By: Kim Kastorff
"It's time to recognize that the philosophy of 'maximize shareholder value' is such a defunct economist's idea", says Lynn Stout, professor of Cornell Law School (http://articles.latimes.com/2012/sep/02/opinion/la-oe-stout-stock-prices-20120902).
We are seeing that this focus on the short-term share price can be damaging to a firms' employees, taxpayers and society, but also its shareholders. Still shareholders are concerned with financial returns and maximizing shareholder wealth. Are shareholders also concerned with social impact, and is there a trade-off?
Certainly some shareholders have little concern for society, our environment or our sustainable future. Yet, a growing number of impact investors such as those found at the Investors Circle Conference held in San Francisco in May 2013, are raising important questions around both the firms' financial sustainability and social impact. In seeking angel investing or VC funding, the entrepreneur or firm may have to demonstrate their alignment in social mission, and to demonstrate that with quantifiable social metrics, tracking and reports. Some of the firms seeking funding promote their high GIIRS (Global Impact Investing Rating System) score (giirs.org) similar to Morningstar Investment rankings. Other social enterprises displayed their B Corporation logo, which is offered by the B Lab, a non-profit agency which can certify firms “wishing to benefit society as well as their shareholders” (www.bcorporation.net), in exchange for an annual fee and a comprehensive questionnaire process.
Sustainability and social impact advocates (e.g. Kimpacto) and other promoters of corporate social responsibility (CSR) are encouraging firms to not only strive for third party ratings, but also to consider routine and current sustainability and social impact reports as part of their financial planning and competitive edge. Justification for your time and efforts include:
- Sustainability or Impact reports account for sector-specific environmental, social and corporate governance (ESG) factors which can assist with operational and strategic decisions;
- IRIS metrics and GIIN standards are globally accepted and therefore can offer insightful comparisons and competitive benchmarking;
- Routine measurement and reporting better prepares the firm for similar questions needed to achieve a high GIIRS rating every two years, or to obtain B Corp status; and
- More and more researchers are demonstrating that firms who measure and report on these factors actually obtain long-term financial returns and benefits. (http://www.greenbiz.com/blog, INCR propose listing standards for stock exchanges By Robert Kropp, Published May 03, 2013)
Possibly there are some choices to be made. Are you seeking immediate financial gains with little regard to long-term social or environmental issues? Or, are you striving for greater sustainable social change along with patient capital and long-term financial returns?
Increasingly more initiatives are pushing for the latter, a long-term sustainable financial + social impact approach. According to Kropp (May 2013), "Sustainable Stock Exchanges (SSE) is an initiative by the United Nations that seeks 'corporate transparency, and performance on ESG issues and responsible long-term approaches to investment." For example, both the "Johannesburg Stock Exchange (JSE) - requiring 450 companies to produce integrated reports, and the Brazilian Stock Exchange, adopted a report-or-explain position in order to promote sustainability reporting among listed companies.
Along with increased measurement and reporting on sustainability and social metrics, we now have greater insights into the correlation between financial returns and environmental / social returns. When making these comparisons, it is important to differentiate between negative screening, positive screening, ethical investments, sustainable investing, impact investing or responsible investments, to name a few. As with financial investments, these social and environmental mission driven approaches have various purposes, objectives and strategies. According to the book, Sustainable Investing: The Art of Long-Term Performance (Krosinsky and Robins, 2008), "Responsible investment is an overlay that can be performed on top of ethical, sustainable or mainstream strategies", but which falls under the SRI subcategory.
Each category or strategy may produce different performance results, so again, it is important not to lump all social / environmental mission investments into a catchall group from which to generalize the performance against market benchmarks. For example, a study of 850 global SRI portfolios, Krosinsky and Robins found that the 'ethical funds' performed basically in-line against the 5-year average of the FTSE 100 and S&P 500, and significantly under-performed in comparison to the MSCI World Index. However, the "sustainable investing" funds significantly outperformed returning 18.7% on a five-year average return from 2002-2007, against major indices: MSCI World (17%), S&P 500 (13.2%) and FTSE 100 (13%). Even when considering all 135 SRI funds together (i.e. not differentiating 'ethical' vs. 'sustainable'), the five-year average return was impressive at 15.2%, which is a competitive rate of return, with a lower risk profile and a focus on long-term sustainable social change. Again, we see that "funds that invest in a dual manner, both mitigating risk and seeking opportunity at the same time, have been outperforming most significantly of all" (Krosinky and Robins, 2008).
