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Wednesday, June 01, 2011

Moving Impact Investing from Niche to Mainstream, While Protecting the Mission

By Thorsten Wirkes

Impact Investing: A tool to keep good-doers busy or a tool to transform the world? Moderator Matthew Bishop, American Business Editor for The Economist, put this question to a panel of impact investing professionals and impact entrepreneurs at the first session of the Impact Investing Track at SOCAP/Europe.

The panel's unanimous answer, unsuprisingly, was: Impact investing is here to change the economic system and the world. Impact investing can and should be a catalyst for a new economic system, in which economic decisions take long-term financial, social, and economic externalities into account.

A quick rundown of the other questions and issues debated and discussed during the opening session.

Impact investing should change the economic system - does this preclude it from being an asset class?

Whether impact investing should be considered its own asset class is an issue that divided investors and did the same for the panel. Wim van der Beek, of Goodwill Investments argued that calling impact investing an asset class is actually harmful and condemns the nascent space to remain niche. As an asset class it will only be one of many instruments for investors. The impact investing aspiration, however, is to make social and environmental considerations inherent in every investment decision.

Leapfrog Investment's Jim Roth countered that impact investing provides a recognizable label that helps connect with more people at scale as repeated explanations become unnecessary. The consensual take-away from the session was that in the short run, the idea of impact investing being its own asset class can be beneficial, while it may prove harmful in the long run.

Bishop moved the participants' attention to the hurdles to impact investing joining the mainstream. The panel identified three hurdles:

  • An economic way of measuring impact.
  • A regulatory environment accommodating long-term thinking.
  • An adequate market infrastructure.

Economic ways to measure impact

Only with the proof that their investments have driven change, can the financial industry become sustainable, said Femke Bos, Fund Manager of the Triodos Microfinance Fund at Triodos Investment Management. At the same time, the panelists jointly expressed concern about new and, what they called, complicated impact measurement schemes currently debated. They feared additional cost for investors and an audience experiencing an information overload. Instead, they advocated for the use of internal key performance indicators as external measures of success. Triodos, for example, ranks its microfinance investments according to their social implications. This provides both a performance management tool and at the same time tracks impact.

Meanwhile, van der Beek introduced an intriguing point, arguing that in order to join the mainstream, the impact-oriented sector needs to adopt the language of the mainstream. To him, impact investing will only trickle into every investment decision if decision makers can fit it within their existing frameworks. He proposed talking about risk-adjusted returns instead of introducing impact as a third dimension. Impact would be factored into the risk component and, strikingly, act as a risk mitigator in the long run. While this is indeed an idea worth exploring, it would still require the mainstream to adapt their current decision-making processes.

The panel sent the clear message that a shift in investment horizon needs to take place if impact investing is to move to the mainstream. Bishop indicated that according to today's regulations, the fiduciary obligations of investment managers require them to take short-term perspectives. Shifting to a long-term focus, externalities would play a more important role, which in turn benefits the risk-return perception of impact investments. Roth emphatically supported the call for a change in regulation to allow for a long-term investment horizon.

Building the necessary market infrastructure

Inadequate regulation is closely connected to the third hurdle identified: The need for a strong market infrastructure. Building on the lessons learned from microfinance, Bos of Triodos, said that impact investing can only become mainstream if adequate market infrastructure allows increasing the transparency in the market. Specifically, she pointed to the lack of credit bureaus as a central point of information exchange in India. Her fellow panelists agreed that infrastructure institutions along with an adequate regulatory system and regulators shielded from political influence would be strong drivers of impact investment.

Keeping the mission while becoming mainstream

The discussion shifted to the question of how impact investing can protect its mission while moving to the mainstream. This linked nicely to the asset class debate, revealing that impact-orientation needs to be woven into the fabric of the organization and hence be a natural part of operations. Just as impact-oriented criteria should be natural parts of investment decisions and not a separate task. David Wood, from Better World Books led the charge on this. He described how BWB needs to compete operationally with Amazon, but at the same time needs to protect its triple bottom line mission. It became clear that an impact-oriented mission can only survive, if it does not require a daily conscious effort to keep it alive, but everyday operations automatically contributing to achieving it. Or to put it more provocatively: An impact-oriented mission can only survive, if it does not exist as a separate impact-oriented mission, but is the core purpose of the business.

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