A SOCAP Guest Post By David Bank
In this lead up to SOCAP18 we asked a few of our media partners who are covering stories that are of vital interest to the SOCAP community to curate and share articles that relate to our SOCAP18 conference themes. This week’s suggested reading comes from ImpactAlpha.
We’re covering impact investing like a real beat, on the hunch that it will become one.
That was our standard line a few years ago whenever folks asked why we launched ImpactAlpha as a media platform for the impact investing marketplace. As delegates to this year’s SOCAP18 well know, the beat has arrived with a bang.
With the five-day-a-week Brief, ImpactAlpha brings you the deals, the signals and the voices that are building a new approach to business and investing.
So the new challenge we faced this spring was how to lift our beat reporting into a cogent narrative. I somehow got volunteered to write a weekly column.
We launched the “new” (subscription-based) ImpactAlpha with a rundown of some of those themes: Impact is the global growth story. Falling costs make new solutions viable. Turning points are nigh. Women are leading. Inclusion pays off. The global 21st century regeneration is urgent, possible and already underway. The trillions of dollars in play are reshaping finance itself.
We call the column “The Impact Alpha.” That doesn’t mean me! The impact alpha is the investment edge that comes – in all sorts of ways – from driving social and environmental impact. We see it on the beat every day and explore it further each week. Sample some of the columns below. If you want to get even more of that impact alpha, direct to your inbox, please subscribe.
The column that got the biggest response tried to grapple with the need for both investible deals and systemic change. How can markets be harnessed (and transformed) for “the great civilizational rebuilding” that’s required? The inimitable Jed Emerson took up the debate in a thoughtful response.
A few columns tried to trace how the logic of impact is inexorably spreading through what is generally called “mainstream” investing, but should more accurately be called “legacy” investing (in the same way that tech innovators refer to the “legacy” software they’re seeking to replace).
Not everybody liked the metaphor of “infecting the host,” but Agents of Impact inside investment teams, big banks, corporations and communities do seem to be spreading inexorably, if not exponentially. “The act of driving capital toward explicit, accountable social and environmental value-creation starts companies and investors down a trail of logic that may well scramble alliances and split constituencies.”
One way that “infection” happens is by so-called conventional asset managers standing up impact products and strategies. Such “hybrid investors” are in fact the fastest-growing segment of impact investors (according to the recent survey from the Global Impact Investing Network). Inside the hybrids, new impact products and funds will live alongside conventional investments, which the GIIN defines as those without explicit impact intent. Over time, that will make clear not only comparative client demand, but financial performance—and impact.
The worry, of course, is that as impact investing spreads through the economy, impact itself will be diluted. In a column on the arrival of big private-equity players like TPG, Bain and KKR, I provocatively suggested that “the era of impact-washing is over.” My point was that, insofar as an impact strategy or a screen for ESG (for environmental, social and governance performance) can indeed generate financial returns, marketing won’t deliver the goods. “Managers that can find mispriced risk, undervalued assets and overlooked entrepreneurs will,” I wrote. To get the impact alpha, you have to truly drive impact.
How? By driving improvements in operations, by improving governance and measurement, by mitigating long-term risks and seizing underappreciated opportunities. “There is tremendous opportunity to gain insight and alpha through finding companies with improving momentum in their ESG profiles,” Cornerstone Capital’s Erika Karp told me. Just as educators and employers are beginning to look at “distance traveled” as well as absolute achievement, so investors are valuing the improvement, not just the outputs.
Proponents of impact investing shouldn’t fear the new guidance from the Trump administration’s Department of Labor that some thought threw cold water on the consideration of ESG by pension fund fiduciaries. If you believe such factors are indeed “material,” then those funds would arguably be breaching their fiduciary duty by not considering them (as the Europeans now hold). We did a followup podcast exploring the issue as well.
I’ve been struck by a common theme in our coverage: Things that were impossible even a few years ago are now possible, and profitable. Big data and new algorithms are making it possible to lend to millions of small businesses and individuals in the US and around the world who have had trouble getting access to the kind of appropriate, affordable capital they need – to build a school, buy a rickshaw or motorcycle, light their homes, or start or grow a business. We’re familiar with the impact of the falling cost of technology, from mobile phones to solar panels. The falling cost of capital may have even greater impact.
We’ve found that investors sometimes have a problem finding the right tool for the job. Early-stage climate innovations that may not pay off for decades? Not a good fit for venture capital. Working capital for smallholder farmers that feed the vast majority of the populations in many countries? Too risky for most banks. It’s time for a much broader range of investors to step up and build — and fund — the right financial tools for the big jobs ahead.
Yes, I’m susceptible to a kind of magical thinking that may overlook some of the innumerable obstacles in the way of the inclusive, regenerative future. But I’ve been struck how often overlooked is the fact that, to take just one example, renewable energy deployment has blown through even the most optimistic forecasts of several years ago, as falling prices make solar and wind competitive with fossil fuels almost anywhere in the world. In the current climate, so to speak, it’s too easy to miss the long-term trend. “I know blue-sky thinking can be dangerous. Right now, unwarranted pessimism is the bigger risk.”
But such optimism shouldn’t obscure the failures. I called out the backers of the $1 billion Abraaj Growth Markets Health Fund, now embroiled in the liquidation of the Abraaj Group, to explain what happens next. Not to their $1 billion investment, but to the $140 billion in additional investment in health infrastructure every year through 2030 to meet Sustainable Development Goal No. 3.
ImpactAlpha is offering a special discount to members of the SOCAP Community. Subscribe here and enter discount code Socap2018.