Are impact investments the new hedge funds?
To keep the spirit of impact investing, it is worth opening up the terminology to be more inclusive of a myriad of strategies.
When I started looking at impact investing in 2011, the term was causing much debate. I was already late to the party back then, so it is interesting that six years on we are still not settled on what exactly impact investments are.
Just recently, three philanthropists talked to me about their impact investments when they were actually referring to donations of their time or money that resulted in a visible positive social outcome.
I also spoke to a banker who referred to municipal bonds that fund civic services as impact investments. And later that day I was invited to the launch of an ‘impact investment’ market rate-returning fund that simply screened out carbon-risk companies.
The use of the term ‘impact investing’ in these examples causes palpitations among the pioneers of the term. They insist that a competitive monetary return and a quantifiable social return are required to qualify for usage of the two words. At impact investment events – of which there are many these days – you will also witness panel participants drumming the correct terminology home.
Give it up
But it is probably time to give up with the definitions and instead just let these new socially and environmentally positive investments in their myriad of forms find a home in this over-arching term, lest we discourage the very thing the pioneers of impact investing set out to do.
In 2011, only a handful of small projects could be deemed to be impact investments – mostly done privately between banks and their clients. I wondered if more was happening than we thought that fell outside the strict definition, particularly in microfinance, because back then the term impact investing was quite rigid.
There was a good reason. The pioneers wanted to encourage investors to review their portfolios through a lens of social good, and market-rate returns were deemed essential in convincing them they could have their cake and eat it. But since that time, things have changed and the original users of the term should feel proud, not frustrated.
As impact investing has become part of the financial lexicon, people have become aware that all investments have an impact, which has encouraged those with a conscience (as I’m an optimist, I would say that is most investors) to take a second look at their portfolio. It has also reminded anyone who donates money or time that those donations are only useful if they are having a positive impact.
Thanks in part to this renewed focus on the relationship between money and social and environmental challenges, there are hundreds of investments now happening that are somewhere on a spectrum of small to large positive social or environmental outcomes, as well as earning something between zero and double-digit returns. And thanks to having some sort of umbrella term – and indeed one that is trending – people are more willing to step out from behind their advisers and talk about what they are doing, thereby inspiring others.
No hair splitting
In addition, more banks are willing to launch products that fall somewhere on both spectrums and talk about it. Is UBS’s latest gender lens co-investment technically an impact investment? It promotes equality and offers returns, so I think so. What about JPMorgan’s £1.5 million funding to boost attainment levels in maths and English at GCSE for disadvantaged students in the UK? I would argue yes. Why split hairs if the spirit of impact investing underlies a product or project?
It is important for another reason that we loosen up the grip on the term. Being rigid does not work well with innovation; impact investments by their very nature require new thinking. One of my favourite impact investments, launched in March, is the Accion Frontier Inclusion Fund, managed by venture firm Quona Capital. The fund invests in venture-stage fintech companies that provide solutions for the underbanked in emerging markets.
In this case, the fund is close to the original definition of impact investing. It should produce a high rate of return as the companies have undergone a rigorous selection process and it will have a measurable impact on the communities that the underlying firms operate in. But beyond that, it captures the essence of impact investing: one of supporting innovation.
Michael Schlein, president and CEO of Accion, points out that to help 3 billion unbanked people step out of poverty, it is small disrupters that are needed. Those early-stage companies and social entrepreneurs require funding. Indeed, any social or environmental problem that is yet to be solved simply needs a new idea and someone who can back it – be that as a donation or for a double-digit return. It is precisely this solution that impact investing provides in its more general terminology.
If tighter definitions are needed – and they may well be as the industry grows – it might be helpful to look at another innovative industry that emerged in finance as an example: hedge funds.
When they began to take off in the mid-2000s, a lot of air and ink were exhausted on explaining what hedge funds were and were not, until eventually people gave up and kept the term but introduced sub-divisions of ‘strategies’.
I suspect and hope that is where we will end up with impact investing.