Similar to financially motivated investments, some will outperform and some will underperform. So, when you hear that a Social or Ethical or Sustainable Investment achieved lower returns....please do not conclude there is a "trade-off" between financial and social return. Like ALL investments, you take a risk and sometimes you place your eggs in the wrong basket.
According to the latest study (May 2013) from SJF Institute and Duke University, the "Impact commitment correlates with basic measures of business success. Contrary to the popular belief that companies working to have positive social and environmental impact have a hard time growing as fast or being as profitable as traditional enterprises, our research shows that at the enterprise level, a tangible commitment to impact... is strongly correlated with overall business growth. This trend is statistically valid across all industry segments.. company ages, and geographies." (http://sites.duke.edu/casei3/whats-new/publications/ “Accelerating Impact Enterprises: How to Lock, Stock and Anchor Impact Enterprises for Maximum Impact “ by Cathy Clark, Matt Allen, Bonny Moellenbrock and Chinwe Onyeagoro)
So, what is your financial return and social impact? Are you generating positive returns and positive social imapct? Do you even know? Will you be motivated to measure and report on social metrics if your business success is correlated to your impact commitment? If you are still resistant, what will you tell your employees, customers, donors, lenders, board of directors or investors when they ask about your social or environmental impact commitment? Or, maybe your competitors will explain for you!
Sooner or later, you will have no option but to measure and report your business success - both financial + social and environmental. And, why would you avoid it? After all, there is no real trade-off, which means that you can have both a financial return and social/environmental impact. Of course, the decision is up to you, since what you measure is what you achieve. Just remember, that in an era of greater transparency, communication and heightened social and environmental concerns ... 'Doing good makes good business sense" (Kimpacto.com).
By: Kim Kastorff
If you think of a new or creative idea, would you consider that 'innovation'? Why do we sometimes say 'innovative idea' and other times we just say 'idea'? How can we measure or understand innovation if we don't have a clear idea of what constitutes "innovation" in the first place? It seems that often words are used interchangeably - idea, creativity, innovation - and that there is no clear boundary defining the innovative stage in the product cycle.
So, I began to question - how do we define 'innovation' and how long is it considered 'innovative'? For example, the telephone was once considered innovative, but probably nobody would consider that innovative today in the world of mobile apps and other technology. That is an obvious example, but what about Impact Investing? Is Impact Investing considered innovative? And, if so, is it still considered innovative or has it moved beyond to something more legitimized and mainstream? First, let's define 'innovation'....
According to Hitt et. al (2001) innovation can be defined as “the identification and exploitation of previously unexploited opportunities.” Innovative processes involve creating new resources or using existing resources in a unique way, in order to commercialize products or services, enter into new markets, or target new customers.
Rogers defines innovation as “an idea, practice, or object that is perceived to be new by an individual or other unit of adoption." Communication is an important element, defined as “a process in which participants create and share information to reach a mutual understanding” and ultimately, the innovation achieves diffusion through “certain channels over time, among the members of a social system” (Rogers, 1995).
Now, let's compare these definitions to Impact Investing and decide if this field makes the Innovative List. We are already seeing the transfer of resources through innovative financial instruments and indices, new tools for measurement and reporting standards developing globally. Innovative solutions are offered in order to transfer capital (e.g. mutual funds, social impact bonds, private equity, internet-based lending, crowd funding) and to quantify financial + social measurement using new social metrics (e.g. IRIS).
