Impact Investing Conference

Transcription

1 School of Enterprise and the Environment Summary of Proceedings Impact Investing Conference 5th-6th June 2014 Authors: Heather Hachigian Molly Johnson-Jones Kindly Supported by

2 Executive Summary The proposition of doing good to do well is drawing increasing attention among investors, both small and large, to the concept of impact investing. In 2013, a G8 Task Force was established to catalyze social impact investing by harnessing the power of capital markets and entrepreneurship. But there is little consensus on what constitutes impact investing, how it relates to mainstream finance and how we can measure impact, risk and success for specific investments and in the wider context of its economic significance. In June 2014, the Smith School of Enterprise and the Environment hosted a Conference on Impact Investment in partnership with the Stanford Global Projects Center to engage with these questions and identify opportunities for collaboration between the financial industry and impact investors. The Conference opened with the prediction that there would be as many definitions of impact investment presented over the two days as there were attendees. Indeed, academics, community workers, family offices, foundations and institutional investors presented a broad range of perspectives on the definition, scope and potential of impact investing. Far from paralysis, the diversity in perspectives contributed to a productive discussion and demonstrated the wide range of knowledge, competencies and skills needed to move the impact investing agenda forward. The first panel set out the context and research agenda for impact investing. Despite its historical links to economically targeted investment programs primarily among US pension funds in the 1980s and 1990s, there has been little academic research documenting the economic significance of impact investing. While a flurry of industry reports have surfaced in recent years, panelists noted the need for academic rigor. All panelists identified scale as an important topic for future academic research. This will require collaboration with the financial industry, and in particular, institutional investors, to establish effective internal governance frameworks, alongside new technologies and models for investment. The next two panels offered an institutional investor perspective on impact investing. Participants shared a bold vision for the potential of impact investing. Far from sacrificing financial return, impact investing was understood as having the potential to accelerate returns in an era that has witnessed underwhelming performance in conventional investments. There was also a broad consensus that impact investing is not only consistent with fiduciary duty, but integral to fulfilling promises to employees in the case of pension funds. While the second session underscored the idea that every investment has an impact, the third session took up the challenge of determining which investments should be considered to be real impact investments. The audience was encouraged to refrain from Impact Investing Conference Oxford

3 blending impact investing into responsible and sustainable investment in order to maintain the integrity of its unique characteristics. The fourth panel explored the potential for a complementary relationship between small family offices/foundations and large institutional investors. Panelists suggested that small investors have the agility necessary to develop close personal relationships and make decisions quickly. Moreover, these catalytic investors are often more willing to take higher financial risks and offer guarantees to large institutional investors. The panel concluded with consideration for how to encourage more philanthropic organizations to engage in impact investing. This will require breaking down the firewall that currently exists between their grant-making and investment functions. The fifth panel featured a variety of new impact investment products and strategies designed to meet growing client demand. For some, asset allocation was an important consideration for achieving impact. In particular, real assets offered a direct impact in the form of sustainable agriculture, renewable energy, green real estate, among others. Others placed more emphasis on the need to change our perception of utility. All panelists agreed that structuring products in a way that is familiar to investors is key for success. The conference concluded with a panel on measurement, a recurring theme throughout the six panel sessions. For some, intuition might be enough to measure impact. Others emphasized the need for frameworks and tools, drawing inspiration from economic development. A concern for balancing rigor with practical systems of measurement was shared by all panelists. While standardization is desirable, participants emphasize the importance of flexible measurement systems to accommodate a diversity of values among impact investors and clients. The willingness of some investors to accept belowmarket rate returns but not to accept higher risk raised interesting questions around effective ways to measure risk necessary to reduce the perception of risk. Perhaps most valuable drawn from all panelists was the reminder not to lose sight of the importance of understanding the program or venture that underpins the investment. At the end of the two days, no consensus was reached on a definition for impact investing. But far from posing a roadblock, this definitional ambiguity provided the scope necessary to host a rich dialogue on the potential for collaboration between the financial industry and impact investors. The strongest rallying point among participants was found was the key role of intermediaries to support the growth and development of the sector. Intermediaries are needed to aggregate small deals, provide standard metrics and centralized expertise, ensure deal flow and provide space for collaboration. Acceleration of impact requires time to develop a track record for the sector, deep pockets, philanthropists who are educated and willing to take higher risks and tolerance for experimentation and failure within the financial industry at large. At the broadest level of abstraction, Impact Investing Conference Oxford

