Mendell and Barbosa examine a range of new and emerging exchange platforms around the world designed to connect investors with impact investing opportunities.
The fourth article in this journal looks at a specific impact investing case, that of Vancity Credit Union, based in Vancouver, Canada. Geobey and Weber in their article: ‘Lessons in Oper-ationalizing Social Finance: The Case Of Vancouver City Savings Credit Union’ find that Vancity provides a model for social finance institutions around the world. As a member of the Global Alliance on Banking and Values, Vancity has made impact investing (termed social finance) a core aspect of its mission. This article takes us through the historical underpinnings of Vancity’s approach to social finance and impact investing. It then goes on to examine the financial statements of Vancity from 2000 to 2011 to see if their products do indeed provide opportunities for investment with positive social and environmental impact. They also look to see if such product offering has cost something to Vancity when measured against its peers.
Madeleine Evans’ article ‘Meeting the Challenge of Impact Investing: How can Contracting Practices Secure Social Impact without Sacrificing Performance?’ provides a quantitative exploration of the framework by which impact investors can achieve their desired results without a trade-off between the social and environmental impacts they seek and the financial return they require. This article draws on the contract theory and the analysis of incentives in multitask principal–agent relationships in an attempt to answer this question.
This special issue on Impact Investing concludes with an article from Nicholas Florek, ‘Enabling Social Enterprise Through Regulatory Innovation: A Case Study From The United Kingdom’. This article explores the new hybrid legal structures developed in the U.K. and U.S. to encourage impact investment is social enterprise. Florek argues that the U.K.’s Community Interest Company (CIC) model has been effective in assisting social enterprises to diversify their funding streams, leading to greater sustainability in the sector. He analyzes data from the U.K.’s National Survey of Third Sector Organisations in 2009 to provide evidence of the success of CICs as a new legal form that achieves the goals policy makers intended to foster when drafting the new legislation.
To date there has been limited academic work on impact investing. Most of the available literature comes from industry-based reports. This special issue of the Journal of Sustainable Finance and Investment provides six academic articles that address key issues in developing impact investing from a niche market activity to one adopted by large institutional investors.
We frame impact investing in its broadest terms, from investment in micro-finance and social enterprise development at one end of the spectrum to global infrastructure at the other. We argue that seeking positive social and/or environmental returns in addition to financial returns is a viable option for investors large and small.
Impact investing is a key aspect of responsible investing and positive environmental, social and governance (ESG) considerations, but to grow beyond the current characterization of micro-finance, a fully coordinated marketplace will be required. In partnership with government, impact investing is unlocking new and innovative ways to solve some of the world’s most pressing problems while simultaneously providing the financial returns required by investors.
This article first appeared in the Journal of Sustainable Finance and Investment.
Dr. Hebb is the Director of the Carleton Centre for Community Innovation, Carleton University, Canada. Her research focuses on the financial and extra-financial impact of pension fund investment in Canada and internationally with particular emphasis on Responsible Investment and Corporate Engagement and is funded by the Social Sciences and Humanities Research Council, Government of Canada.