Many believe that impact investing is capable of reaching a potentially larger scale than donor-based philanthropic institutions. For example, a subset of impact investing is the U.S. based “Community Development Finance”, which has seen significant growth since the Community Reinvestment Act (CRA) was passed in 1977, and additionally the Community Development Finance Institution (CDFI), which was initiated in 1992. Resulting policies and innovative financial products have supported growth in excess of $23 billion in assets in 2006 (Fulton and Freireich, 2009).
Accordingly, the field has moved beyond the initial innovation phase, and has entered into a marketplace building phase where infrastructure is developing, along with centers of activity, and is achieving global scale. A 2010 study estimates the European SRI market has reached nearly €5 trillion, as of December 2009, which represents roughly an 87% growth over the prior year (EuroSIF, 2010). A more recent JP Morgan study shows that the UK, US, European, and Australian governments have made over USD $5 billion available for impact investment over the past few years (Saltuk, 2011), and the potential to grow to about $500 billion, including high growth sub-sectors of Microfinance ($25 billion in 2006), and Clean Technology investments ($148 billion in 2007) (Fulton and Freireich, 2009).
This demand-side has been triggered in part by the public attention given to Muhammad Yunus, when he received the nobel peace prize in 2006 for his contributions in developing the Grameen Bank and this notion of ´banking for the poor´, which later became known as micro-credits (www.muhammadyunus.org). Microfinance institutions (MFIs) range from very small non-profit associations to large commercial banks, both serving a mission to help the poor, unemployed or entrepreneurs who cannot obtain standard bank products.
Social entrepreneurs have achieved scale based on their innovative and practical approaches, and long-term sustainability focus on social issues (e.g. poverty). Social business ventures have also made social impact a high priority, and operate as for-profit businesses. Since 2008, the B Lab has certified 750 B Corp. businesses in 27 countries and 6 continents, as of the 1st quarter 2013 (http://www.bcorporation.net). These firms consider both soft ethical and social values and also hard proactive measures. Occasionally, social and impact firms may partner with other Corporations, angel investors or VC firms, in order to further drive change through their social expertise, large professional networks, and supply chains that scale social products and services.
Collectively, the impact investing movement is driving social change and greater awareness and momentum. In the last few years, we have seen more actors, change agents, opinion leaders and network connectors for the impact investing field, including the Global Impact Investor Network, Investor´s Circle, ANDES, and Social Venture Network (Ashta, 2011). The GIIN Investors´ Council is a “leadership group” comprised of more than 50 impact investors ranging from banks, pension funds, foundations and family offices and across various geographies, with a goal of advancing the learning and growth of the field (www.giin.org).
So, is Impact Investing innovative? In contrast to the outdated idea of throwing money at a problem or other such short-term approaches, impact investing considers innovative solutions for helping businesses and communities become self-sustainable. It seems that innovation is found at the core of impact investing, with proactive approaches to seeking greater social impact and sustainable systemic change. We are experiencing a shift from short-term gratification to the idea of long-term solutions which carry forward and benefit generations to come.
Is this a new idea for you?
Doing good makes good business sense - Kimpacto (kimpacto.com).
By: Kim Kastorff
Impact Investing and Venture Capital (VC) often take off and form superhero powers when in sync and mission-aligned. We may see truly magical power when social impact scales over walls, cities and across foreign lands. Yet, these successful missions may give the impression that one cannot exist without the other. Truth be told, VC firms are helping fund the Impact Investing industry, but should they get ALL the credit? Are VC firms the new superhero of the modern world? Or, are other groups deserving recognition?
First, we want to thank the VCs for their enormous impact. For example, SJF Ventures raised $90 million along with its third fund to deliever social impact growth investments. Mainstream banks were among the investors into the fund - Citicorp and Deutsche Bank, along with insurance companies, foundations, and wealthy families and individuals (http://www.businessweek.com/articles/2013-05-02/one-bright-spot-for-vcs-impact-investing).
What this demonstrates is that impact investing also collaborates among many non-profit and for-profit sectors, to include: mainstream banks, non-governmental organizations (NGOs), pension funds, private and family foundations, insurance companies, high net worth individuals, grant making, social venture capital funds, private equity, debt providers and social impact bonds (Mulgan et. al, 2011).
