The Who’s and What’s of a Solid Sustainable Investing Strategy — Impact

With funds, media attention and policy interests pouring in, Impact is getting all the attention as the buzz word of the moment. Sustainable investing, responsible investing, impact, ESG, we may use these words interchangeably, but that’s attributable more to a lack of understanding about the differences, than them being the same thing. For they are not the same thing.

If you want to apply one of those terms in evaluating a business model, it is critical that you understand which one fits. Why is it so important? Because increasingly regulators are holding investors and fund managers responsible for proving that they are really selling what they say they are. “Impact Washing”, like ESG Washing or any other kind of “washing”, is about making misleading claims that sound good on paper but aren’t actual.

So, let’s dive into the hot term of the moment: Impact Investing.

Many of us think we know what that means: giving money to businesses or people who are going to make a big difference in our society or the planet. We’ve heard the phrase “people and planet”, so we think it must have something to do with helping one of those things and that it is like charity, and you shouldn’t expect to make any money.

Well, that’s not what Impact Investing is about — when done correctly.

Impact Investing is about moving the money where it is needed and providing financial returns as well as social returns, while providing capital to fund innovation that solves the world’s “wicked problems”. For example, think about plastic waste in the oceans; or lack of fair access to healthcare, hygiene, employment, financial inclusion, or education for much of the world’s populations; or these infernal summers and extreme weather conditions attributable to climate change. These are just some of the many issues that Impact Investors try to fund the development of innovation and businesses.

To be proper “Impact”: you need 1) intentionality, 2) measurability and 3) additionality. In other words, you have to start off with the intention to make something good happen, measure the amount of good being done, and then be able to show that this benefit wouldn’t have just happened on its own anyway without your involvement.

The “Spectrum of Capital” is a scale that you can use to see where you fall in terms of your alignment as an investor, on a scale of 1–5. Are you “Financial First”? Meaning that your fiduciary duty to maximize profits over all social concerns trumps all? Well, that is one side of the spectrum. The opposite end is “Impact First”, meaning that you are willing to forego a financial return, or even take a loss in order to promote the needs for a social return, benefitting society, above all else. Then there are 3 possibilities in between, ranging between lower financial returns and lower social returns as the areas in between. All these approaches are apparent in investment strategies, and it is important to know where you sit as you put together your investment portfolio.

The next part of your strategic approach would be to identify which values are important to you as an investor. Some investors are ”faith-based”, aligned with a particular religion or being in a network of religious investors while many others are “mission driven”, perhaps with a set of principles, traditions or beliefs anchoring the core of their decision making. Who are these investors? It ranges from religious institutions’ pension funds to family offices to investor networks. Maybe the beliefs are anchored in religious texts or family traditions passed down through generations. Or maybe, you are just a deeply principled person who thinks that we all have an individual responsibility to improve the world, or maybe its worrying about what children will get stuck with. Regardless of where it comes from, Impact Investors often share a sense of commitment to doing something good with their money. However, it is important to note that the returns on some Impact Investments have started to resonate with “Financial First” investors who are interested in the solid returns some Impact Investments have been providing. For example, consider climate change technology, green energy, packaging solutions or alternative proteins that replace meat: these are all examples of Impact that produce sizable financial returns while addressing social concerns.

Essentially, it is about both: Impact Investors want what’s called a “double unicorn” of a billion in financial returns while improving the lives of a billion people.

So how can you integrate these ideas into your investment strategy? For Impact, it’s not just the “what” of the problem the business is solving, but the “who” is this problem being solved for. We often miss this “who”, but it is every bit as important as the “what”. If you think about it, what if you are pouring money into solving a social problem that nobody wants solved? Many investors live on one side of the planet and conjecture about what life must be like on the other. We might think, for example: laptops for online lessons for children in places without access to schools! However, has anyone investigated connectivity in these places? This happens a lot: fancy equipment without the infrastructure. Maybe there are things these people would prefer first. How about asking them?

Asking people what it is that they need to improve their lives is the critical component of what’s called Impact Measurement and Management. It is about actually figuring out who needs what and how that is going to improve their lives. Further, it is about measuring along the way to make sure these changes are happening and that they are positive for the people experiencing them. Best part is, if it’s not working out then you can pivot early and try a different approach, instead of wasting all the money and trying to find out at the end what went wrong. That’s the management part.

Impact Measurement and Management is important to have in place, because the vigilance and data produced and analyzed along the way will help to ensure those key social returns. Remember the Impact Unicorn? That’s the billion lives we want to be improved as part of our investment WITH financial returns.

Yes, it sounds like a lot, but it’s critical to understand what you want as an investor and what is being promised by your potential investment. Align those goals with your goals, make sure they’re happening by watching along the way and you will sleep well knowing that your social returns are doing good while your financial returns do well.

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