Will Impact Investing Cause The Demise of The Raison d'Etre It Is Founded Upon?
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. As a very well known and globally revered person stated to me “I see a 5% allocation to conforming/compliant investments as a 95% failure”.