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Impact Investing

Profit from a better world.

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sproutAdvisor.ca There has long existed a gap between philanthropy and any singular devotion to capital gains. But this uncharted space is fast being filled by the growing phenomenon of impact investing.

At its heart, impact investing is a simple concept: mobilizing private capital for public good. It operates on the basic premise of solving social and environmental issues while generating financial profit. This requires the management of social and environmental performance alongside financial risks and returns.

This marriage of investment capital to social and environmental issues holds great promise, says Geoffrey Moore, co-founder and CEO of TBC Capital Inc., a Montreal-based financial services firm with a mandate to provide investment strategies and solutions with a focus on impact investments.

“It takes a more proactive approach than traditional socially responsible investment and is driven by a growing realization that governments and community organizations simply cannot, on their own, address the major environmental and social challenges of our time,” says Moore.

It is, in part, thanks to people like Moore that a rapidly growing supply of capital is flowing into impact investments across geographies, sectors and asset classes. In Canada, the field draws largely upon innovations from the U.K. and the U.S., and there are home-grown pioneers as well. The Canadian Task Force on Social Finance report provides a wealth of information on the development and opportunities in impact investing in Canada.

“Impact investing is indeed rapidly growing; the early days of an industry building up around it is taking place, and according to JP Morgan’s definition it is in the process of establishing all of the characteristics of an emerging asset class,” says Moore, referring to JP Morgan’s paper Impact Investments – An Emerging Asset Class.

A departure from the conventional is seldom without its own attendant challenges. Moore is acutely aware of the various systemic barriers that the impact investment industry must overcome.

“Many still assume that any strategy with the word ’social’ in it is not a good investment,” says Moore. “This lack of awareness is largely responsible for keeping impact investing on a parallel track, separated from the mainstream investment management industry. Developing greater awareness of the opportunities across the industry is key.”

However, big structural changes are afoot. “While standards for financial analysis are well established, those same standards are emerging with regards to social and environmental metrics and ratings.”

Traditional asset allocation models and interpretations of fiduciary duty create some other barriers. Moore assures concerted efforts by various agencies, within and outside Canada, are being made to overcome theses challenges.

“An enormous amount is happening very quickly and there are numerous conferences taking place, filling both educational and networking roles,” he says.

This is just one of the many approaches taken by those bound together by the shared belief in the potential of impact investment as a viable solution to many social and environmental concerns.

The Global Impact Investing Network (GIIN), a U.S.-based non-profit organization, has developed Impact Reporting and Investment Standards (IRIS) creating a language and framework for measuring the social performance of impact investments.

Closer to home, the Canadian Task Force on Social Finance recommends a minimum 10% allocation to mission-related investments be made by all Canadian foundations over the next decade.

“This would create a demand for several billion dollars worth of impact investments and will provide a case study into how asset allocation models might evolve over the coming years,” says Moore.

The evolution of impact investing in Canada also owes a great deal to Social Innovation Generation at the MaRS Centre in Toronto (SiG@MaRS). This group and its partners have done an enormous amount of work and also act as a main convener for organizations interested in impact investing across Canada.

These efforts have finally started to bear fruit. The G-20, in partnership with Ashoka’s Changemakers, a global online community committed to solving the world’s most pressing social problems, has just committed more than $500 million to support the winners of the G-20 SME Finance Challenge, addressing such areas as microcredit, agriculture, sustainable energy, and others that fall under impact investing.

South of the border, the U.S. State Department is sponsoring a Social Capital Markets (SoCap) conference in Washington, D.C. in 2011 because they believe that there is money to be made through social entrepreneurship.

A variety of community, green, vaccination and social impact bonds have already come to market, with the potential for much greater application through instruments providing diversification and potentially attractive risk-adjusted returns for investors.

As governments become increasingly aware and involved, the potentially huge societal and financial benefits derived from greater collaboration should inspire greater efforts.

“Business and investment opportunities are extremely large,” says Moore. “And given the fact that impact investing is built on the premise that governments and community organizations cannot ‘go it alone’ to solve the major social and environmental issues of our time, I believe that there are real incentives for different actors to work together.”

According to Moore, this is an exciting time to be involved with impact investing. He has sponsored the launch of a not-for-profit, community initiative called EYE4IMPACT, which will launch a speakers’ series featuring leading impact investors and social entrepreneurs.

The first event takes place February 22 in Montreal and features Russell Read, chair and managing partner of C Change Investments and former CIO of the California Public Employees Retirement System (CalPERS), who will speak about the next wave in effective green investments.

Conflicting motives

Detractors of impact investing often argue there is a clash of interests between return expectations and social conviction; that any conflicting interests have the potential to undermine the promise of impact investing.

Moore admits some investments are appropriate for certain institutional or individual investors whereas they will not be for others. Following strict guidelines, using a clear and transparent approach and applying proper due diligence can ensure the promise of impact investing is not undermined, he asserts.

“It is always about the client; advisors and consultants know their clients,” he says. “There is a spectrum of impact investment solutions addressing various risk appetites depending on the focus on financial returns versus desired social impacts.”

In the end, it all comes back to education. “It is about exposure to different types of funds and their value propositions,” says Moore. “It is about overcoming scepticism that ’social’ investments can provide competitive returns, and it is about investors having more and more belief in the concept of doing well financially while doing good.”

As greater awareness builds of how the power of capital can address social and environmental problems through an alignment of stakeholder interests, the innovations will follow.

Moore believes that in addition to the short-, medium- and long-term variables that prudent investors should consider with regards to their individual portfolios or pension plans, serious consideration also has to be given to the very-long-term, going beyond retirement.

“Thinking of sustainability issues, of the futures of our children, of the incentives that bring diverse actors together to address challenging social and environmental issues is all good business and will create tremendous investment opportunities,” he explains.

Filed by Vikram Barhat, editor@Advisor.ca

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