Collectively, impact investing creates jobs among bottom of the pyramid (BoP) communities, increased sustainability and more diverse and innovative solutions as compared to “NGOs or other donor-driven programs” (Ruttmann, 2012). Thus, impact investing is requiring more proactive solutions and measurement approaches, and long-term sustainability among these communities. Occasionally these firms and investments are seeking a greater social impact and a longer term horizon, which may not always be compatible with some VCs or investors and further necessitate the involvement with other for-profit and non-profit entities.
Thus, impact investors are open to a variety of sectors, investors, entities and asset classes as long as the mission is a long-term solution considering both financial + social impact. For example, as opposed to throwing money at the problem or other such short-term solutions, impact investing seeks to build the communities and business to become self-sustainable in the long-term. Mission alignment becomes more important, and terms such as ‘collective impact’ are more commonly used in this space.
While there are a variety of collaborative impact investing institutions, we are seeing rankings and clear leaders who are scaling the field. Impact Assets developed the “IA50”, providing the top 50 funds globally, including: Acumen Fund, Bridges Ventures, Calvert Social Investment Foundation, Grassroots Business Fund, Habitat for Humanity, IGNIA Partners, LeapFrog Investments, Root Capital, RSF Finance, SJF Ventures, and Triodos Investment Management. So, not only the VC funded ventures are achieving scale but a wide variety of collaborations, both for-profit and non-profit.
Amid the economic crisis, certain banking institutions have risen to be leaders in offering significant socially responsible and transparent solutions for social change. For example, Triodos Bank originating in the Netherlands, is considered the #1 social bank and is consistently growing year after year despite the global credit crisis. In Oakland, California, One Pacific Coast Bank offers loans to individuals that previously wouldn't qualify and utilizes a graduated system. This program gives the consumer a chance and the opportunity to establish a credit rating, and eventually the person or firm will become self-sustainable or have a sufficient credit rating to apply for standard products, along with the other creditworthy members of society. Even traditional banks are now adopting microfinance, social responsibility, or impact investing practices, which may generate growth and expansion from these demand-side product offerings and socially acceptable practices.
A true superhero- Muhammad Yunus received the nobel peace prize in 2006 for his contributions in developing the Grameen Bank and promotes the notion of ´banking for the poor´, which later became known as micro-credits (www.muhammadyunus.org). Overall, microfinance institutions (MFIs) may range from very small non-profit associations to large commercial banks, both serving a mission to help the poor, unemployed or entrepreneurs who cannot obtain standard bank products. Among the MFIs we may see foundations, cooperatives, credit unions, non-bank financial institutions and commercial banks (Martin, 2011).
Social entrepreneurship institutions also have achieved scale based on their innovative and practical approaches, long-term sustainability focus on social issues (e.g. poverty). Entrepreneurial firms may grow in size, and become known as SMEs (small and medium size enterprises), which trigger further innovation, job creation, and economic growth. SMEs are common institutional forms in emerging economies, possibly subject to different laws and regulations, depending on size and social purpose.
Collectively, these various institutional types have created significant global social change, and consequently greater awareness and momentum. In the last few years, we have seen more actors, change agents, opinion leaders and network connectors for the impact investing field, including the influential investors network - Investor´s Circle and Toniic. The GIIN Investors´ Council is another “leadership group” comprised of more than 50 impact investors ranging from banks, pension funds, foundations and family offices and across various geographies, with a goal of advancing the learning and growth of the field (www.giin.org).
Together as these institutions implement impact investing products and approaches, we will see many more superhero missions and powerful institutional forces coming to the rescue. Along with our collective efforts, we want to show our gratitude to all the mission-aligned VC firms for their social good, and to the many other superheroes who are fearless and persistent in conquering the evils in our world. Together, may we rise above the doom and gloom era and strive for better communities that consider financial sustainability and also our social and environmental impact.
'Doing good makes good business sense' - Kimpacto (kimpacto.com).