4 the scaling up of impact investing within the financial industry depends on the development of an ecosystem. Collaboration among a wide variety of actors is key to achieving this vision. Acknowledgment The Smith School and Stanford GPC are grateful to panelists, keynote speakers and participants for sharing their diverse perspectives and experiences and contributing to a thoroughly stimulating and productive dialogue. We also thank UBS, volunteers, staff and advisors that made the event possible. Presentation Slides Presentation Slides are available for download through this link. Impact Investing Conference Oxford

5 Session 1: Setting the Agenda The first session set out to navigate the impact investing landscape from a research perspective. While impact investment is often described as a nascent sector, it became evident during the session that the concept is underpinned by a much deeper history that can be traced back at least to the economically targeted investment among pension funds in the 1980s. From this vantage point, impact investment can be understood as the latest installment in the evolution of an investment approach that explicitly seeks to generate positive impact for communities where we live and work. Despite its historical ties to economically targeted investment, there has been little academic research on impact investment and, in particular, its economic relevance for society and its risk and return characteristics. The research that does exist is interdisciplinary and draws on concepts from finance, economic geography and development theories. While there is a dearth of academic work in the area, panelists noted the recent growth in industry reports, including the Monitor Group, GIIN and JP Morgan, and the lack of Impact investing is a consensus on definition of impact investing. Terms associated philosophy, a framework with impact investing include natural capital, blended value, or approach to investment social finance, among several others, each representing a that can be applied across particular set of values. One panelist noted that how we define asset classes. impact has implications for estimating the size of the sector. Earlier studies were more optimistic but have since revised significantly downwards to $10 billion. Other estimates place the sector at around $4 billion. All panelists agreed that scale is an important topic for future research. New academic research is beginning to bring a much broader lens to thinking about these issues in relation to large institutional investors. It was noted in all presentations that government can contribute to facilitating scale. This need not only involve government in the traditional role as regulator and provider of subsidies and guarantees. As one panelist noted, sovereign development funds can play a unique role in attracting foreign capital while at the same time combining financial returns with development objectives. Viewed in this way, impact investment is not an asset class itself, nor is it confined to microfinance or a specific program. It is a framework and a philosophy for investment that can be applied across asset classes. Impact investing can accelerate financial return for institutional investors. But scale will take time to achieve and panelists emphasized the need for more research to promote effective process of scaling up. In particular, we need to understand the potential for perverse effects Impact Investing Conference Oxford

6 of private finance of public goods and identify strategies for preventing the importation of negative aspects of capitalism to impact investing. One example that was given is the potential for uneven provision of privately financed infrastructure. Institutional governance was identified as one important area for future research. Moreover, it was suggested that academic research is needed to promote the professionalization of asset owners themselves, alongside re-intermediation, new technologies and new theories and models for investment decision-making. Session 2: New Paradigm Investing The keynote address offered insight into how impact investing fits into the investment strategy of an institutional investor with a long-term investment horizon. The key question to ask is what is good for the pensioners and employees? Framing the question in this way requires a more holistic understanding of performance that includes the impact of those investments on employees life style. Not only is such an investment approach consistent with fiduciary duty, but it is incumbent upon the asset manager to make the lives of employees who they serve It is incumbent upon the better. asset manager to make the lives of employees Understanding fiduciary duty in this way, it was suggested that a who they serve better vast majority of fund managers are not doing their job. Without a more holistic approach, the way we invest undermines the interests of employees and pensioners. In particular, it was suggested that the current mainstream approach to investment serves as a double insult to beneficiaries. In the first instance, conventional investment is not concerned with long-term performance. But worse than this is that conventional investment strategies use employees savings to make investments that make their lives worse off in the future. That is, we have created a world through our investment that is highly distorted. The respondent to the keynote address expanded on what it means to be a holistic investor. In particular, engagement with companies on environmental, social and governance issues was emphasized. The audience was urged to refrain from placing impact investment in a box and avoid getting caught up in debates over Every investment has definitions. We need to begin from a much broader interpretation of impact. Investment can be positive for society, or it can the potential for impact investing, given that essentially all investment be negative, but no has impact. That is, investment can be positive for society, or it can investment is neutral. be negative, but no investment is neutral. A holistic approach also Impact Investing Conference Oxford

