Impact investing is about using markets and money for social good. Impact investing is built on the belief that private capital can play a powerful role in solving the massive global challenges of our day, and that capital markets should work for good as well as profit. This vision is realized through investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.
Every month, PCV will give you a roundup of what’s new in the field, what conversations are taking place, and how you can get involved. Here are some highlights from August:
Impact Investing Proves Itself Yet Again
Earlier this month, Nuveen TIAA Investments released Responsible Investing: Delivering Competitive Performance. After assessing the leading socially-responsible investing (SRI) equity indexes over the long term, the firm “found no statistical difference in returns compared to broad market benchmarks, suggesting the absence of any systematic performance penalty. Moreover, incorporating environmental, social and governance criteria in security selection did not entail additional risk.” The authors added that SRI indexes had similar risk profiles to their broad market counterparts, based on Sharpe ratios and standard deviation measures.
Speaking of risk, return, and impact, at the GSG Summit of social investors in Chicago last month, Sir Ronald Cohen, a British venture capitalist turned impact investor (and friend of PCV) suggested that more capital would be directed towards achieving social and environmental benefits if impact investments can show they can reduce stakeholder risk, cut the cost of capital, help recruit talent and boost financial returns by uncovering new kinds of profitable investing opportunities.
Then came the results of a small but high-profile experiment in social impact investing out of St. Petersborough, England. A third-party evaluation showed that world’s first social impact bond helped reduce recidivism of ex-offenders in the St. Petersborough prison system. The private investors who helped finance the program were repaid with interest from the local government.
Building on increased interest in sustainable investment and recent changes to relevant ERISA guidance, our partners at the US SIF Foundation released a new resource this month for plan sponsors, “Adding Sustainable and Responsible Investing Options to Defined Contribution Plans.” The five-step guide assists plan sponsors considering the addition of an SRI option to their defined contribution retirement plans. Along with practical tips and suggestions, the guide provides links to additional resources plan sponsors can leverage.
With a growing body of data indicating that companies with strong environmental, social and governance (ESG) standards have stronger financial performance, as well as the competitive financial performance of SRI funds, defined contribution plans are well placed to enter this marketplace.
The Future Of Energy Investment Is Clean and Renewable
A new model emerging for growth-starved utilities looking to profit from America’s solar and wind power boom includes a shift from power purchase agreements to buying assets outright. American Electric Power Co. is using it for a $4.5 billion deal that’ll land the U.S. utility owner a massive wind farm in Oklahoma and a high-voltage transmission line to deliver the power. NextEra Energy Inc.’s Florida unit is using it to build solar farms. And in April, the CEO of Xcel Energy Inc. said he’d use it to help add 3.4 gigawatts of new wind energy over the next five years.
Why should you care about that? Because it’s part of a bigger market shift and awakening around SRI and the future of return. Investment advisers who ignore the ethical fund sector are neglecting the opportunity for big and long term returns for clients, according to The Financial Times. Over the past year alone, ethical and sustainable funds have posted an average growth of 16.8 per cent compared with 15.2 per cent from the average non-ethical fund.
J.P. Morgan this month said they’ll facilitate $200 billion in clean-energy financing by 2025. The bank is making what it calls “the largest commitment by a global financial institution” to facilitating clean energy financing. That bank did about $15 billion in such deals in 2015, including green bonds, tax-equity financings, project financing and even IPOs; the new pledge would boost that to about $22 billion a year.
This comes on the hells of a record volume of green bonds being issued in the first half of 2017, according to Bloomberg New Energy Finance’s monthly report. The $68 billion of bonds issued from January to June was higher than full-year issuance in all years but 2016. It represented more than two-thirds of the 2016 full year total of $95.6 billion. If this pace is maintained in the second half of the year, the total volume of green bonds issued in 2017 would cross $130 billion.
Our friends at ImpactAlpha launched an excellent series earlier this month called Operation Impact. The focus of the series is practical innovations from impact investing problem-solvers.
The Case Foundation’s Rehana Nathoo kicked off the series to share lessons learned in changing investment culture, practice, expectations and habits to enable a new level of impact. Nathoo shares how the foundation is creating a culture of transparency among impact investors and entrepreneurs to deal with the emerging problem of a lack of visibility into where impact capital is flowing and to whom.
The series also included ideas for measuring impact at lower cost for higher value from our friends at Acumen. They focused on an impact-investing myth that needs busting: The proliferation of social-impact metrics and frameworks is giving front-line employees, managers and investors the kind of data they need to improve their operations — and deliver genuine impact.
Investing In Good Business
Speaking of Acumen, as they were writing about the need for lean and consistent impact data, a new in-depth look at the impact management practices of impact investor-backed enterprises is out from German consulting firm Roots of Impact. They interviewed 24 agriculture and energy enterprises of varying sizes and found that impact businesses rarely draw on commonly used databases or standards when developing their metrics. Instead, most develop their own indicators as they build their business.
Talent is equally distributed, opportunity is not. For the impact investor, that’s an “alpha” opportunity. “Ability and intelligence cut across race, sex and gender orientation, but opportunity (and you can fill in access to capital) does not,” writes Big Path Capital’s Michael Whelchel in American Banker. Opportunity No. 1? Only 2% of $60 billion in venture capital investments last year went to women-run companies. But studies show female chief executives in the Fortune 1000 drive three times the returns as S&P 500 enterprises run predominantly by men.
On a related note, gender lens investing — using capital to alleviate the economic plight of women and girls — is gaining steam. Suzanne Biegel, a gender lens investing pioneer now at the Wharton Social Impact Initiative, has a great interview on Wharton’s website with Nick Ashburn, the institution’s senior director for impact investing.
And Much More!
Philanthropists, including the Duke Endowment, the Boeing Co. and the BlueCross BlueShield of South Carolina Foundation have all pledged $17 million upfront to allow Nurse-Family Partnership to expand its services through a pay-for-success program – the first pay-for-success program to be run statewide in any state. The free program is for first-time mothers and connects them with a nurse to answer questions about pregnancy and caring for their babies. The outcomes to be measured include reducing the number of preterm births, reducing hospitalizations of the young children, and reducing emergency department visits related to injuries.
Financial services firms are increasingly directing investor dollars into regenerative agriculture and other systemic food projects. A growing number of investment companies in this realm are now using capital to help ranchers switch to 100 percent grass-fed beef production, connect small farms to communities with little access to fresh food, and transition farmland used to grow commodity corn and soy to organic, regenerative systems.
Campden FB published an article about the role of family offices in impact investing. The piece demonstrates how wealth managers and private banks are seeing an increase in demand for impact investments from their clients, highlights how there is untapped potential for family offices not yet involved in the space, and discusses factors that may be attributing to this growing interest in impact investing.
Exchange-traded funds, or ETFs, are bundles of stocks that trade in the public markets. Most track a specific stock market index. Rockefeller Foundation is putting up a $300,000 grant to Impact Shares, based in Dallas, to let non-profit organizations create their own social impact ETFs. Organizations would identify company stocks that are important to their missions – veterans’ organizations might select companies committed to hiring vets, for example – and bundle them into an ETF.