A Navigational Guide to Impact Investing
In November 2019, the Tamer Center for Social Enterprise and Social Investment Managers & Advisors (SIMA) hosted a day-long summit at MetLife in New York, focused on sharing and operationalizing best practices for institutional investors to move into impact investing in a more meaningful way.
The Impact Investing Forum covered the impact investing landscape, insights on impact strategies and associated learnings from institutional investors already in the space, key challenges, and talks from companies working on tangible solutions. Participants included representatives from Citibank, the Heron Foundation, the Church Pension Fund, MetLife, New Island Capital, DWS, MIX, SJF Ventures, Shift Capital, The Community Development Trust, and offgrid solar company d.light. By the end of the day, these discussions moved into working groups focused on specific sectors to develop action plans for the organizations present.
Impact Investing Landscape
The day began with remarks from Asad Mahmood, CEO and managing partner of SIMA, and Bruce Usher, Professor of Practice and the Elizabeth B. Strickler ’86 and Mark T. Gallogly ’86 Faculty Director, and co-director of the Tamer Center for Social Enterprise. The two emphasized that now is a key time for institutional investors to put their weight behind socially impactful investment strategies, with $41 trillion of wealth being transferred from baby boomers to their more socially-minded children, and that it is imperative that mainstream investors commit to the space if we are to make change at scale. Additionally, the opportunity set for impact investments has been maturing, and a broad and growing array of attractive options exists for investors across the impact and capital spectrum. Professor Usher noted that challenges facing the sector currently include a lack of consensus around definitions and approach to impact measurement, as well as very high expectations and a perhaps too-pervasive focus on additionality that can hold back some capital.
"[A]re your returns artificially inflated because you’re offloading the externalities onto society?"
—Dana Bezerra, Heron Foundation
Insights from Practitioners
During the morning session, Heron Foundation president Dana Bezerra pointed out that private foundations are only required to spend five percent of their assets annually on philanthropic activities — these vehicles serve primarily as a tax shelter, and most of their assets are invested traditionally, without the same level of care and intentionality they give to their charitable contributions. The Heron Foundation has undertaken an extensive exercise to invest nearly the entirety of their AUM in socially impactful strategies, by taking an extremely data driven approach and evaluating whether a company or an investment is a net contributor or detractor to society across a variety of metrics. She acknowledged the complexity of this approach, and that no opportunity is ever clear cut. Rigorous due diligence is critical — in one instance, Heron was considering investing in a PACE loan vehicle for energy efficiency retrofits, only to find that it placed homeowners at high risk of defaulting on their mortgages. She left the asset managers in the room with a thought provoking question — are your returns artificially inflated because you’re offloading the externalities onto society?
"[C]apital exists to serve business, not the other way around."
—Michael Grossman, New Island Capital
Michael Grossman, managing director of Private Credit at New Island Capital, explained that in his view, impact investing is a style of investing rather than an asset class, and that it is useful to remember that “capital exists to serve business, not the other way around.” Chris Rowe, vice president of investments at the Church Pension Fund, spoke of the need to counter bias, from holding impact investments to higher standards than traditional investments to the embedded racism that skews risk perception in emerging markets. Louise Schneider-Moretto, director at DWS (formerly Deutsche Asset Management), spoke about their three impact strategies, in which DWS seeks to create structures that match actual instead of perceived risk. These include a cleantech / environmental fund focused on private equity and private debt in Asia, a blended finance approach to clean energy access in Africa, and microfinance globally with a gender equity lens.
Some of the key challenges cited by institutional investors that are preventing a greater allocation of capital to impact strategies were a lack of scalability, a lack of data and a lack of people at all levels within financial institutions who understand how to implement ESG considerations into existing investments effectively and with integrity. It was noted that favorable regulation was needed to help with scalability. As for the challenges with data and know-how, one proposed solution was enhancing collaboration with development finance institutions (DFIs), who typically lead in impact measurement and management, including sharing of due diligence. In particular, DFIs making data from their microfinance and other impact investments public would be helpful in correcting risk perceptions and allowing other investors to justify entering these asset classes as well.
In the afternoon, participants heard about tangible solutions being deployed by organizations like Shift Capital, which focuses on impact real estate and is working with the Ford Foundation on developing the nation’s first neighborhood trust. Offgrid solar company d.light is growing rapidly and seeking to start securitizing receivables on its solar devices to help fuel continued expansion. MIX is helping to reduce information asymmetry by providing data to current and prospective investors in areas such as inclusive fintech and agricultural finance. A key shared strategy among these entrepreneurs was tying the impact solution to the business model in order to achieve financial sustainability as well as scalable impact.
Finally, attendees broke out into groups focused on areas such as clean energy, education, and community development to discuss specific pain points and ways forward in these areas. When all attendees came together again, these takeaways were shared. The groups will reconvene on a conference call in one year to discuss progress on their initiatives to date, with the hope that formalizing connections between industry players at various stages of developing impact investing strategies will help the collective move ahead more efficiently to realize the potential impact investing has.
By Dominique Keefe ’20 and Maya Zamir ’20, co-presidents of Microlumbia.