7 invokes issues of intergenerational equity, as effective investment management requires concern not only for current pensioners but future generations. The panel concluded by highlighting some of the most significant challenges to realizing this vision for a holistic approach to investment. In particular, the discussion focused on perverse incentives in the financial industry that contribute to undermining a long-term perspective. But this did not detract from drawing more optimistic conclusions about the future. In particular, given that we engineered the current system, it is in our power to create a better one. Session 3: Long-Term Investment The effects from the credit crunch continue to drive the need to find a balance between the interests of a fuller range of stakeholders. Moreover, these effects serve as a catalyst to bring environmental and social issues to the fore of the financial industry. Given the pervasiveness of sustainable and responsible investment among mainstream investors and drawing on the insight from the previous discussion that every investment has an impact, this panel took up the challenge of determining which investments can and should be considered real impact investments. We need time and Panelists explained how impact investing fit within their overall deep pockets, and we approach to investment. For some, there was significant overlap must allow for failure between long-term or responsible investment and impact investing. As one panelist noted, all investments that are related to sustainability fall somewhere on a spectrum of impact. Some activities can be considered degenerative activities, while others fall much closer to the transformative side of the spectrum. Others drew a much harder line between impact and long-term investing, urging the audience to refrain from blurring the concept of impact investment with long-term or responsible investment. In particular, impact investing has unique characteristics that are at risk of getting lost if it rolled into responsible, sustainable and long-term investment. For example, impact investment often requires a tolerance for failure and investments that are highly illiquid. While an investment might become financially valuable over time, the primary goal from the perspective of an impact investor is the social impact. Several examples were provided to delineate impact investing from other approaches to investing. The session concluded with recognition that impact investors cannot operate alone to Impact Investing Conference Oxford

8 achieve what is needed. A wider ecosystem is needed to support the impact investment and such a system must allow for failure. Session 4: Catalytic Investment Family offices and foundations have a particular interest in impact investing given the potential for creating societal and environmental value, alongside financial return. The previous panel suggested that impact investment does not map directly onto long-term investment strategies of institutional investors. As such, there is a need for other investors willing to take risk of failure and promote impact over financial returns. This panel considered how family offices and foundations can play this role. Panelists were first asked to describe their motivations for engaging in impact investing. Most attractive was the potential impact investing offered to transcend the dichotomy between doing good and making money, offering an attractive new way approach to grant-making. There is a whole new wave of philanthropist seeking to transform the way that people look at business. In this sense, it was noted that social enterprise has served its purpose. Philanthropic capital must seek alignment between grantmaking and investment consistency. from the dichotomy in We are still suffering thinking: this is where I Panelists were then asked to identify the challenges they make my money and this experience with impact investing. One key challenge raised is where I do good. during the discussion is the labor-intensive process involved in building portfolios. In particular, panelists noted that finding investable projects is exceptionally difficult. While there is a lot of creativity and enthusiasm, there are few products in which to invest. Many impact strategies are highly illiquid, which makes generating annual yield difficult. The lack of technical ability to execute investments was also identified as a challenge. As one panelist noted, capacity is not there yet and investors aren t talking to people in the charity space. Co-investment presented its own suite of challenges. In particular, panelists highlighted the importance of finding partners that share values and the importance of developing a long-term relationship. Finally, many have not made this transition from traditional philanthropic capital to impact investing, noting we are still suffering from the dichotomy in thinking: this is where I make my money and this is where I do good. Education is needed important to break down the firewall between grant-making and investment functions. Impact Investing Conference Oxford

