We’re all struggling with vocabulary and converging disciplines these days as we try to move the bar on social and environmental change. In recent weeks, I’ve found myself answering the same questions over and over again – at conferences, in interviews with journalists and doctoral students and in networking conversations with colleagues around the globe. I thought sharing those questions and answers here might provide food for thought and would love to hear how you would answer these same questions!
What is Impact Investment?
In mainstream investment, you get a single financial return, and social and environmental impacts are considered “externalities”.
Impact Investment (hereafter “ImpInv”) recognizes that social and environmental impacts are NOT externalities. They are results, aka returns on investment, sometimes positive, sometimes negative, but always something we should be taking into account. Don’t believe me? Think about what happens when those externalities come home to roost – toxic waste super funds, decreasing air quality (and increasing asthma and respiratory disease), etc.
Quantifying social and environmental impact is a nascent and complex discipline but a mandatory one given the finite nature of planetary resources. We need a few “big picture” indicators that everyone can use so that we can accumulate significant data points for investment purposes – and we should continue to explore the vast range of more detailed indicators, primarily so that we can learn continuously how to use resources more effectively and efficiently.
That said, we should all be aware that gathering data has financial and social costs that impact our investment outcomes. The social costs are where ethical issues arise. We may want a particular piece of data – are we supporting a disadvantaged ethnic minority, for example. The people who provide this information, however, may be targeted by the groups that persecute a particular minority, creating a real danger around transparency. We are often willing to ask overseas questions that are illegal in our home markets (to prevent discrimination). Why are we comfortable asking these questions in societies with less developed legal codes? The people we want to know about have the same rights to privacy that we do and we should be respectful of that fact. Bottom line – simple, comparable, cost-effective, ethical indicators are needed for investors. More detailed explorations of social change have a place as well, but not necessarily in the investment arena.
Is Impact Investment an Asset Class?
The good news is that ImpInv is NOT an asset class; it is an investment THEME offering opportunities across multiple asset classes, including real estate, savings deposits, venture capital, debt, growth capital etc. The reason this is important is that it makes ImpInv accessible to most retail and institutional investors, regardless of their risk tolerance or risk/reward preferences.
Please STOP trying to label ImpInv as an asset class. The result is that each actor argues ferociously for whatever type of ImpInv he or she supports as the exclusive definition. Instead of educating investors, these internal factions encourage them to keep sitting on the fence waiting for things to become clearer. We should be promoting broad definitions that demonstrate awareness of risk/reward profiles and urge all investors to allocate some of their resources to an impact investment in the asset class of their choice!
How is ImpInv different from ESG, SRI or CSR?
Today, the primary difference between ImpInv, ESG and SRI relates to ownership. ESG and SRI refer to screening publicly listed (exchange-traded) companies for certain types of desirable and/or undesirable behavior. ImpInv is primarily focused on privately held companies and often seeks to create or promote a desirable outcome, either social, environmental, or both. All three disciplines accept that all investment activities have social and environmental impacts in varying degrees. Furthermore, the extent to which we understand and manage those impacts can lead to better performance and sustainability.
CSR (corporate social responsibility) covers a broad range of corporate philanthropic activities ranging from PR fluff to serious community and economic development projects and many things in between. Corporate treasury departments can (and should!) adopt ESG/SRI policies for managing their own money. Some CSR departments are beginning to explore the possibilities of ImpInv alongside traditional philanthropic programs.
Was this information helpful? Are your working definitions different than mine? Please let me know what you think!
Lauren Burnhill – @LaurenOPV