By: Kim Kastorff
So you have heard all the "Impact Investing" buzz around proactively seeking and measuring both financial return + social impact. But, perhaps you are a bit skeptical or question all the hype? Already we have ESG, RI, SRI, CSR, so does Impact Investing add anything new? Is this just another marketing scheme, or is it really something different? I wondered the same thing, so I took an historical look and here's what I found…
The 18th century marked the beginning for environmental, social and governance (ESG), and responsible investing (RI) which includes a broad range of activities and firms from which Socially Responsible Investing (SRI) has formed. ESG showed increasing popularity during the 1970´s when environmental pressure groups such as Greenpeace and Friends of the Earth began the fight against pollution and waste, and today many firms consider "ESG" factors in their daily operations and goals.
Eurosif offers a general definition of SRI to include “any type of investment process that combines investors´ financial objectives with their concerns about ESG” (UN PRI, RI Digest, 2011). The SRI field has evolved more significantly by offering modern and innovative investment strategies, such as positive screening, best in class, shareholder activism, and more recently impact investing. These SRI strategies are considered more proactive, as compared to the negative screening and religious foundation of the RI field.
Impact investing is also closely related to its antecedent Blended Value (BV) coined by Jed Emerson in 2000. BV applies to both for-profit or non-profit firms, who create economic, social, and environmental value components, and whose investors (market-rate or charitable) together generate value by providing capital to organizations (Jed Emerson, www.blended- value.org). While impact investing builds on former BV approaches, it differs in its more proactive investment strategy, quantitative measurement of social return, and a goal of long-term sustainability. According to Bugg-Levine and Emerson (2011), “Impact investing is what we do, and blended value is what we produce.”
You could say that Impact Investing is a proactive strategy under the SRI umbrella, with a goal of generating value. Impact investing was coined in 2007 with the purpose of offering a unique and innovative investment approach, which expands upon the broader antecedents of the SRI and CSR movements of the past two decades (Bugg-Levine & Goldstein, 2009).
Ethical Investing also differs to Impact Investing as these former approaches seek to merely avoid investment in harmful activities (e.g. guns, smoking) through negative screening, while the latter applies positive screening or proactive approaches to seeking positive social impact. Impact investing utilizes various socially constructed and accepted viewpoints (e.g. smoking is harmful to one´s health), but additionally seeks socially positive impact areas (e.g. reducing poverty), therefore considering both negative and positive SRI screening strategies.
The religious foundation of socially acceptable practices has formed the basis for the SRI field, and subsequently impact investing which offers a more proactive strategy, as compared to other CSR or ESG practices (Fulton & Freirech, 2009). Impact investment involves proactively utilizing capital (e.g. debt, equity) in order to achieve social or environmental benefits as well as financial returns, which differs to other SRI strategies which may apply positive or negative screening to publicly listed companies but are less proactive in targeting social objectives (Ruttmann, 2012).
So, is Impact Investing different? Impact investing is a more proactive strategy towards achieving social impact. Although, impact investing has stemmed from other SRI investment strategies, such as negative/positive screening, best in class and shareholder activism, it can be distinguished through its innovative investment products, and proactive social impact approach.
Collectively, areas such as CSR, SRI and Impact Investing have triggered greater awareness due to the global credit crisis, which demonstrated that “helping the financial sector become more sustainable is an imperative for our societies” (Imbert & Knoepfel, 2011). What is meant by more is to be able to serve social needs. Impact investing serves social needs by generating funding flows from a more leveraged pool of private sector investors, thereby increasing the long-term sustainability of social projects (Bridges Venture et. al, 2010).
By combining business acumen and products with the motivation for social change, we see that Impact Investors are demonstrating their unique (although not silver bullet) solutions to delivering financial returns + social impact. Without a doubt, impact investing is a growing field offering unique strategies and solutions for long-term sustainable social change...so join the buzz and let's try something new.
Doing good makes good business sense - Kimpacto (kimpacto.com).
What is the difference between Impact Investing and Socially Responsible Investing?
by Kim Kastorff
2 May 2013
In some communities like San Francisco, Impact Investing has become a buzzword, creating widespread attention and increasing interest among investors, communities, institutions and government, given the awareness of economic, social and environmental issues. Yet still too often I receive feedback that it is just another 'do-good' or 'go-green' scheme....which is like saying the Golden Gate Bridge is just another bridge.