9 The panel concluded with a discussion on the opportunities for collaboration between philanthropic investors and the financial industry. In particular, foundations and family offices identified themselves as particularly well suited for screening and brokering deals, given their agility afforded by virtue of being small. With relatively small bureaucracies compared to encumbering structures of large institutional investors, philanthropic investors have the ability to experiment and innovate. Intuition, technical experience, capacity, rigor and the ability to take decisions quickly were all identified as complementary attributes to match with the scale of large investors. Moreover, given their willingness to prioritize social over financial returns, family offices and foundations could offer guarantees to attract large institutional investors. Session 5: Institutional Investors as Partners Institutional investors are becoming increasingly interested in impact investment. Driven in part by client demand, asset managers are offering new investment impact products and new strategies. Moreover, asset managers themselves are recognizing the symbiotic relationship between social and commercial objectives, and seeking to transform market failure into opportunity. This panel provided insight into the way in which these new impact investment products are being designed and structured to meet this new demand. For some panelists, asset allocation was an important Building a track record is consideration for achieving impact. In particular, real assets important. So far, we are offered a direct way to achieve impact in the form of in the early stages, relying sustainable agriculture, renewable energy, green real estate, on anecdotal evidence. It among others. In this way, impact investing mapped onto a will take time to build long-term investing strategy to deliver persistent and higher legitimacy. returns and positive impacts that account for resource inefficiencies, environmental stewardship, and long-term value creation. For others on the panel, emphasis was instead placed on the need for a new way to conceptualize utility. One panelist noted that an impact investing strategy seeks to transform market failure into opportunity. All panelists noted the importance of structuring impact products in a way that would be familiar to mainstream financial institutions. The panel concluded with a discussion on how the financial industry can scale impact investment. Intermediaries were identified as key to growth of the sector. For private wealth and foundations, a new generation of gatekeepers such as financial advisors, lawyers and accountants is needed. For Impact Investing Conference Oxford

10 institutional investors, it was suggested the shift that is needed is more complex. In particular, one panelist noted the impact investing requires its own Freshfields moment. Some innovative mechanisms were presented, including guarantees that account for moral hazard and strategies to leverage the wisdom of crowds to signal good deals and reduce the perception of risk. The role of exchange platforms was also discussed. Panelists noted that innovation in the financial industry is currently lacking, and research and development is needed. The industry must be willing to tolerate failure and encourage experimentation. Building a track record will be important. So far we are in early stage, with only anecdotal evidence, and panelists agreed it will take time build legitimacy in the sector. Session 6: Measures of Impact, Risk and Success Measurement of success, risk and impact was a recurrent theme throughout the conference. Deciding what counts as impact depends on what the investor is seeking to change. Investors have different motivations for measuring impact. As such, an important question is whether standardization in measurement is even possible. This panel set out to directly engage with questions of measurement, picking up on debates raised in previous panels and offering insight from the perspectives of community workers and investors directly involved in measurement. Most fundamental to the issue of measurement is deciding what counts as impact. Panelists suggested that measuring impact must begin with a thesis or theory of change. In this way, the decision about what metrics to use must be shaped by investor s intent. For example, some did not consider job creation as impact, while for others, job creation was core to their mandate. One panelist noted the amount of jargon in the sector, suggesting it ultimately comes down to outputs and outcomes, where outputs are measurable, quantifiable results and outcomes are understood as longer-term impacts. Beyond contributing dollars, impact investors contribute expertise, talent and other resources that should also be captured in measurement of impact. The measurement of risk presents some unique challenges and opportunities. One panelist noted that often their clients do not mind below-market returns, but they are concerned with risk, including capital risks (i.e., losing the principal investment), unquantifiable risk, transaction cost risks, exit risks and impact risk (i.e., not achieving desired impact). Effective measurement of risk can go a long way to reducing the perception of risk in the sector needed to attract more impact investors. Impact Investing Conference Oxford

11 In terms of inputs for measurement, investors rely on companies to provide the data. As such, developing a close relationship is important. One panelist emphasized the importance of having the same person as the point of contact throughout the life cycle of the investment. Moreover, it is important that employees all have impact skills alongside investment skills. The panel concluded with a reminder of the fundamental importance of understanding the program or venture underlying the impact. All panelists agreed that some standardization in metrics is desirable, but standards must be flexible to accommodate diversity and ensure the right things are being measured. Impact Investing Conference Oxford