Impact Investing is quite special and unique. Although, as a young and emerging field it currently suffers from inconsistent definitions and uncertainty, and often gets lumped in with all the other socially responsible and ethical approaches. So, let me attempt to clarify (and to welcome comments)....
From an historical perspective, one key difference is simply the age and the evolution of these terms. Conceptually, the beginning of Socially Responsible Investment (SRI) and Responsible investing (RI) can be traced back to the 18th century, when John Wesley (1703 - 1791) a co-founder of the Methodist Church, preached that you should not exploit others or engage in sinful trade or profit. Specifically, negative screening approaches were followed by the Methodist religion as they believe that investors should not associate with guns, liquor, tobacco or gambling.
Since the 1950s, a series of social campaigns and trade unions have made investors aware of the social and environmental consequences of their investments. During the 1980s, there was significant shareholder activism against South African firms, due to the system of apartheid. This resulted in negative flows of investment to South Africa, forcing the majority of businesses (approx. 75% of South African employers), to call for the end of apartheid (Ethical Partnership Ltd., accessed 2012). Although SRI was not the only contributing factor, this demonstrates the level of importance among global investors.
More recently, impact investing was coined by Anthony Bugg-Levine in 2007 during a meeting at the Rockefeller Foundation. Since then, it has emerged as a a new approach to seeking proactive solutions to our social and environmental problems (e.g. education, poverty, health, energy, etc.), by offering investments that generate both financial returns and social (including environmental) impact. Thus, Impact investing can be considered a derivative of other initiatives, such as responsible investing (RI), socially responsible investing (SRI), and corporate social responsibility (CSR), all of which to various degrees consider values and stakeholder interests within a firm's daily operations.
Ok, so there are similarities and differences. But, here’s where it really diverges. Impact Investing has spun off into its own field or movement, as it more proactively seeks long-term sustainable social impact by applying business acumen and seeking financial returns. Often I hear that 'it is all about the intent', meaning that impact investing must have an initial intent to seek social + financial impact.
Following this trend, Kimpacto, Inc. promotes "Maximizing Financial + Social Impact" with the premise that "Doing good makes good business sense." Overall, Impact Investing has a greater focus on long-term financial sustainability and business fundamentals, as compared to its more religious predecessor- SRI, or other ethics based fields. Still, impact investors care about ethics and responsibility just the same. A key point is that Impact Investing is not a decision of social responsibility OR business fundamentals, it is BOTH.
Today, impact investors are demonstrating that there doesn't have to be a trade-off or bifurcate world which has formerly separated business and social sectors, as suggested by Bugg-Levine. In fact, we are seeing an increasing number of For-profit business sectors and also Non-profit organizations that are blending their financial goals with their social values, and incorporating both in their measurement and reporting.
Unlike other ethical or SRI fields, impact investing utilizes ideas and social practices from a wide variety of both non-profit and for-profit sectors, to include: non-governmental organizations (NGOs), pension funds, private and family foundations, insurance companies, banks, high net worth individuals, grant making, social venture capital funds, private equity, debt providers and social impact bonds (Mulgan et. al, 2011).
Perhaps, one day there will be no difference among the terms- Impact Investing, SRI, RI, CSR or Banking & Investing. If this trend continues all organizations and individuals will bridge their differences and invest for both financial + social impact.
Kim Kastorff has 15+ years of international finance experience and two Masters degrees - MBA and a Masters of Research in Impact Investing. Specific areas of expertise are in banking, financial and investment services, energy and sustainability, consulting, and financial education. Years ago, I told my students the purpose of business is to "Maximize shareholder returns." Today, it seems that stakeholders care about both "Maximizing financial + social impact." So, I am dedicated to helping impact investors and entrepreneurs adjust and remain competitive in this new environment. My goal is to promote impact investing and financial inclusion as we collectively strive for a more educated and financially sustainable global environment.